A Smart Contrarian Energy Stock
04/18/2012 8:30 am EST
When you have a story that most people have not taken the time to examine, there's a great chance to defy conventional wisdom and profit handsomely, writes Rudy Martin of Latin Stock Investing.
The strategic attack on YPF SA's (YPF) valuation continues. Argentina's central government, in coordination with the provinces, has taken a series of steps that have again fueled the fears of a nationalization of YPF and further action in the oil industry in Argentina.
Based on its recent market close, the market value of YPF is down 55% from its 52-week high set in January of 2012. The other oil stocks are also depressed. The shares of Petrobras Argentina (PZE) were recently also less than half the value of their January high!
In the news, the Argentine government accuses the energy firms of not supplying enough oil. The Argentine government also is slamming the oil companies of not reinvesting. The Argentine government accuses the oil companies of bleeding the country dry by sending profits out of the country. Don't buy into this overplayed story.
Clearly, it's the government that needs to change...and these changes are already in the works, as you would know if you were watching local coverage closely, and not just the common Wall Street press.
On the positive side, these actions are part of a Federal Oil Agreement designed to increase production, ensure supplies to the country, generate employment, and save and attract foreign investment. These are all good things for longer-term investors. Consider these facts.
1. Oil Price Caps Need to Be Lifted
The decade-long freeze on oil prices has hindered investment in the oil and gas industry of Argentina, while imports have soared.
Argentina's Energy Secretary Daniel Cameron is soon expected to propose that oil prices for export be raised to $63 per barrel, from the current $42. That may not be fully up to international price levels, but it does show a willingness to move to a market-based approach.
This spread differential only makes sense if there is a real supply excess. For example, Brent spread will probably experience dramatic swings from $10 to $25 over the next five years, reflecting rapid Utica, Bakken shale production growth in North America. As Latin America gets its own shale production growing,a similar differential would be practical.
West Texas Intermediate futures are at the biggest discount to London-traded Brent crude in more than five months. Crude had mostly traded between $104 and $109 from February until recent sessions, when investors eyed minutes from the Fed's last meeting in March that suggested the economy is gradually improving enough that a third round of Treasury purchases, known as quantitative easing, could be unnecessary.
So a $63 price is way too low...but could be the start for negotiations with producers. Speaking of negotiations, getting the right price of the stock is another issue.
2. Shareholder Rights Must Be Upheld
Opportunistically, recent licensing revocation actions against YPF have strategically depressed the valuation of its shares, making it easier for the federal government to accomplish a partial investment in the now-$9 billion market value company.
Fortunately, the government of Argentina does actually have enough money from its previous takeover of the pension plans to fund a modest share position. And the government of Argentina could force the current holders to take a note for the balance.
And that worries bond investors too. The spread between the yield on benchmark Argentine bonds and comparable US Treasuries widened ten basis points to 912 basis points, according to the JPMorgan Emerging Markets Bond Index, underperforming the index again.
3. Shale Deposit Activity Needs New Operators
There is no way we can defend YPF here. It was just following orders from its Spanish parent to maximize dividends.
Fortunately, Exxon Mobil (XOM) has agreed with YPF SA to tap shale oil deposits in Argentina, according to local newspaper accounts. Exxon executives recently met with energy secretary Cameron in Buenos Aires to discuss how to jointly develop areas of YPF's Vaca Muerta shale deposit in the southwest province of Neuquen.
Oil production in Argentina has declined by nearly a third since 1999, and reserves have fallen 18%. Gas output, meanwhile, is down 9% since a peak in 2006, and gas reserves have fallen 51% since 2000. To plug this gap, the country increased its imports of expensive liquefied natural gas, which triggered a 110% rise in its energy import bill last year.
And let's not forget the role of Brazil and China here.
4. Brazil Needs to Be Encouraged to Take a Greater Role in Argentine
Just days ago, Brazil's Petroleo Brasileiro (PBR) became the latest oil major to be stripped of its operating license by the Neuquen province in western Argentina.
However, Petrobras claims it has fulfilled all its obligations in the area, and understands that its rights to the concession and to renegotiate the concession remain valid, as specified in an accord drawn up in 2008 which was to be in force until 2027.
Petrobras holds a 55% stake in the concession, and has invested $10 million in seeking new hydrocarbon sources in the area over the last three years.
This is a friendly shot at the Brazilians to get them to step up their activity. Let's get real-$10 million is nothing, given the size of the overall opportunities in Argentina, and assuming the proper political and economic changes.
Besides, the Brazilian company's Argentine assets are its biggest outside of its home country. It produces most of its oil in the country from the Puesto Hernandez oil field in Neuquen province, and the Medanito and El Tordillo fields in the provinces of La Pampa and Chubut.
While some may balk at this, I have argued and continue to feel that the Argentine government needs to get in now to create the type of investor-friendly environment that exists in Brazil and bring in other global energy giants too.
5. China and Russia Appear Headed for a Significantly Greater
The license changes are not just penalties. There will be real changes that bring in other companies.
Neuquen revoked the concessions because the companies-Tecpetrol SA, Argenta Argentina SA, and Petrobras Argentina-hadn't invested enough in production at the oil fields, the province said in a recent statement. The concessions will be given to the provincial government's oil and gas company, Gas y Petroleo del Neuquen SA.
Aaccording to comments by the chairman of Gas y Petroleo del Neuquen, Chinese and Russian national energy companies have shown interest in Argentina's emerging shale oil and gas sector too. And these companies really have the scale to be producers here.
Beijing oil company PetroChina (PTR) has become the world's largest publicly-traded oil producer, surpassing Exxon Mobil in production last year. PetroChina pumped 2.4 million barrels of oil a day in 2011, exceeding Exxon's daily output by 100,000 barrels.
Exxon's oil production declined 5% in 2011, also falling behind Russian energy company Rosneft. Meanwhile, Petro-China pumped 3.3% more oil than the year before.
From my perspective, this action with YPF is nothing more than a corporate takeover with the government playing favorites to local Argentine political interests to get values down.
Six provinces, including Chubut, have already stripped operating licenses from YPF, but most have been marginal in terms of overall output. But Manantiales Behr accounts for about 10% of the company's total national oil output, and any effort to rescind the operating license would likely spark further legal action by YPF, which has accused Chubut of singling it out unfairly.
No wonder the other companies are under fire too! When investors figure out how the government is trying to devalue YPF and the future of oil in Argentina, they will realize how they gave away once-on-a-lifetime value by running away from one of the largest oil finds in recent years.
How low is YPF stock? It's selling at 33% of its 1999 all-time price high...that's an easy 300%. It's selling at 0.37 times a depressed growth rate, versus PBR, which sells at 2.3 times growth. That an easy 600%.
And I could go on with more comparisons to point out what a rip-off investors face here if they dump YPF, even if they got 100% of the current market value.