Oh Argentina. Why must you frustrate us so? You're blessed with
so many resources and have so much charm. Yet you can't help but
alienate everyone that you come into contact with.
Over the last century, as nations such as Japan, South Korea,
Brazil and China worked diligently to join the world's top-ranked
economies, you squander away your largesse. Back in 1900, you had
in the world, and citizens from Spain, Italy, the U.K. and
elsewhere couldn't wait to emigrate to your beautiful cities and
fertile plains. You really should be at the top of your game right
Your vast storeholds of untapped natural gas could make you an
energy giant along the lines of Russia or Norway. Instead, you
fritter way such largesse with petty internal grievances. These
days, you're no longer even in the top 20, according to the
International Monetary Fund, having been surpassed by the likes of
Taiwan, Poland and Indonesia.
You're in the headlines once again, doing your best to damage your
economy even further. But this time, you won't succeed. Despite
yourself, global institutions are likely to thwart you as you move
to make yet another misstep.
I'm talking, of course, about the battle of wills being pursued by
Argentina's government and energy giant
, which is 57% owned by Spain's Repsol. In a bid to please the
segment of consumers that voted in the current Kirchner government,
Argentina has begun to do an impressive imitation of Venezuela,
turning tax-paying energy companies into the enemy. These companies
have seen limits imposed on what they can charge consumers while
paying ever-higher taxes on any profits they make.
As a result, YPF and others have done whatever any profit-making
enterprise does: allocate resources into other countries where
financial returns are better. So even as Argentina sits on a huge
amount of energy, underinvestment has led the country to be a
(Contrast that with neighboring Brazil, which has walked a much
finer line between supporting oil giant Petrobras (
) while also ensuring that its broader society reaps financial
gains from a coming energy production boom.)
The battle between Ms. Kirchner's government and Spain's Repsol has
now come to head. And looking at YPF's stock chart, it's easy to
conclude which side is winning.
Concerns are growing that in a fit of pique, Ms. Kirchner will pull
off a radical stunt such as kicking Repsol out and nationalizing
YPF. It (probably) won't happen. For speculative investors, it pays
to watch events unfold, as potentially outsized gains may be had if
Simply put, it appears as if the Argentinean government is
bluffing, and they've taken this bluff as far as they can. Fears
that YPF will be nationalized dominate the Argentinean media, with
more than a few columnists noting that Venezuela's move to kick out
for-profit energy firms has been a disaster for that country.
PDVSA, Venezuela's national oil firm, has been mismanaged and is
said to be buckling under $35 billion in debt, according to
has kept PDVSA from maximizing capital spending to deliver peak oil
As Reuters noted in early March 2012, "Critics say the Chavez
government has not invested enough in increasing output after it
fired thousands of PDVSA managers following a 2002 strike at the
company. The socialist leader has built up his support by spending
oil revenue on social programs."
But Argentineans, which are far more likely to be in the middle
class than most Venezuelans, have little appetite for a Robin
Hood-style government. Indeed, Ms. Kirchner runs the risk of
alienating her voter base by pushing YPF into state hands and
leading to a deeper cycle of underinvestment and higher fuel
[block:block=16]Yet it's not the Argentinean voters that mater
here. It's the global financial institutions and legal
organizations that will determine how this all plays out. Repsol
has a very strong case that the Argentinean government is starkly
impairing the value of its YPF stake by tacitly beating down the
stock price on nationalization fears. Even Venezuela found that it
had to make foreign energy companies whole on their investments
after they were kicked out.
To be sure, things could get even more heated before they are
of YPF could easily slip lower in coming days if Ms. Kirchner
doesn't make an abrupt about-face. This is why this is a
speculative opportunity, suitable only for patient investors. Over
the long-term, Repsol's stake in YPF will be supported in courts.
When that happens, shares could quickly move back toward the $40
mark, where they were this winter, meaning the stock could
Risks to Consider:
This analysis assumes that logic and rationality return to this
heated dispute. Argentina can't always be counted on to arrive at a
rational conclusion, though.
Action to Take -->
With the odds tilted heavily in favor of Repsol as global legal
bodies get set to weigh in, a modest investment in YPF makes sense.
It pays to read up closely, as signs may emerge that the
Argentinean government is set to back off -- before any formal
truce is announced. That would be a great time to establish a
bigger position, as shares could appreciate quickly once any
agreement is announced.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.