Big Uncertainties for YPF Investors
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
President Cristina Fernandez de Kirchner announced on Monday that the Argentinean government will seize a majority stake in YPF (NYSE: YPF) from Repsol (NASDAQOTH: REPYY.PK). Talks about nationalization had been going on for a long time, the method and its consequences, however, are quite unclear, to say the least.
When YPF was privatized in the nineties, provisions were made about how the Argentinean government could recover its control over the company. One clear requirement was that an equal acquisition offer should be made to all shareholders, something which has not happened in this occasion.
The government has decided to seize a 51% of the company, which is coming only form Repsol´s 57.4% stake. Grupo Petersen, controlled by Eskenazi family, which is strongly connected to the government on a personal level, will not suffer any seize on their 25.46% holding. Grupo Petersen had access to YPF via an unusual transaction in which its participation was paid with dividends from YPF itself, now that the company won´t probably be paying anymore dividends; Grupo Petersen may be in trouble.
Many journalists have been reporting about the Eskenazi family losing its privileged position among the businessmen surrounding the government lately, I guess we´ll get a clearer picture about their situation once we know what will happen to their holdings in YPF.
The law states that Repsol should receive a compensation for its loss, which will be determined by an Argentinean court. The amount of such compensation is completely unknown at this point and how the Argentinean government is planning to pay for it is another unanswered question. The Spanish government is talking about possible economic sanctions and international litigations against Argentina in case it´s unsatisfied with the settlement, which sounds like a very likely scenario.
Individual investors which hold around a 17% of the company through floating shares are facing many uncertainties about the value of the company. First of all, the fact that the Argentinean government decided to arbitrarily expropriate only Repsol´s participation paints a clear picture about the strong level of discretionarily in these kinds of decisions. What will happen to market float is not decided yet.
Furthermore, many questions remain unanswered about how the company will operate in the future; the Argentinean government may impose some unsustainable targets on YPF. Keeping internal fuel prices low, paying high taxes on exports - in case there are any - while at the same time increasing exploration and production levels sounds like a very complicated combination.
One of the main reasons for the expropriation, according to public officials, has been YPF´s lack of investment in exploration and production. The government doesn´t seem to be in a financial position to increase funding for new projects, and international investors’ won´t probably have many incentives to get into a partnership with the new stated owned YPF.
If the new company goes for increasing production from existing oil and gas wells without exploring new projects, those wells will continue getting depleted and the company´s concessions will dramatically lose value overtime. Short term cash needs and production targets are clearly not the best policy for an oil company from a sustainability point of view.
Investors are facing enormous uncertainties about their prospects as YPF shareholders, the value of their holdings and the future of the company are quite unpredictable right now. Upside potential is usually very high in this kind of scenarios, but speculating about the decisions of government officials is not an easy task at all.
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