Robust Chevron Takes A Risk Investing In Volatile Argentina

| About: Chevron Corporation (CVX)

Argentina is one of the most oil-rich nations in Latin America, but the conditions in the country are far from being perfect. Chevron (NYSE:CVX) has taken the lead and tried to face the odds by deciding to invest $1.24 billion. It plans to use the money to drill 100 wells in Neuquén province. Recently, Argentine environmentalists demonstrated against Chevron's activities in Neuquén province. In spite of these setbacks, Chevron is in a very strong position in Argentina and I shall discuss why.

Chevron was victorious in the recent embargo

The Argentine Supreme Court lifted an embargo filed against Chevron, which had stopped the company from perusing assets worth $19 billion held by its subsidiary. The court's decision allowed Chevron to finalize an agreement with YPF (NYSE:YPF), the Argentinean state-run oil company, to develop the Vaca Muerta super-field, the second-largest shale oil reserve in the world.

Chevron's assets had been frozen by an appeals court in Argentina after an allegation was made against Texaco regarding environmental damage caused in the Ecuadorian rain forest. Chevron purchased Texaco in 2001, inadvertently inheriting the lawsuit filed against the latter. The suit was filed in the year 1993 by U.S. lawyers in favor of 30,000 Ecuadorian residents in the Amazon region, at the Lago Agrio oil field.

Argentina is an attractive natural gas destination

Though Argentina's unstable political and economic conditions intimidate potential foreign investors, they are also lured by its rich oil and gas reserves.

The Vaca Muerta prospect promises gratifying formations of shale clusters, housing an estimated 22.5 billion barrels of oil and gas. According to a document published by the U.S. Energy Information Administration, Argentina is home to more than 802 trillion cubic feet of extractable shale gas.

With such promising figures, Chevron has stood firmly by its decision to invest in Argentina, in spite of the huge economical and political setbacks in the country. Chevron's contribution will help increase the total well count from 50 to above 100. An additional 25 exploratory wells in Vaca Muerta and the Cacheuta will probably be drilled as well.

What is eating Argentina?

In Argentina, basic goods are heavily subsidized and stringent price controls have been put in place, driving out foreign investment from the country. Argentina faced its first energy deficit in 2011, ultimately forcing the administration of Cristina Fernandez de Kirchner to nationalize a 51% stake in YPF.

The extensive inflation also acts as a hurdle to operate any kind of business in the country. According to certain estimates disputed by the government, the country has reached an inflation rate of 25%. In spite of these obstacles, the extraction of hydrocarbon lures giant energy companies to invest in Argentina.

Cristina Kirchner's future may not seem very bright in Argentina, having created records for all the wrong reasons. Her infamous populist policies have dragged Argentina's economy further down, angering Argentines to the extent of demonstrating on the streets.

The government was also condemned for using the central bank reserves to repay public debt and for having imposed draconian currency controls. These currency controls reflect some of the most extreme protectionist measures anywhere in the world. The government is also alleged to have messed with the state's inflation and poverty figures, giving false hopes to the citizens.

While high rates of corruption have been the last straw for most Argentines, loss of economic freedom has driven away all foreign investors, turning Argentina into an almost investment-hostile country.

The question of Falkland Islands

Cristina's infamy is not restricted to Argentinean boundaries. It has also affected international ties thanks to the question of Falkland Islands. Attacking the British on their colonialism, Cristina wrote to David Cameron recently to hand back 'Las Malvinas'. To onlookers, it looks like the Argentinean President has renounced civil and active diplomacy.

Chevron is not alone in Argentina

Chevron is not alone in this complex country. In order to raise a sum of $15 billion, the amount required to completely develop the first shale cluster, YPF had joined hands with Bridas and China's CNOOC. The deal that YPF had struck with Bridas International expired a few days ago and may prove to be a major setback for the Argentine state oil company. On a brighter note, YPF's profit saw a rise of 31% when compared with the same period last year. Nevertheless, the company faces a number of lawsuits and compensations amounting to almost $1 billion.

In May, Exxon Mobil (NYSE:XOM) had announced that it would invest an amount of $250 million in the Vaca Muerta prospect. Exxon Mobil, which had drilled 5 wells last year, plans to drill five more this year. Exxon Mobil is one of the biggest competitors of Chevron and its presence in Argentina may seem like a threat to Chevron. However, at this point in time, Exxon Mobil's role in Argentina is limited in terms of investment and engagement.


With a market cap of $234 billion and an enterprise value of $230 billion, Chevron is one of the largest companies in the world, let alone oil and gas companies. However, with a PEG ratio of 2.78, Chevron does seem overvalued. In its favor, Chevron is profitable and has a profit margin of 11.28% and an operating margin of almost 14%.

With a revenue of $213 billion, this is a giant company that can afford to take risks such as the one it is taking in Argentina. No matter what Argentina's policies are, the country still needs foreign investment. It needs to monetize its oil and gas. There is no better company than Chevron to help the country doing it. That is probably one of the reasons why the case against Chevron fell in the Argentine Supreme Court. Certainly, Chevron not only appeals to risk-aware investors but also risk-averse investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.