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A New Era For YPF: Buy

November 28, 2013 | About:
fedezaldua

fedezaldua

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Last year, the Argentinean government nationalized 51% of YPF (YPF) from Madrid based Repsol (REPYY), which still holds a 12.4% stake in Argentina's biggest oil and gas company. When the nationalization happened, Argentina's government argued that the Spanish group had not been investing enough in the country. Hence, the lack of investments had left Argentina without its very much appreciated external surplus in oil and gas. Even when its true that YPF's Capex investments were kept at a minimum level from 2003 to 2011, its also true that low Capex was a direct result of Argentina's (very) poor and unsustainable energy policies.

After the nationalization happened, no compensation had been awarded to Repsol until now. As a result, the Spanish oil company had started international legal actions against Argentina. Miguel Galuccio, YPF's new CEO - who is the best CEO the company has had since Jose Estenssoro died in 1995 - has been also pushing president Cristina Kirchner to arrange a final settlement with Repsol. He had been looking for partners to invest along YPF in the Vaca Muerta formation, one of the world's most promising shale oil and gas reserves, since he accepted the Chairmanship in 2012. Finding partners without a settlement with Repsol was not easy. Only Chevron (CVX) had agreed to make a $1.2 billion investment before the settlement with Repsol arrived. Argentina needs many more billions in order to develop its huge shale reserves. Now, the country and YPF's CEO might get all the investments Vaca Muerta needs.

A new era for Argentina.

Argentina, which is the third biggest Latin American country in GDP terms right after Brazil and Mexico, is looking for international investments but its non-market friendly policies have left the country without foreign direct investments nor access to international capital markets. As a result, the politically weakened president Cristina Kirchner recently named Jorge Capitanich, who is a popular market friendly governor, to lead the country until 2015, when presidential elections are to be held.

The results have been great so far. In less than a month Capitanich has started a plan to solve the country's problems with its statistics (which is an on going issue with the IMF) and seems to be ready to attack Argentina's biggest problem: Inflation. Besides, he just managed to finally close the YPF-Repsol chapter in a favorable way for the country. Argentina will pay Repsol $5 billion in 10 year government bonds with a 8.5% coupon rate. The price tag looks cheap for a company that is expected to produce an EBITDA of $4.7 billion as soon as next year.

Is it now the time to invest in YPF?

Most definitely, I think it is time to buy YPF – which is already held by the billionaire investor George Soros. The reasons are somewhat straightforward: (1) YPF holds huge potential reserves. (2) YPF holds a near monopoly in downstream. (3) The company's last quarter results have been outstanding. YPF reported strong results with a solid 36% year-over-year (yoy) EBITDA growth and a solid 4.2% yoy margin expansion thanks to increased upstream production, higher realized prices for natural gas and higher refined products prices in the local market. (4) YPF's valuation remains extremely depressed. The oil and gas major trades at 2014 3 times EV/EBITDA and 8 times earnings.


Rating: 3.0/5 (2 votes)

Comments

quixote1
Quixote1 premium member - 9 months ago
yeahhhh...............but is the holding of one of the biggest cleptocracies of the world................Watch your wallet when you deal with the argentinian goverment.

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