Argentina: Don't Feel Too Sorry For Repsol

April 27, 2012

 

IntroductionIn my last article, I tried to present a balanced picture of what is happening in Argentina. And yes, there is no question that some of the steps taken by President Kirchner are unfortunate and have added to already-existing global distrust.
But some media groups are using recent events as an opportunity to "pile on?" A case in point: the Wall Street Journal. I quote the lead from a recent story:

"It is never a good idea to agree to blackmail. The extortionist will not be satisfied until the victim is bled dry. Just ask Repsol (REPYY.PK), the Spanish oil giant. The record of its relationship with the government of Argentina strongly suggests the sovereign-risk equivalent of such a crime."

Correct me if I am wrong, but did not Repsol agree to buy a majority holding in YPF (YPF) back in a 1999 privatization?
The article points out that "Nationalizations, particularly in the energy sector in Latin America, are nothing new."
Good point: you pay your money and take your chances.
What is the blackmail angle? The article claims there are two blackmail angles:

1. The government set the price of a barrel of oil at $42 and mandated that YPF oil output could not be exported until Argentine demand was satisfied.
2. The government brokered a deal to get 25.5% of YPF sold to a third party.

The article: "Repsol was trapped."
Trapped?

1. According to Yahoo Finance, YPF's cash flow from operating activities averaged $3.2 billion annually in the 2008-2010 period. So even with the price of oil fixed at $42, YPF did not do too badly.
2. The third party deal? Today's market cap for YPF is $5.5 billion. At $40 per share (the YPF price before the recent sell-off), it would be $17 billion. 25.5% of that would be $4.3 billion. According to the information presented in the article and my calculations (see table below), YPF got $3.8 billion for its sale to the third party. For such a large transaction, $3.8 billion is reasonable.

Third Party Payment	Amount (mil. US$)
Bank Loan	680
Dividend	1,301
Outstanding	1,900
Total	3,881

Blackmail?
The WSJ article goes on to say:

"... in 2011, [YPF] investment reached a record level. Since YPF retained only 10% of earnings after dividends, that investment required heavy borrowing and YPF debt increased sharply from 2007 to 2011."

Once again, this statement needs to be qualified. With Repsol receiving 57% of the dividends being paid out, it would be quite reasonable to ask Repsol to reinvest at least part of what they received. According to Yahoo Finance, YPF's dividend payments over the 2008-2010 period totaled $5.1 billion. Repsol's share: $2.9 billion.
Don't feel too sorry for Repsol.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

 

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