A Disappointing Third Quarter
Petrobras Argentina's third quarter was indeed disappointing: EBITDA declined by 21% year-over-year with margins contracting to 26.4%. Poor results can be explained mainly by three variables: an oil and gas volumes contraction of 9% year over year, a $30 million reversal in equity income from related parties and SG&A expenses increasing by 7% year over year.
All the above being said, not every aspect of Petrobras Argentina's results looked grim. The company improved average pricing from downstream operations, showed stronger gross profitability in the refining and petrochemicals segments and lowered its exploration expenses by $33 million year over year. Besides, gas sales strongly benefited from higher prices attributable to the government’s “Gas Plus” program, which granted a $7.5 per mmbtu price for all additional production over a defined historical level – well above the previous price of $2.5 per mmbtu.
The only alarming trend I see is the continued decline of mature fields that affected production during the period. Nevertheless, I believe Petrobras Argentina will at some point resume its exploration efforts. On the one hand, it has huge promising acreage yet to be explored. On the other hand, Petrobras Argentina counts a $253 million cash balance, and its net debt is negligible at 0.4 times EBITDA. Hence, the company could very easily increase its $118 million quarterly capex expense in an aggressive way.
Valuation Looks Very Attractive
Petrobras Argentina is essentially cheap, as cheap as YPF (NYSE:YPF), the recently nationalized Argentinean oil major that is held by George Soros. After all, both companies operate in a country where the government has not been as investor friendly as most Latin American countries have been, with the clear exception of Venezuela, of course. That said, the government should be changing by 2015 (when elections are to be held) and all the presidential candidates are much friendlier to foreign investment than the current administration.
The one big difference between those two companies is that Petrobras Argentina is a clear M&A target for bigger companies, while YPF is not for sale. Petrobras sells for 2.5 times 2014 EV/EBITDA while YPF sells for 2.1 times 2014 EV/EBITDA.
Nowadays, I hold both names in my portfolio, but I still believe high M&A probabilities deserve a 0.4 times EBITDA premium in favor of Petrobras Argentina.