The Argentina oil industry has been more or less reduced to a
utility under a presidential decree announced last Friday. But the
new rules don't provide the kind of monopoly risk profile usually
associated with lower margins.
[caption id="attachment_69008" align="alignright" width="300"
caption="Oil pump, Los Perales, Santa Cruz, Argentina"]
Under the decree announced by President Cristina Fernández de
the government will establish a commission
to review the annual investment plans of all companies operating in
the Argentina oil sector. The commission will reject any proposals
it believes are inconsistent with national goals. Companies must
submit their annual plans by September 30.
Furthermore, the commission will set a reference price for sales
that reflects production costs, effectively mandating the profit
margins of companies producing Argentina oil.
Another decree released on Friday gives Argentina's economic
minister power over the shareholders in companies partly owned by
the social security agency. This is the same economic minister who
voted to pay Repsol SA (
) nothing in advance of the government takeover of its subsidiary
) in April.
We have been
negative on Argentina for some time
as South America's second-largest country has struggled with
hyperinflation and extreme political risk. GDP grew by 8.9% in
2011, but inflation probably topped estimates of 24% following
several years of hyperinflation.
Economic figures coming out of Argentina are suspect, as the
government denies estimates for inflation, reporting a rise of just
9% last year. Economists expect growth to fall to just 2.75% this
year. Capital flight pushed the government to institute a series of
controls last year. Argentina is still largely shut out of the
international bond markets in the wake of its 2001 default.
Petrobras Argentina SA (
) has fallen more than 40% since the beginning of the year. Though
Argentina would have to think twice about nationalizing the
subsidiary assets of the state-owned company of its largest trading
partner (Brazil), the environment around Argentina oil is risky and
likely to get worse.
The Global X FTSE Argentina 20 ETF (
) has underperformed most other countries and regions, with a loss
of 27.9% since the beginning of the year, compared with a 7.6% drop
in the iShares MSCI Brazil Index Fund (
) and flat performance in the iShares S&P Latin America 40
Index Fund (