Is It Time To Buy YPF?
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This year, I was among the many investors that were caught by the state nationalization of YPF (NYSE: YPF). Repsol (the former YPF control group) was not the only affected by President Cristina Kirchner's decision. YPF's stock is down 63.6% in 2012. That said, the company, which is the biggest company in Argentina and the main energy producer and operator (it owns 30% of the downstream market), is trading at seemingly ridiculous multiples: 2013 x3.7 P/E and x1.7 EV/EBITDA.
Of course, as I always say, multiples are static and the market is fearing a politically driven use of YPF's resources. If politically driven, YPF could suddenly shrink earnings and YPF's current 25% EBITDA margin. Even if that were to be true, the company has enormous shale oil/gas reserves. Actually, YPF's shale reserves could be the third largest in the world. The US Energy Information Administration estimated those reserves at 774 trillion cubic feet of gas concentrated in the Vaca Muerta rock formation, which has 23 billion barrels of oil equivalent.
Maybe that is the reason to explain that, against all odds, YPF is finding powerful partners to invest in those potentially valuable resources. Chevron (NYSE: CVX), Statoil, and Bridas are already in this list. According to recent news, Chevron and Bridas would develop two separate pilot fields, each requiring an initial investment of up to $2 billion. According to YPF's CEO Mr. Galuccio (who is a true professional with a very successful track record at Schlumberger), these upfront investments would be used to carry YPF through until the fields produced sufficient gas, whereupon YPF could market the gas to fund its share. Full development of each field would cost around $10 billion. This would already be a good chunk of the $37 billion that, according to YPF, would be needed to fully exploit Argentina’s shale resources.
Mr. Galuccio is now aiming to attract oil giant and shale expert Exxon Mobil (NYSE: XOM) into investing next to YPF. He has strong reasons to keep trying to seduce American oil majors; along with all American oil producers (like CVX), XOM is at the technological and technical edge regarding shale gas and oil resource development, such as hydraulic fracking. Their technical capacity and ample financial resources (XOM 2012 EBITDAX is expected to be as high as $56.5 billion), make them especially attractive for YPF as potential partners.
Maybe those apparently positive developments are the reason why YPF's shares are up by almost 22% in one month while the S&P 500 is up by a merely 3.5%. Now, is it time to get into YPF again? I would stay on the sidelines for now. Even if Mr. Galuccio is a highly recognized professional and YPF has ample reserves and only a $8 billion Enterprise Value, I would like to see a bit more of YPF's story before I buy shares. I would rather buy shares at a higher valuation knowing the true direction this company is taking. Assets are great and resources are massive, but I want to see a management concerned for its equity investors and willing to give back profits. States might not be your ideal partner. Even if they could be efficient (like Statoil), they just have a different agenda.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!