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 align="alignright" caption="Oil pump, Los Perales, Santa Cruz, Argentina"] [/caption]
Under the decree announced by President Cristina Fernández de Kirchner, 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 ( REPYY , quote ) nothing in advance of the government takeover of its subsidiary YPF ( YPF , quote ) 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 ( PZE , quote ) 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 ( ARGT , quote ) 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 ( EWZ , quote ) and flat performance in the iShares S&P Latin America 40 Index Fund ( ILF , quote ).
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