The government of Argentina and Spanish oil company Repsol (REPYY) are apparently near to signing a US$5 billion agreement that would compensate the company for the May 2012 expropiation of its assets on YPF (YPF).
The news, that may be confirmed on Tuesday after Repsol´s board meeting, could become a breakthrough for the nationalized YPF, which is in need of fresh funds to invest in its prized shale formation of Vaca Muerta. Since its nationalization, YPF has been struggling to get the necessary investments that would allow it to increase the production of oil and gas as well as its R&D activities.
However, its share value has been growing on news about deals with other companies, such as Chevron (CVX), to jointly exploit Vaca Muerta and, since November 2013, on a potential agreement with Repsol that would provide YPF access to international financial markets and other alliances prospects.
Role of CEO Galuccio and YPF Perspectives
Right after the nationalization of the company, the argentine government appointed former Schlumberger (SLB) executive Miguel Galuccio as CEO of the state energy firm, signaling its intention of having a professional management in the company. Nevertheless, Galuccio´s job has not been easy: energy markets were over-regulated, implying record-low prices for upstream and downstream activities, declining production and no major investments. Along with the Repsol affair acting as a, somehow, legal barrier for the company's development, perspectives were far from exciting.
The landscape for YPF, and the industry, may be changing. The government increased prices for the discovery of new gas wells and gas pumped at filling stations. Though the country is suffering from high inflation (around 25%, according to different sources), the goverment is aware of the necessity to stimulate oil and gas investments given that imports of energy top US$12 billion in 2013, consuming most of the current account surplus.
Following different sources, under Galuccio´s guidance, YPF has doubled investments and increased returns. His goal is to take advantage of Vaca Muerta shale oil field and gas formation in order to generate new alliances that bring new investments and technology to the company, transforming YPF as a leader in Latin America in the exploitation of shale gas and oil and converting the country in a net-exporter again in the medium term.
Briefing of the Company
After the argentine government nationalized the company, taking control of 51% of the stock, YPF stock decreased up to US$10.25 to trade between US$12 and US$15 until mid-2013. Since then, the stock has been increasing in price and has been lately traded at US$27 to $28 with a peak of US$ at the end of 2013.
With a market cap of around US$11 billion, YPF sells for 7.6 times EV/EBITDA, having a P/E ratio higher than the industry (13.56 vs 4.98) and a net profit margin and ROE a slightly higher than the industry as well (5.09 vs 5.01 and 11.59 vs 11.07).
We consider that the mentioned agreement with Repsol and the policies that are being implemented by the goverment (such as increases in upstream and downstream prices) will favor YPF regarding exploration and commercial activities. As a consequence, we think there is room for the stock to increase in value in the medium term.