Repsol YPF (REPYY.PK), the Spanish oil and gas company, has been making headlines lately after the Argentine government announced it was expropriating 51% of YPF's Class D shares. All of these Class D shares are owned by REP. REP has a 57.4% stake in YPF and a book value of 4.1EUR billion as of year-end 2011. To our incredulity, the price was not disclosed as it is to be determined by the Argentine Court of Appraisal. As of earlier this week, the Argentinean government replaced CEO Sebastian Eskenazi with Planning Minister Julio De Vido to run YPF.
For equity investors, the worst possible scenario is that the government effectively seizes the asset and does not pay anything for REP's stake in YPF. And while we think REP will receive some compensation for its stake, we expect it to be below market prices. We also think it is unlikely that the Argentine Government will be timely about a payment, if any. This leaves us concerned about the uncertainty surrounding REP's balance sheet status. The Peterson Group owes 1.5EUR billion to REP, as of year-end 2011, plus 74EUR million in the form of loan guarantees to YPF. The Petersen Group has a 25% stake in YPF. The debt owed consists of annual payments of 200USD million from 2014 to 2012. Investors will simply have to wait and see what the Argentine Government decides.
In that worst-case scenario we outlined, REP would trade in the 10.0x to 11.0x range for 2012 P/E compared with the comparable company average of 7.9x. And though REP's shares have taken a hit on the news of nationalization, we still believe there is further potential downside given political and financial uncertainties including further cuts to its already lowered credit rating (S&P). REP management seems to be aware of the ramifications and is acting decisively, having already scrapped the YPF cash dividend for 2012. If the company feels a need to improve liquidity, it does have options. The 30.0% stake in Gas Natural is worth over 3.0EUR billion and the 60.0% stake in a Brazilian affiliate is worth approximately $10.7USD billion are both potential divestiture candidates. Ultimately, it is not smart to fight these types of politics. We don't like the precedent this is setting under the Fernandez regime and are staying away from the stock.
Now, if you still want exposure to big players in the oil and gas industry, we would recommend other major players with global reach but in less politically risky locations like Exxon Mobil (XOM) and Marathon Oil (MRO), the latter which is held by John Burbank, Barry Rosenstein, and Reid Walker (for more analysis on MRO read John Burbank's Q4 Picks). Marathon Oil has decent dividends and a single digit PE ratio. We would even prefer a company like British Petroleum (BP) in spite of its assets in Russia and reputational debacle. BP has been aggressively diversifying, recently entering into a $7 billion joint venture with conglomerate, Reliance Industries (BOM: 500325), in the attractive Indian oil market. This is its second strategic alliance in the past two months. BP yields nearly 4.5% and has a 2013 forward PE ratio of 6.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.