S&P: PDVSA Ratings Unaffected by Ruling

Standard & Poor's Ratings Services said today that news regarding Exxon Mobil Corp.'s moves to freeze $12 billion in Petroleos de Venezuela S.A.'s overseas assets has no immediate impact on our rating and outlook on The Bolivarian Republic Venezuela and its national oil company and related entities, including CITGO Petroleum Corp., Petrozuata Finance Inc. (Petrozuata) and C.A. La Electricidad De Caracas.

The reach of the court orders obtained by Exxon Mobil in the U.K., the Netherlands, and the Netherlands Antilles outside of the aforementioned jurisdictions is uncertain. Furthermore, frozen assets in the U.S. are limited to about $300 million, which is not significant relative to PDVSA's unrestricted cash in hand (about $3.6 billion as of second-quarter 2007) and total assets (about $92 billion as of second-quarter 2007). We do not believe the aforementioned court orders will have a meaningful impact on PDVSA's day-to-day operations, given that it appears that the court order only prevents PDVSA from disposing of its assets. Nevertheless, credit terms from suppliers and financial institutions could become more stringent and increase the cash cost of doing business for the issuer.

Furthermore, the rulings highlight our ongoing concern regarding the issuer's ability to attract foreign investment in light of the government's decision to restructure PDVSA's operating service agreements and to grant PDVSA a majority share in the heavy oil production and upgrading projects in the Orinoco Zuata region. We view a retaliatory interruption in crude supply, threatened by President Chavez, as unlikely given that sales in the U.S. represent about half of PDVSA's revenues. We will continue to monitor the situation closely to asses further the potential rating impact of the dispute between PDVSA and Exxon Mobil.

The ratings on PDVSA and its sole shareholder, Venezuela, are tightly linked, reflecting our opinion that PDVSA is a public policy-based institution that plays a central role in meeting the sovereign's political and economic objectives. The ties of ownership and economic interests between PDVSA and Venezuela are evident in the significant contribution of the oil industry to government revenues (nearly 50%) and the country's exports (90%). The most important supporting rating factor for the sovereign is its solid balance sheet. Gross general government debt is expected to fall to 20% of GDP in 2008 and debt in net terms is expected to fall less than 5% of GDP, given the significant liquid assets the government has built up in various funds, most importantly in the FONDEN. Political factors continue to be the main constraint on the sovereign ratings. Expansionary public spending ahead of local and regional elections could undermine government finances and continue to fuel inflation, which is now more than 20%. Furthermore, changing and arbitrary laws, price and exchange controls, and other distorting economic measures have negatively affected Venezuela's domestic economy and have deterred foreign direct investment.

The ratings and outlook on PDVSA's U.S. refining subsidiary CITGO Petroleum Corp. are unchanged following the legal action against its parent. While CITGO may face tighter credit terms from suppliers, its assets and operations do not appear to be affected by the freeze. Currently, the ratings on PDVSA limit those on CITGO, even though the refiner's credit profile is commensurate with a higher rating level.


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