By Julie Wernau
Bondholders looking for compensation if Venezuela defaults know that one big pot of money remains: the assets of state-owned oil refiner Citgo Holdings Inc.
But there is a problem. Dozens of companies are lining up with claims on those same funds.
Venezuela last year pledged all of Citgo's equity as collateral to bondholders and to state-owned Russian oil producer Rosneft in debt deals. In addition, at least 43 companies -- including ConocoPhillips Co. and Canadian mining firm Crystallex International Corp. -- are pursuing legal claims against the government, according to World Bank's International Center for Settlement of Investment Disputes. These companies say they were stiffed when Venezuela's government expropriated their assets there.
Now, with Wall Street judging that a default may only be a matter of time, it is becoming clear that there isn't nearly enough of Citgo to go around.
"There are more hands out than there are assets to pay them," said Russ Dallen, a partner at investment bank Caracas Capital Markets, based in the Venezuelan capital.
A default would trigger rights enabling any of the claimants to attempt to seize Citgo, triggering cross-default clauses in Venezuelan sovereign bonds if they remain unpaid once a final court order is issued, according to Credit Suisse. Attorneys say that would send creditors into a frenzied legal battle for assets that could take years to resolve.
Citgo reported in bond-offering documents that its 2015 equity value was $8.3 billion. But many analysts believe the true figure is at least $3 billion lower now, and possibly more as rising oil prices and growing stockpiles of fuel squeezed profits for refiners. It also reflects a multibillion-dollar dividend Citgo paid to its parent, Petróleos de Venezuela SA, or PdVSA, the state-owned oil company.
Meanwhile, claims on Citgo appear to be ballooning. Venezuela's total potential liabilities related to claims pending before the International Center for Settlement of Investment Disputes could reach around $10 billion, Credit Suisse estimated in March. These companies are converging on Citgo because it is Venezuela's most accessible source of dollar-based assets, attorneys say.
Based in Houston, Citgo owns refineries in Lake Charles, La., Corpus Christi, Texas, and Lemont, Ill. The company also owns valuable networks of pipelines and fuel-distribution terminals in the eastern U.S.
Earlier this month, Sens. Ben Cardin (D., Md.) and Marco Rubio (R., Fla.), along with a number of other senators, proposed legislation calling for President Donald Trump to prevent Russian oil giant Rosneft from seizing the company. Foreign control of Citgo would pose a "significant risk" to U.S. energy and national security, the legislation said. Rosneft is currently under U.S. sanctions, which would prevent a takeover of U.S. assets.
"The prize here is Citgo and we are getting closer to it," said Robert L. Weigel, a lawyer for Crystallex, which won a $1.4 billion arbitration award last year against Venezuela following the government's expropriation of a gold mine in 2008.
Crystallex is suing PdVSA to recoup a $2.2 billion dividend that Citgo transferred to its parent in 2015, according to a 2016 exchange offering circular, using the proceeds of a U.S. bond sale. That was after PdVSA abandoned plans in early 2015 to sell the subsidiary outright. As Venezuela's most significant asset in the U.S., Citgo it is a "natural target" for judgment creditors, Crystallex wrote.
ConocoPhillips is locked in litigation over U.S. oil rigs drilling in Venezuela that then-President Hugo Chávez declared state property in 2007. The company has asked a U.S. court to cancel the lien Rosneft has on Citgo's stock and declare the pledge a fraudulent transfer, intended to remove assets to Venezuela from the U.S. that could be seized by creditors.
PdVSA said in court filings that any move to cancel the lien is premature and would strip Venezuela of its immunity rights as a sovereign nation. An attorney for Rosneft didn't respond to requests for comment.
PdVSA avoided default last month after scraping together a $2.1 billion payment. This year, Venezuela, PdVSA and Citgo together owe more than $10 billion.
Lee C. Buchheit, a sovereign-debt lawyer with Cleary Gottlieb Steen and Hamilton LLP, warned that any effort by bondholders to claim Citgo shares after a default would entitle Citgo creditors to demand immediate repayment of their loans to the company. That move could financially devastate the refiner.
"Everyone in the game is a big boy and they know the only way Citgo is worth anything is if it is a going concern," Mr. Dallen of Caracas Capital Markets said.
--Alison Sider contributed to this article.
Write to Julie Wernau at Julie.Wernau@wsj.com