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Oil Companies Hope for New Opportunity in Energy-Rich Venezuela

One of the biggest headlines recently related to oil companies was news of the passing of Venezuelan President Hugo Chavez.

"El Commandante" as he was affectionately referred to by his countrymen, at least by those who approved of his leftist policies, was 58 and succumbed to a lengthy battle with cancer.

Predictably, news of Chavez's passing has sparked ample speculation about what the future holds for Venezuela's oil industry and those oil companies looking to profit from a possible renaissance there.

Venezuela is South America's largest oil producer and an OPEC member. In what may come as a surprise to some investors, Venezuela could be called the Saudi Arabia of OPEC.

In other words, the South American nation is home to about 300 billion barrels of proven oil reserves, compared to about 270 billion barrels in Saudi Arabia. That is according to OPEC's own estimate.

Not only that, but Venezuela is home to the largest natural gas reserves in the Western Hemisphere.

Given those superlatives, it is easy to understand why some Western oil companies are cautiously optimistic about what the future may hold for them in Venezuela.

A Rosy Scenario for Oil Companies

Despite its embarrassment of oil riches, Venezuela has failed to unlock the profit potential in these reserves.

Due to years of not properly investing in its oil industry resources, production steadily declined by about 25% in the 14 years Chavez was in power, and oil exports fell by nearly 50%. In fact, there were various points during the Chavez years that Venezuela was actually a net importer of crude.

"Venezuela's clout on OPEC and on world oil prices has been greatly diminished because of its inability to exploit its enormous resources," Michael Lynch, president of Strategic Energy and Economic Research, a consultancy, told The New York Times. "In the 1990s, their production was booming and they could thumb their nose at Saudi Arabia and get away with it, but now they have become OPEC's poor cousin."

That is to say even with a regime change, which does not appear imminent, it will take years for output there to jump to the point where Venezuela makes a significant contribution to reserves and profits for major oil companies.

But if there was a change, two major oil companies stand to profit the most…

Exxon Mobil Corp. (NYSE: XOM) and ConocoPhillips (NYSE: COP) learned the hard way what fighting Chavez resulted in: Nationalized assets.

As things currently stand, the government gets a 60% stake in all production projects. When the industry was nationalized in 2007, both companies exited because they couldn't come to agreement with the state-owned oil company.

Regarding Exxon, it is easy to understand why it would benefit from change.

Following its 2009 purchase of XTO Energy, Exxon became the biggest U.S. producer of natural gas. As investors know, natural gas prices have since plunged, and Wall Street has been all over Exxon to increase its oil reserves. Venezuela represents a way for the largest U.S. energy company to ameliorate its crude reserves concerns.

As for ConocoPhillips, which has a dividend yield of 4.5%, the Venezuelan situation is equally as easy to understand, but perhaps more compelling than with any other Western major.

When Chavez nationalized Conoco's Venezuelan assets several years ago, those assets were worth $4.5 billion. That does not sound like much, particularly to a company with a market cap north of $71 billion, but those assets are believed to be worth $20 billion – $30 billion today.

It is estimated that Conoco could pull a net profit of $10 billion out of Venezuela in the coming years if it can reenter the country.

Even though $10 billion is not the biggest amount of money one can hear about in the oil industry, consider this: $10 billion would more than cover three years of COP's dividend obligations (at current levels) or provide for a dividend increase, something the company hasn't done since 2011.

But these oil companies are just "cautiously optimistic," however, because it could be a while before Venezuela truly becomes a significant area of production and driver of profits for U.S. and European oil giants.

An Election Quickie

The opportunities for oil companies all depend on who follows Chavez to lead Venezuela.  

Vice President Nicolas Maduro has succeeded Chavez for now and, unfortunately for those looking for a near-term bounce for oil companies, Maduro is exactly who Chavez would have picked to succeed him.

Making the situation all the more murky is Venezuelan law, which mandates elections must be held within 30 days of Chavez's death. It looks like the National Election Commission set April 14 as the day.

The quick election gives Maduro the upper hand over any potential challengers. Four or five weeks for anyone to mount a legitimate challenge to an incumbent with Maduro's name recognition is asking a lot. Political common sense dictates it is unlikely Maduro will be defeated in April.

That means the regime change oil companies so desperately want to see in Venezuela will be hard to see any time soon.

Venezuelan policymakers have already assured investors that the country's oil legal and tax structures will remain in place. That is not encouraging news from a country that has nationalized its chemicals, fertilizer, and yes, oil companies.

Jose Valera, a Houston energy lawyer, told The New York Times that if Maduro or another member of the Chávez movement was elected president in a special election "it is reasonable to expect continuity of a substantial portion of the policies."

But as for Venezuela's economy, he argued, "the situation right now is not sustainable and it's only a matter of time before some significant changes will have to be instituted."

Want more info on investing in oil? Check out this report from our energy expert Dr. Kent Moors: Forget the Doom-and-Gloom, Now Is a Time to Be Bullish

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