Published reports from Argentina indicate the government has decided to take control of the country's largest energy company, YPF S.A. (YPF). The information was published in the Pagina 12 newspaper, which is a paper considered to be friendly to government policies. If the information is accurate - this is Argentina after all - both YPF and the company's major stockholder, Spanish energy company Repsol YPF S.A. (OTCQX:REPYY) would be attractive short sale candidates.
YPF has been under government pressure to increase in-country exploration and production as energy imports have been required to meet Argentina's energy needs - $10 billion of imports in 2011. A previous article of mine, Stay Far Away From YPF And Its High Dividend Yield, discussed the issues with the company and stock. In the three weeks since that article was published, numerous drilling and production permits held by YPF have been revoked in an effort to force the company to increase production. Yes, that makes no sense, but this is Argentina.
Repsol YPF owns 54 percent of YPF and the Argentine company - Grupo Peterson - which manages the YPF operations holds 25 percent, leaving about 20 percent of YPF S.A. as free float. The Spanish parent, Repsol YPF trades in the U.S. on the OTC QX trading system. OTC Markets Group has promoted the QX service as an alternative to the major exchanges for the listing of American Depository Receipts - ADRs. Currently over 40 large cap international companies list their sponsored ADR's with OTC QX.
The YPF holdings represent approximately 20 percent of the total Repsol YPF value. The Spanish energy company currently has a market cap of $30 billion and YPF S.A. is valued at $11 billion. A government takeover of YPF would cause a significant portion if not all of the $11 billion value to vanish in the eyes of the market. At some point Argentina will be forced by international court to reimburse shareholders for a take-over. But remember, Argentina still owns bond holders several billion dollars from the 2002 default. Shareholders may wait for a very long time for compensation if Argentina takes YPF.
No take over will occur until a law is passed by the Argentine legislature, giving the government some legitimacy to the value grab. Currently, the Kirchner government has no problem with getting any legislation it wants passed.
Even if the takeover rumors are incorrect, the problems facing YPF discussed in the previous article remain and the stock value should continue to decline. So far in 2012, both the Argentine and Spanish stocks have lost close to 20 percent of their values. There is still plenty of room for further declines.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.