When you are in a hole, stop digging -- no expression better exemplifies the situation in Venezuela caused by Hugo Chavez and his government. Obviously, this is not something they understand, as the current administration keeps digging the Venezuelan economy into a deeper hole, intensified by its attempt to nationalize rigs owned by a U.S.-based company.
On Wednesday, Venezuelan Oil Minister Rafael Ramirez issued a statement that Petroleos de Venezuela SA, the state oil company, was going to nationalize 11 oil rigs owned by Helmerich & Payne, a Tulsa, Oklahoma-based drilling company.
Helmerich & Payne has been working in the country for 52 years, but apparently this is how the government has decided to resolve a conflict with the company now. It is not all that complicated, Helmerich & Payne expects to get paid for the work it's done and the government does not want to pay. And despite not paying it, the government still wants the drilling company to re-activate wells that have been idle for more than a year.
We are not talking chump change here. The invoice is for $100 million and that is not in dispute. For some reason, the Venezuelan government thinks that enslaving its own people to work for nothing is some kind of enticement to foreigners to do the same.
In most places, this form of dispute resolution might be viewed as stealing. However, "in the name of the people" you can get away with quite a lot as many authoritarians have been known to do. The people, of course, know nothing about managing the rigs they have taken. This leads me to believe they should invest in large quantities of galvanizing paint and RustOleum so that the rigs can be maintained until another government comes along that is the wiser, maybe.
This seems to be a reoccurring theme. I wrote about Cemex (CX) being in the same bind in 2008. ExxonMobil (XOM) took the Venezuelan government to the international court, and won a judgment against it. What are the odds this led to getting paid? Even supermarkets have been seized, and to some degree run into the ground by incompetence.
Chavez has done so much for the people that in January he was able to help them with exports by graciously devaluing the currency by 50%!
It is no surprise that Venezuela has had trouble paying its bills. Chavez has been ignoring basic economic principles during his entire tenure. He has settled many disputes in the same fashion with the same results. Look for more devaluations in the not to distant future.
If you are investing in companies with significant international presence it might be worth examining the political risk and consider whether you are being sufficiently rewarded.
While I have doubts about the Chavez government's ability to drill, clearly it had no trouble digging. Someone close to Chavez should inform him the two are not the same.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He does not own shares of the companies mentioned at the time of this post.