Investors Should Say Goodbye Argentina
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The emerging market story is well-known to investors. The positives to investing in emerging economies include rapid economic growth, low debt levels, a population becoming middle class, and a government that allows free markets to enrich their populace.
Then there is Argentina, a country blessed with an abundance of natural resources but where the government can't stop making stupid economic decisions. Argentina should be using its natural resources, as neighboring Brazil has, to improve the lives of its citizens.
But instead it has followed in its decades-long path of government policy mistakes by making another poor decision recently. All the signs are pointing to a greater government role in its largest energy company, YPF S.A. ADR (NYSE: YPF), which is currently 57.43% owned by Spain's oil company Repsol (NASDAQOTH: REPYY.PK). Nationalization, ala Venezuela, also looms as a possibility.
The country's president, Cristina Fernandez, has given all the signs the past few weeks that YPF will be undergoing drastic changes soon. She has openly criticized the company, demanding much greater amounts of investment and production.
Argentina's oil output has dropped 32% since production peaked in 1998 and gas output has fallen 10% in the 2004-2010 period. Reserves have also declined, with oil reserves down 18% since 1999 and gas reserves lower by 54% since a peak in 2000. YPF has been solely blamed (and not government policies) for Argentina's falling hydrocarbons production and subsequent 110% leap in last year's fuel import bill. In reality, it is the government's highly regulated domestic market, where prices are kept well below global levels, which has discouraged investment.
Despite the government's disincentives, YPF has indeed been investing into the country's hydrocarbons. In the Chubut province, where two concessions were taken away, the company invested $350 million in its fields in 2011 – a 236% rise from 2009. This resulted in a 14% increase in completed wells for 2011 and a rise of 83% from the 2007 well completion level. Production also increased in Chubut province by 2.6% in the last four years despite a number of strikes by workers.
Despite such success, the end seems to be near for YPF as a private company it seems, as Fernandez has openly backed regional governors who have stripped YPF of operating concessions. YPF lost 12 licenses in five provinces since March 14, including the loss of its most productive field on March 31.
It is therefore no surprise that the markets have built in an expectation that the long-held aim of bringing the former state-owned oil monopoly back under state control will soon occur. Not only is this bad news for YPF shareholders like Repsol, but it hurts investors holding the Argentina exchange traded fund, the Global X FTSE Argentina 20 ETF (NYSEMKT: ARGT) as the country's reputation for how it treats investors suffers. The ETF consists of Argentina's 20 largest stocks.
It is really sad that Argentina decided to make such a move at this time, as YPF recently discovered some very large shale gas and oil reserves in the country. Argentina is believed by experts to be home to the world's third-biggest reserves of shale hydrocarbons.
Estimates are that it would cost about $250 billion over the decade to begin to develop these shale deposits. This is money that clearly the Argentine government does not have. The only hope was to have YPF, Repsol and any international partners they could draw in invest into Argentina's shale riches. But unless the government quickly reverses course, it looks the shale deposits may never be developed and Argentina's energy import bill will continue to climb.
For investors, unless Argentina's government changes policy course and soon, they will be better served by investing into other emerging markets around the globe.
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