Argentina's Central Bank has been losing Foreign Exchange (FX) reserves for well over a year now. As a matter of fact, FX reserves have gone down by an outstanding 33% year over year and they continue to slide. The reason? Argentina's lack of access to international capital markets added to the country's need to pay for its U.S. dollar denominated debt and for fuel imports. All those added ingredients made this week's currency depreciation an obvious outcome.
Now that the government has finally decided to depreciate the exchange rate in order to protect its FX reserves (the Argentine peso fell 20% in 48 hours against the U.S. dollar), what should you do if you own shares at companies that are based in Argentina such as Petrobras Argentina (PZE) or YPF (YPF)? Let's review one company at a time.
A Potential Oil Giant
YPF, which fell by as much as 15% on Thursday, Jan. 23., is being incredibly well managed by Miguel Galuccio – a former Schlumberger (SLB) executive. As a matter of fact, for the third quarter last year, the company reported stronger results with an extremely solid EBITDA growth (up 36% year-over-year) and substantial margin expansion (up 4% year-over-year) thanks to increased upstream production (total hydrocarbon output was up by 2% year over year) and higher realized prices for natural gas and refined products.
Even though YPF will suffer from this currency depreciation since its U.S. dollar denominated revenues should decrease while its net debt will increase in EBITDA terms, the company remains solid from a fundamental standpoint. On top of this, the current valuation more than reflects the country's problems. Taking into account a 20% depreciation of the Argentine peso, YPF sells for 2.8 times 2014 EBITDA and 8.5 times earnings. A cheap price tag for a company that owns the Vaca Muerta formation, which is the third biggest shale oil and gas area in the world.
Waiting for M&A
Petrobras Argentina, which is 67.2% controlled by Brazil's Petrobras (PBR), is one of the biggest oil and gas companies in Argentina but its operational performance is far behind YPF's. For the third quarter last year, despite higher realized prices for its gas and refined oil products, Petrobras Argentina's EBITDA declined 21% year over year with margins contracting to 26.4% mainly given by lower oil and gas volumes sold (down by 9% year over year) and higher SG&A expenses (up by 7% year over year). That said, the company has very valuable downstream assets and huge potential shale reserves. In addition, it's the only big oil company in the country which is selling itself. I think that, at the current market prices, Petrobras Argentina deserves a bet. The company now trades at 2.4 times 2014 EV/EBITDA, well below its potential value in any given M&A deal.
Argentina's depreciation of its exchange rate was easy to forecast and the problems the country currently has to access international credit markets will end in 2015, when a new and much more market friendly government is supposed to begin. All presidential candidates are in favor of opening up the country to foreign investments. Moreover, the current administration will leave a country with a negligible level of public and private debt. The time to invest, according to me, is right now. Just in a moment when Mr. Market is selling off valuable assets. Great investors such as George Soros (Trades, Portfolio) and Richard Perry (Trades, Portfolio) are already long.