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Thursday, April 19, 2012

Argentina Takes Over YPF


Argentina Takes Over YPF Energy Company

April 16, 2012 | 1948 GMT

Summary
DANIEL GARCIA/AFP/Getty Images
Argentine President Cristina Fernandez de Kirchner announces her proposed bill April 16.
Argentine President Cristina Fernandez de Kirchner announced April 16 that she will send a bill to Congress authorizing the expropriation of a majority stake in YPF, a subsidiary of Spanish energy company Repsol. This will give the government greater flexibility in managing the oil and gas sector, but presents a number of serious challenges -- including the fact that this process has made outside investors even more wary of investing in Argentina.
Analysis
Under the new law, the federal government will hold 26.01 percent of the company while the provincial governments in oil-producing areas will split 24.99 percent, giving Argentina a 51 percent majority stake. The decision is in line with recent leaked reports that the government would declare a majority stake in YPF and settles a monthslong dispute between YPF and the government.
Currently, Repsol owns 57.43 percent, Argentina's Eskenazi family (through the Petersen Group) owns 25.46 percent, several private groups own 17.09 percent in publicly traded stock, and the Argentine government owns 0.02 percent plus a "golden" share that gives it a veto on board decisions. According to Fernandez, the government plans to take its entire 51 percent from Repsol. In its recent dispute with Repsol, one of the government's key goals has been to stop YPF's practice of remitting 90 percent of its profits as dividends to stockholders and instead invest that money into new production. With both oil and natural gas production declining, the government spent $9 billion on fuel imports alone in 2011 to maintain sufficient supply of subsidized fuel for Argentina's populace. Given the rampant decline of the industry and the strong potential for oil and natural gas production in the country's favorable geology, more investment could be the sector's ticket to success.
However, there are serious questions about whether the government has the capacity to rapidly or efficiently increase production. The struggle between YPF and the government has been bitter and, as a consequence, the provincial governments have revoked not only YPF concessions but also Brazilian and Canadian concessions. YPF is the major player in Argentina's oil and natural gas sector, and likely has the ability to increase production in conventional deposits of oil and natural gas. Argentina also possesses substantial unconventional reserves -- both proven and estimated -- which will require foreign capital investment and advanced outside technical expertise.
Energy companies typically have a high tolerance for volatility, and with unconventional oil and natural gas basins bringing Argentina's possible reserves to more than 25 billion barrels of oil and more than 22 trillion cubic meters (777 trillion cubic feet) of natural gas, the country has the potential to be a highly lucrative investment. Knowing this, the Argentine government is likely to maintain a highly interventionist policy in the energy sector, putting any investment at a high risk of regulatory disruption. However, if the government offers favorable terms, the short-term gains could make partnering with YPF profitable -- even under government management. The government has also recently loosened financing options by making Central Bank reserves available for lending to "productive" projects. Financing for the oil and gas sector may thus be made available from domestic sources without having to turn to risk-averse international lenders. 
Aside from the overarching regulatory environment, the expropriation will directly affect the operations of YPF. Argentine Planning Minister Julio de Vido, a longtime ally of Fernandez and her deceased husband Nestor, and recently appointed Political Economy Secretary Axel Kicillof will be in charge of managing the transition of YPF from Repsol to the government. De Vido and Kicillof will be charged with ensuring the company's loyalty to the federal government. As we have seen with a number of recent moves in the political inner circle, those close to Fernandez can expect to find influential places in the new YPF. This process will be critical for YPF's future. If YPF follows the path of Venezuelan state-owned energy company Petroleos de Venezuela -- where technocrats were all replaced with government loyalists, radically decreasing the company's efficiency -- the prognosis is poor for YPF's ability to increase production. 
Finally, there will be serious pressure on YPF to transfer resources to the provincial and federal governments, since government at every level in Argentina is suffering from serious budget shortfalls, and the country's isolation from international lending markets reduces its flexibility in funding social programs. Rising energy costs have exacerbated this overarching challenge, but increasing energy production will not completely solve it. In the medium- to long-term outlook for YPF, the company likely will be required to supply an increasing percentage of government budgetary needs.



Read more: Argentina Takes Over YPF Energy Company | Stratfor