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YPF's New Issue - Great Opportunity

December 17, 2013 | About:
Anthony Balls

Anthony Balls

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YPF Sociedad Anónima (YPF) is the main oil company in Argentina and is also one of the cheapest energy companies to be leader in a medium-sized country and economy. This has an explanation: Argentina's energy policy has been a fraud during the last decade as the government has been encouraging oil reserve consumption and destroying incentives to production by fixing oil prices to producers. All of this caused a big energy deficit in the country, that now has to import a huge amount of energy to keep its economy (and household energy) running.

Expropriation

YPF was partially owned by Spanish Repsol (REP) but in 2012 President Cristina Fernandez de Kirchner decided to expropriate Repsol's holdings in YPF due to the aforementioned energy crisis in Argentina. In an attempt to make the company utilize its full production capacity and to raise investment in new exploration wells. Repsol stated that reduction in new investment was the result of anti-market policies.

It was not until a few weeks ago that Argentina finally decided that it had to compensate Repsol for this expropriation. Agreements between these two parties have been reached around the amount of $5 billion.

Attempt to Resolve the Crisis

Argentina has now different problems to resolve its energy crisis:



  • Lack of dollars: It doesn't have funds to invest in YPF.

  • Lack of market confidence: Its policies have been very restrictive to foreign firms and many of the most renowned companies operating in the country just decided to go away.


But the country has since tried to solve its differences with its creditors in order to enter international debt markets again. It remains to be seen if it can do it. On the other hand, YPF and Argentina have a huge asset which is the finding of one of the world's most important oil reserve banks in Patagonia. Exploration and operation of these wells has seduced many companies like Chevron (CVX) and Pemex (Petróleos Mexicanos). Conditions for operation and agreements remain to be seen.

YPF Bond Issue

Yesterday, YPF issued its first debt since the expropriation scandal. The company issued $500 million yielding 8.875% with maturity date 2018. YPF expects to raise more funds in future issues in order to continue exploration efforts and maybe to repay Repsol.

Bottom Line

Argentina's economic situation is not the best as it struggles with an annual inflation rate of near 30%, a fiscal deficit and shortage of dollars. Moreover, it's not competitive and lacks infrastructure and strong institutions. Many people expect the situation to change after 2015, when a new government assumes power.

Investing in YPF's bonds may seem a risky move but with the country's aforementioned need for energy and foreign investment, I don't see YPF defaulting on its newly issued debt. In addition, we cannot forget the fact that it's the country's biggest producer and supplier of energy. With raising tariffs, YPF is poised to increase its earnings in quarters to come. State regulation in the energy sector is expected to be lifted in the short term in order to attract investment and encourage production.

I would at least consider these bonds as well as future issues from the company.

About the author:

Anthony Balls
Long term investor. I like mostly bonds and preferred stocks. I only buy stocks when I believe they are at bargain prices

Rating: 5.0/5 (2 votes)

Comments

superguru
Superguru - 3 months ago
Can an US based investor buy these bonds? How?
anthonyballs
Anthonyballs - 3 months ago
Hi, Yes of course you can. Just ask your bank account manager about them and you'll surely be able to buy them. On the next day of the issue they were trading up +4%, If you keep them to maturiry it's an interesting yield though and you won't be able to find many 5 year bonds yielding that much.

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