Argentina's Default Is Just Bump In The Road For YPF

Aug. 6.14 | About: YPF Sociedad (YPF)

Summary

Argentina recently defaulted on its bonds.

While the default will raise borrowing costs and decrease credit, YPF is strong enough to withstand that negative impact.

YPF has strong operating cash flows to finance itself in the short term.

YPF has strong international partners to finance its growth in the long term.

Argentina has done it again. The nation recently missed a payment on its debt, making it twice in the last 13 years that the South American country has defaulted.

On the surface, YPF S.A. (NYSE:YPF) seems deeply exposed to Argentina's macro troubles. Nearly all of YPF's operations and promising acreage reside in Argentina. Furthermore, the Argentine government owns 51% of the company, giving the government significant control over the company's operations.

Because Argentina's macro conditions are murky, there is the concern that the government may lean on a healthy YPF to help it pay its bills. Mexico used Pemex for exactly that purpose when it nationalized the oil company from foreign ownership before recently reversing course.

Furthermore, Argentina's default could raise the cost of borrowing for YPF. Historically, if a sovereign government runs into trouble, the sovereign's banks will also run into trouble as well. If banks reduce loans as a consequence of Argentina's default, credit will contract and interest rates will rise, increasing YPF's borrowing costs.

Those things being said, there are reasons to not be concerned:

First, Argentina's government has arguably learned its lesson about meddling with YPF. In 2012, the government nationalized Repsol's stake and saw oil and gas production fall as a consequence. Because of the problems caused by falling domestic oil and gas production, Argentina settled with Repsol, paying the company $5 billion for its stake. Because it corrected its earlier mistake of changing YPF's shareholder structure, Argentina's government will not likely to try and meddle with YPF again in any serious way.

Second, YPF has strong enough operating cash flows to make it through the short term without need for any new bank loans. According to the company, YPF has enough cash to finance its operations for the next year and does have access to other financing if it needs it.

In the long term, YPF has strong international partners that are deeply committed to co-developing acreage with the company. In Vaca Muerta, for example, YPF has partnered with international giant Chevron (NYSE:CVX) to explore and develop the area. As part of its agreement, Chevron invested $1.24 billion last year, and has agreed to invest an additional $1.6 billion this year. The company will likely invest significantly more in the future. Because of Chevron's assistance, YPF will not have any financing problems in the long term.

As another indication that the default is not a problem, many savvy investors are sticking with YPF. Soros Fund, for example, owns over 5 million shares of the company. Third Point also recently declared that it established a position in the company.

In conclusion, while Argentina's default is certainly terrible news for all Argentine companies, the event is just a bump in the road for YPF. YPF has strong enough operations to finance itself in the short term and the company has strong enough international partners to finance its growth in the long term.

YPF remains one of the best speculative ways to play the spreading of the shale boom. Given its prodigious natural gas reserves and promising geology, Argentina may very well be the next country to realize shale's benefits. And as one of the largest landholders in Vaca Muerta and other promising plays, YPF is the best strategically placed company to benefit.

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