Fitch Affirms PDVSA Corporate at 'BB-'; Outlook Stable.

CHICAGO -- Fitch has affirmed the local and foreign currency Issuer Default Ratings (IDRs) of Petroleos de Venezuela S.A. (PDVSA) at 'BB-'. Fitch has also affirmed the 'AAA(ven)' national scale rating of PDVSA. The Rating Outlook is Stable.

PDVSA's foreign and local currency IDRs are constrained by Fitch's 'BB-' foreign currency rating of the Bolivarian Republic of Venezuela and are strongly linked with the sovereign's credit profile. The linkage is based on the company's nature as a state-owned entity, the shareholder's ultimate ability to restrict PDVSA's financial flexibility, and utilization of PDVSA's financial resources for quasi-sovereign and fiscal, rather than productive capacity, uses. Currently, the oil minister and the PDVSA president are one and the same further demonstrating the government's tight control over the strategy and resources of PDVSA. PDVSA's Rating Outlook is influenced by three fundamental factors: the pressing political interference risk; vulnerability to cash flow redirection to the sovereign; and the company's ability to attract private investment, all of which also support the linking of PDVSA's rating to that of the sovereign.

The company's credit metrics are strong for the rating category, characterized by low leverage and high interest expense coverage; however, they are tempered by substantial redirection of financial resources to government spending. As of year end 2005, PDVSA reported interest coverage, as measured by EBITDA to interest expense, of over 100 times (x) and a financial leverage, as measured by total debt-to-EBITDA, of 0.2 (x). It is estimated that the company transferred approximately $27.4 billion to the Venezuelan government in form of income tax payments, royalties, dividends, and other contributions to social spending. Transfers from PDVSA to the government, excluding social spending, accounted for approximately 51% and 59% of the government revenue during 2005 and 2004, respectively.

According to PDVSA's 2005 audited financial statements, national hydrocarbon production appears to have reached levels somewhat similar to those reported prior to the 2002-2003 strike. In 2005, PDVSA reported crude production of 2.9 MMbpd, slightly higher than the 2.8 MMbpd reported in 2004, yet, still down from 3.1 MMbpd in 2001, demonstrating the impact of the PDVSA strike in 2002-2003. National production increased to 3.3MMbpd in 2005 from 3.1MMbpd in 2004. The Venezuelan Heavy Oil Strategic Associations, in which PDVSA subsidiaries hold interests ranging between 30% and 49.9%, contribute with about 0.5 MMbpd to the national oil production. The national production mix has been changing over the past 10 years and now PDVSA's own production represents a smaller portion, but still significant component of total output than it did a decade ago.

PDVSA's capital investment program calls for significant third party investment over the ensuing seven years. The near-term appetite from potential sponsors and/or investors for Venezuelan risk is uncertain in the current policy environment. The Venezuelan government modified in 2004 the royalty rate and in 2005 the income tax rate applicable to the Venezuelan Heavy Oil Strategic Associations. In addition, the operating agreements have been converted to joint ventures as of Jan. 1, 2006, with PDVSA assuming control. In August 2005, PDVSA announced that it would increase national oil production to 5.84 MMbpd and refining capacity to about 4.1 MMbpd by 2012 as part of its US$77.3 billion investment program, of which US$20 billion is expected to be invested by third parties. It is worth mentioning that Venezuela is in the process of certifying oil reserves located in the Orinoco Belt amounting to approximately 236 billion barrels. Should these reserves be certified, Venezuela may well become the nation with the world's largest liquid hydrocarbon reserves. Given the many claims on PDVSA cash and the company's modest use of leverage, it is possible that PDVSA may seek to raise additional debt to finance its expenditures.

PDVSA, Venezuela's national oil company, is engaged in the exploration and production of crude oil and natural gas; the refining, marketing and transportation of crude and refined products; and the production of petrochemicals, as well as various other hydrocarbon-related activities in Venezuela and abroad. The Venezuelan government is the company's sole shareholder.

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