A bit quiet around here lately. I would never have guessed to see TRY's price sub $4 with a low of $3.70 today, but I'm in for the long haul on this one and can ride it out. I hope no one got cleaned up or stopped out at the low. TRY Market cap at $355m on $100m in earnings ... it is hard to imagine this getting any better value ... but I would have said that at $4.50.
I just spotted this interesting article on MarketWatch.
My thoughts on TRY and the YPF saga: Repsol didn't play by the agreement and reinvest a percentage of profits in Argentina ... if they had of there wouldn't be an issue. I reckon repsol looked at the $25bn needed in ongoing investment and the depleted reserves and thought lets risk it, we don;t have much that much to lose. I just can't see the Argentinian government coming after our $100m of earnings especially if we play by the rules.
Michael Molinski's Emerging Latin America Archives May 16, 2012, 12:02 a.m. EDT Takeover of YPF: Investor warning or opportunity?
By Michael Molinski
SAN FRANCISCO (MarketWatch) — The Argentine government’s takeover of YPF SA looks at first glance like a clear signal to foreign investors that their investments aren’t safe, at least in Argentina. But is that really the case?
It’s been almost a month since Repsol SA REPYF -3.55% , a Spanish company, had its 51%-stake in YPF YPF -0.56% expropriated by the government of President Cristina Fernandez de Kirchner. Foreign investors have cried foul, accusing Argentina of thwarting any future interest in the country by foreign direct investors.
But for foreign investors entering through the capital markets, there are two questions that need to be answered first: Was the takeover of YPF done in the interests of shareholders? And, how will YPF shares fare in the future?
Addressing the first question, there are arguments to both sides: Repsol says the Argentine government violated its agreement when it nationalized YPF and that hurt Repsol shareholders and YPF shareholders. Repsol blames the government for mismanaging the Argentine economy, and says the expropriation comes after several years of preventing Repsol from passing high energy prices on to Argentine consumers by placing price ceilings on oil.
President Fernandez says Repsol had several chances to reinvest money earned by YPF — as the agreement stated — but instead chose to funnel the profits in YPF toward other international oil opportunities. YPF was a “cash cow” to Repsol, and Argentina was tired of being that cash cow. YPF and its shareholders suffered as a result of Repsol’s failure to invest in the company’s future.
Production and reserves data show that Repsol didn’t keep oil and gas growth on track after it took control of YPF in 1999. Read a story about the Argentine nationalization of YPF. Other private oil companies also fell short. Oil production in Argentina has dropped by a third since 1998 and gas production has fallen by a sixth since 2004, while proved reserves have fallen by 15% for oil and 54% for gas since 2000.
So, was the takeover of YPF good for shareholders of Repsol? And for shareholders of YPF? If you’re a Repsol shareholder, the answer is clearly “no.” But if you’re a YPF shareholder, the answer could be an overwhelming “yes,” depending on how the Argentine government manages the company from here on out.
Repsol shares traded in Europe declined immediately after the takeover and have held there since. On the contrary, the shares of YPY have begun to inch up after taking an initial hit.
Argentina was smart to rush in and appoint new managers. Time will tell how Argentina — without Repsol — will manage the company. The YPF takeover is only one in a string of protectionist measures by the Fernandez government. And that’s not a good sign!
Protectionist policies not only erode technological progress, but they can also affect trade and foreign direct investments in the short run. However, the energy industry is, by nature, extremely competitive and tends to have a short memory.
Even more important to the future of YPF shares is the future of YPF’s investments in the Vaca Muerta shale field. When the takeover took place, Repsol was in late-stage talks with China and others to sell a partnership to develop the fields. Industry experts say YPF is further along than some of its rivals at developing shale, but it will need partners to do so. Shale holds the key to YPF’s future, as its conventional oil fields have been mostly tapped.
The Argentine government has estimated it will need at least $25 billion over the next 10 years to tap that potential. Where will it find that? Credit markets, at least for now, are closed to Argentina. Also, Repsol has threatened to file suit against any potential partners that Argentina might court to develop the Vaca Muerta fields. Small investor opportunity?
Aside from the performance of YPF shares, YPF’s change in ownership might create an opportunity for small investors. The other day, while browsing through lists of top-ten holdings for Latin American mutual funds as of March 31, I noticed that none of the lists included YPF. On the surface, this seems like a good thing. Mutual funds have rules that are designed to prevent risky investments and protect shareholders. Mutual fund managers probably saw the writing on the wall in Argentina, and pulled their investments out of YPF gradually.
But I’d be interested to know if any of these funds plan to start buying up YPF after the nationalization. Now could be the time for small investors to get the jump on large institutional investors, like mutual funds, by buying YPF and betting Argentina will somehow make good on its takeover. As always, investors should tread carefully when investing in Latin America and should read other sources as well before deciding. YPF should be considered a long-term investment as part of a well-diversified portfolio.
Note: To avoid conflicts of interest, I don’t invest directly in Latin American securities.
Michael Molinski is the author of "Investing in Latin America: Best Stocks, Best Funds" and is a founding partner of Investing Across Borders, a San Francisco-based research firm (www.investingacrossborders.com)
TRY Price at posting:
$3.77 Sentiment: Hold Disclosure: Held
