Watch Out For Nationalization!
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In this day and age, you need to be wary of getting your investment nationalized, not just at home but also around the world.
A perfect example
The best example of how this can ruin your day is with YPF (NYSE: YPF) and Repsol Argentina decided to seize control of 51% of YPF, which came entirely from Repsol's 57% stake. This caused both YPF and Repsol shares to tank, with YPF down 70% from its year high, and Repsol has shed 1/3 of its market cap from its high this year as well. If you had been an investor in either of these companies, you would have taken quite a beating. That is why investors must always be careful when buying multinationals, especially in the commodities sector, because governments can nationalize anything. YPF had found Argentina's first shale oil ever, just before it was taken over by the government. Had they not taken the company over, YPF would have hit gold. That shale play had an estimated 37 billion barrels of oil reserves, double what there is currently in North Dakota. Repsol is currently seeking $9-10 billion for their YPF stake, but most likely the final settlement will come in much lower than that.
Repsol and YPF aren't the only companies that got hurt from nationalization. Venezuela has been progressively nationalized the oil and natural gas sector, seizing control of oil rigs from many US firms. Helmerich & Payne (NYSE: HP) had 11 of its oil rigs that were being operated in Venezuela. Helmerich has operated in Venezuela for 52 years, but it still got taken from them, so don't assume just because you've been there for a long time you're safe. One of the most recent highest profile case of nationalize was when Venezuela took ExxonMobil (NYSE: XOM) and ConocoPhillips' (NYSE: COP) assets. Exxon and Conoco didn't take this sitting down; they took this to international court. Exxon won a paltry $908 million, which was less than 1/10 of what they were seeking. But even that was too much, and Venezuela said they would only pay $255 million for the assets it nationalized in 2007, even though an international panel ruled that Exxon should receive more. As of now both XOM and COP are still in the negotiation stage, and Venezuela has said the maximum it will pay out to both parties is $2.5 billion. Argentina and Venezuela are run very similarly, so I think Repsol will receive the same fate as these 2 oil majors in their fight over YPF.
The purpose of this piece is to bring to light some of the numerous problems when investing in oil majors, and what you should look out for. Governments prone to nationalization will probably keep nationalizing unless they experience a huge change in leadership. Large companies like Conoco and Exxon can easily weather through these losses with ease, but smaller companies like Helmerich & Payne, YPF, and Repsol don't have as many assets or as large of a balance sheet as these giants, so when they get some of their assets nationalized, their stocks plummet. As an investor, make sure you do some research on the countries your investment is investing in. This way you don't get caught with your pants down like YPF investors did. Overall I'm bullish on the oil and natural gas sector, but watch out for the geo-political risk, especially with smaller companies.
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