Petrolera Zuata, Petrozuata C.A.
Harvard Business School Publishing, Case: 99-012; Teaching Note: 5-299-013
Posted: 18 Dec 1998
Date Written: September 23, 1998
Subject Areas: project finance, emerging markets, capital expenditure, valuation analysis, sovereign risk and bond ratings, oil and gas, risk management Case Setting: January 1997, Venezuela, oil-field development, $2.4 billion investment, $800 million revenue
Petrolera Zuata, Petrozuata C.A. (Petrozuata) is a proposed $2.4 billion oil-field development project in Venezuela consisting of three components: a series of inland oil wells, two pipelines to the coast, and a refinery. It is the first in a series of development projects aimed at re-opening the Venezuelan oil sector to foreign investment and is part of PDVSA's (Venezuela's national oil company) $65 billion capital expenditure program.
The case is set in January 1997 as the project sponsors, Conoco (a DuPont subsidiary) and Maraven (a PDVSA subsidiary), are planning to meet with various development agencies in Washington and rating agencies in New York City regarding the proposed financial structure. According to the current financing plan, the sponsors hope to raise at least a portion of the $1.5 billion debt financing in the capital markets using project bonds (60% debt-to-value ratio). To facilitate a bond offering in the Rule 144A market, the deal must secure an investment-grade rating, yet neither PDVSA nor Venezuela is investment-grade-both are B rated. The key questions facing the sponsors is whether the project will achieve an investment grade rating and, if not, how to finance the deal so that it remains economically and operationally attractive to the sponsors.
The case has four objectives. First, it illustrates an extremely well-crafted deal which allows students to examine why firms use project finance to fund large-scale capital expenditures. Virtually every major journal covering project finance selected this transaction as "1997 Deal of the Year," and one of them selected it as "Deal of the Decade." Second, the case shows how project financing creates value by minimizing capital market imperfections and by efficiently allocating risk. Third, it explores the potential for the capital markets to fund infrastructure projects and describes the corporate bond rating process in terms of project, corporate, and sovereign risks. Largely due to skilled execution, this project was able to "pierce the sovereign ceiling" (achieve a higher project rating than the home country's sovereign rating), a relatively rare occurrence in the rating world. Finally, it illustrates some of the financial analysis, tools, and terminology used in structuring project finance deals. There is an Excel spreadsheet which allows students to conduct sensitivity analysis on the project's value and coverage ratios.
JEL Classification: G31, G32
Suggested Citation: Suggested Citation