Everything changed in Venezuela after the U.S. conducted an operation that led to the ouster of former Venezuelan President Nicolás Maduro. President Donald Trump has said that he wants U.S. oil companies to enter the country and revitalize its outdated oil infrastructure, and that the U.S. will run the country until a "safe, proper, and judicious transition" can occur.
Venezuela's future remains very cloudy, but that hasn't stopped investors from bidding up Venezuelan stocks, which have blasted 260% higher since mid-December. The bet is likely based on Trump ushering in a friendlier business regime to the country and ramping up oil production in the oil-dependent country.
Here's how investors can gain access to Venezuelan stocks.
It's not exactly a liquid market
The easiest way for U.S. investors to purchase foreign stocks is typically to buy exchange-traded funds or American Depositary Receipts (ADRs), which are certificates issued by banks denominated in U.S. dollars and reflecting some level of ownership in a foreign company. The U.S. markets are the most liquid in the world, so many foreign companies want their shares listed on exchanges like the Nasdaq or the New York Stock Exchange.
Image source: Getty Images.
However, Venezuela is a bit of a different story. Due to years of intense sanctions and government mismanagement, the country's stock market is not very popular and is quite illiquid, meaning that a little bit of action can move it in a big way. U.S.-imposed sanctions also prevent Venezuelan companies from getting ADRs listed in the U.S.
Furthermore, hyperinflation and debt issues have not generated significant demand from U.S. or foreign investors. International arbitration courts have ruled that the Venezuelan government owes U.S. oil companies billions of dollars after Hugo Chávez's administration forced these companies to renegotiate oil contracts in the country at very unfavorable terms. The Venezuelan government has also previously defaulted on an estimated $60 billion of bonds.
How to gain exposure
So, most brokerages do not offer the option to buy Venezuelan ETFs or stocks. However, U.S. asset management firm Teucrium has applied to launch the first ETF dedicated to Venezuela, so this could change.
For investors who don't want to wait, I think the easiest -- and safest way -- to indirectly invest in Venezuela is through the U.S. oil company Chevron (CVX +2.90%). Chevron is the only U.S. oil company that agreed to Chávez's terms and remained in the country. Today, the company has 3,000 employees in Venezuela and produces an estimated 20% of Venezuela's oil, which is roughly 800,000 to 1 million barrels per day.
So while other companies will need to weigh the pros and cons of returning to Venezuela, Chevron is already there and knows the landscape. Chevron Vice Chairman Mark Nelson recently said that the company could double its production at joint ventures it has with Venezuela's state oil company immediately. Up until now, there have been strict limits set by the U.S. regarding oil production on these ventures. "We are also able to increase our production within our own disciplined investment schemes by about 50% just in the next 18 to 24 months," Nelson added.
NYSE: CVX
Key Data Points
Another way to bet on Venezuela is by buying the bonds that the government defaulted on. Recently, some of those bonds had surged to $0.43 on the dollar, up double from last August. The bet is that higher oil production results in higher gross domestic product in the country, making it more likely that the Venezuelan government eventually repays its debt.
Investors should understand that a bet on Venezuela is still incredibly risky. It's unclear who will lead the country long term and what their economic policies will be. U.S. policy on Venezuela could also shift if Democrats do well in the midterm elections and reclaim power in Congress. Additionally, once Trump's term ends, who knows how the next president will approach the country?
The safest way to invest in Venezuela is indirectly through Chevron, which is well-managed and pays a strong dividend with a yield of over 4%. The company is set to ramp up oil production, and I think it's probably a wise move to have some oil exposure in your portfolio.
