Politics are the “only” problem.
Argentina’s erratic energy policies took the country from being a net energy exporter to becoming a net importer (with energy imports running above $11 billion a year). The government decided ten years ago that natural gas prices should be frozen at very low levels and oil exports should face huge taxes with the aim of lowering internal energy prices. Naturally, results were not great: Argentina’s proven oil and gas reserves fell sharply during the last decade. Besides, prices for gas imports (from Bolivia and Venezuela) are increasingly high (at $11 per million British thermal unit (Btu)) against what local producers were receiving until last year ($2.5 per million Btu). Nevertheless, after its seizure of YPF SA (ADR) (NYSE:YPF), the government is making changes in its energy policies to help attract new investments in the sector. YPF is increasing oil prices sold internally to sustainable levels taking the whole sector to a much more profitable position. On the natural gas side, the government is also making drastic changes by increasing the prices that local producers receive by almost 3x in order to encourage local production. The seizure of YPF still weighs heavily on the sector since Repsol is threatening to sue any investor who would seek a joint venture with YPF – the main owner of Argentina’s promising shale areas. As a result of this, YPF’s new CEO, Mr. Galuccio, a former Schlumberger top executive, is said to be seeking to close a deal with Repsol through sharing some valuable exploratory areas with the Spanish company (which is looking for a $10.5 billion compensation). I am sure many chapters are left before Argentina receives all the multi-billion dollar investments its huge natural resources need to be fully exploited. Nevertheless, some companies such as Chevron of the US and Sino-Argentine group Bridas are already showing interest into closing partnership deals with YPF SA (ADR) (NYSE:YPF).
What Companies Should You Follow.
Of course the main company you should watch if you are interested in the Argentine Oil industry is YPF SA (ADR) (NYSE:YPF). The company just reported results and, truth be told, the management is doing a good job at recovering production levels. Fourth quarter profit nearly doubled, and though 2012 income fell 12.2% Year over Year (YoY), the company halted the overall decline in production. YPF’s chief executive, said that the company was on track with 2013 production targets and forecasted a 60% increase in investment to about $5 billion. Fourth quarter net profits rose thanks to higher domestic crude prices and a one-off gain linked to state oil exploration incentives. “Today, I don’t see any problem in following the outline of the $37 billion 5 year investment plan we established” the executive said. Overall, oil production in 2012 rose 2.2% compared with a fall of 7.6% in 2011. YPF seems to be on track to to deliver better results than those expected when the state took over the company in April 2012. All of the above said, I will not blame you if you don’t trust the Argentine state with your savings. I wouldn’t do it either. Of course there are alternatives to YPF. Petrobras Argentina SA ADR (NYSE:PZE), the company controlled by Petrobras Brazil (which is controlled by the Brazilian state) seems to be a good option to play the upcoming Argentine shale revolution. The company owns interesting areas within shale gas areas in the Vaca Muerta formation and trades cheaply at 2013 7x P/E. That said, Petrobras Argentina is in the process of being partially sold and uncertainty seems too high around the potential transaction.
Given the current political situation going on in Argentina I would stay on the sidelines for now. I would rather pay a higher price when the outlook is clearer. This doesn’t mean that you should stop watching YPF SA (ADR) (NYSE:YPF) and all the other related companies. Just wait, the time will come. It’s just not here yet.
The article The Cow Is Alive: Argentina’s Oil Industry originally appeared on Fool.com and is written by Federico Zaldua.
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