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Should You Consider YPF?
Posted by: fedezaldua (IP Logged)
Date: November 18, 2013 07:18AM
I have been long Argentinean oil companies for a long time. The reason is simple: They are cheap taking into account the country's huge shale oil and gas potential. After decades of under-investment explained by unsustainable energy policies, Argentinean oil companies are starting to invest in order to increase production and maximize downstream margins. I have been long Petrobras Energia (PZE) for a long time but now I am ready to invest - once more after my initial failed experience - in the state controlled oil champion YPF (YPF). Let's take a look at the company through its last quarterly results.
Enormous potential ready to be unlocked.
YPF, held by George Soros and Richard Perry , is Argentina's biggest company. The company owns a huge share of the country's downstream market and owns most of the acreage in the third biggest shale oil and gas reserve in the world – the Vaca Muerta formation. Besides, even when its controlled by the government, the company is being led by Miguel Galuccio, a former Schlumberger (SLB) top executive that is doing a great job for YPF. Quarterly results speak for themselves.
For its third quarter, YPF released a 36% solid EBITDA growth and expanded EBITDA margins up to 27.2% thanks to increased upstream production, higher realized prices for natural gas and higher refined products prices in the domestic market. Year-over-year (yoy) results were somewhat impacted by increased exploration expenses, which increased by 31% yoy. The most interesting news was that YPF was able to reverse the multi-year fall in its total hydrocarbon output, which increased by 2% yoy, with crude oil production going up by 3% yoy.
The company’s cash balance also increased strongly up to $1.2 billion, reflecting YPF's stronger EBITDA generation, lower working capital needs and the proceeds from new net debt that was issued during the quarter. Meanwhile, the company continued investing heavily ($1.2 billion just in this quarter) in order to develop its conventional and unconventional resources - YPF's CEO has stated that the company expects to invest up to $5 billion this year alone in order to increase its oil and gas production activities.
Next quarter should be even better since ongoing repair works at the La Plata refinery should be finished soon after a fire that affected Argentina's biggest refinery a few months ago. I think there is huge potential for YPF, above all when the company just trades at 2014 1.7 times EV/EBITDAX – Petrobras (PBR), the Brazilian state controlled oil major, trades at 2014 5.1 times EV/EBITDAX.
Not many investors are ready to face the risks related to investing into a company that was recently nationalized by a non investor friendly government. That said, the government will change hands in 2015 and YPF has huge value. The company is already signing accords with international majors such as Chevron (CVX) in order to be able to extract all the potential resources the country needs to be able to unlock in the coming years. If you think long term, maybe you should be long YPF.
Guru Discussed: George Soros: Current Portfolio, Stock Picks
Stocks Discussed: PZE, YPF, SLB, CVX,