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Repsol and Argentina Set an Agreement on YPF

February 26, 2014 | About:

The Spanish oil company Repsol (REPYY) has announced that its board has approved a US$5 billion agreement with the government of Argentina regarding the May 2012 expropriation of Repsol's 51% shares in the now state energy firm YPF (NYSE:YPF). The deal comes after negotiations that started last November and included executives of Repsol and officials from Argentina and Spain.

According to different sources, the financial arrangement establishes that Repsol will receive a package of sovereign bonds with a market value of US$5 billion; the mentioned package would comprise bonds already issued and a new bond, under Argentina´s jurisdiction, denominated in U.S. dollars with an interest rate of 8.5% per annum, and a maturity of 10 years. Should the market value of those bonds go under US$4.67 billion, Argentina committs to issue a new bond with a face value of US$1 billion.

The agreement has to be approved by both the shareholders of Repsol and the Congress of Argentina. It is expected that the process ends in April; in any case, the Spanish company has guaranteed the payment of its former assets in Argentina and can sell the bonds at the time it desires.

In exchange, Repsol will drop its claims against Argentina, YPF and companies that have struck deals with the Argentine energy firm after the seizure, such as Chevron (NYSE:CVX), in Argentina, the U.S. and the ICSID (International Centre for Settlement of Investment Disputes).

Business Prospects for Repsol

The settlement is good news for the company since, on one hand, it avoids a long legal process with an uncertain result and, on the other hand, it receives bonds that can cash at any moment.

Earlier this year, Repsol sold its liquified natural gas business to Shell (NYSE:RDS.A) for US$4.3 billion and, along with the proceeds of the YPF recent agreement, it is expected that the energy firm will continue investing heavily on exploration (in 2012 it added to its reserves twice the amount of oil and gas that it extracted from operations) and, potentially, in some acquisitions.

Repsol has signed agreements with other companies, such as Petrobras, to perform off-shore exploration activities in Brazil, which will continue increasing its reserves in the medium term and its experience in the field.

In addition, the recovery of the Spanish economy could add up to some value given the company's commercial operations in the country.

Some Financial Indicators

As of today, the stock price is at US$25.85 but reached a record-low of US$13.37 in July 2012, about two months after the seizure of its assets in YPF. Since then, the stock recovered to hover around US$23 to $26.

With a market cap. of US$32.44 billion, Repsol sells for 3.9 times EV/EBITDA, has a P/E ratio of 13.35, higher than industry average of 4.98. Its ROE is 6.05 and its ROA is 2.65 and has an operating margin of 6.41%.

The stock target price consensus is US$27.35.

Rating: 1.0/5 (1 vote)


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