Argentinean Energy Stocks: The Nationalization Fear And The Dead Cow Appeal

| About: YPF Sociedad (YPF)
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Lionel Messi, Angel di Maria, Daniel Diaz and Javier Mascherano are some Argentinean football players who have contributed much into the success of Barcelona and Real Madrid and they have been loved in Spain during the last couple of years. However Messi's country does not seem to enjoy the same love in Spain lately after the sudden nationalization of YPF S.A. (NYSE:YPF) by the Argentinean Government in April 2012. This unexpected movement has impacted negatively several Argentinean stocks, including ones in the energy sector. These energy companies are currently trading with low ratios and the bargain hunters may want to be aware of them.

However before giving more details on the companies, let's dig first into both the nationalization of YPF and its new exploration project in Falkland islands as these two events have raised significant concerns in the investment community.

The Vaca Muerta "war"

Since Néstor Kirchner, Ms. Cristina Kirchner's late husband, gained power in 2003, Argentina has turned itself into an unattractive place for an oil company to invest. It has capped domestic fuel prices and held the wholesale price it pays to YPF below the global level. This was an incentive for Repsol (OTCQX:REPYY) to invest in more promising and less interfering places, such as Brazil.

The latest episode of Argentinean energy policy took place in April 2012 when Cristina Kirchner nationalized 51% of YPF without paying a single penny. The Vaca Muerta (Dead Cow) "war" started. She had accused Repsol of fleecing YPF by using too much of its profits for shareholder benefits rather than investing in exploration and turning Argentina into an importer of fuel.

Latin American countries have often expropriated the assets of foreign companies, ever since Bolivia did so to Standard Oil in 1937. The Group of Seven countries have also rewritten contracts by force majeure. The United Kingdom did so with the tax on North Sea oil in 2005 and Canada's Alberta province raised its take of oil sands revenues in 2009. That is not as bad as seizing companies although it involves changing the rules long after the wells are sunk.

YPF has its assets at the Vaca Muerta basin in the Argentine province of Neuquén and many believe that this basin has the world's third largest shale gas and oil reserves. Repsol, which still holds about 10% of YPF, has initiated legal action against the Argentina government and YPF, and has threatened to do so against anyone doing business with them.

Whatever happens on the legal front, Big Oil appears ready to handle it. The exploitation of the Vaca Muerta Basin will demand capital and technology, and Argentina now lacks both. This is why YPF and Chevron (NYSE:CVX) signed recently a memorandum of understanding to explore both conventional and unconventional shale gas and oil.

Chevron is not alone. The oil majors aren't afraid of Repsol's threats, as Exxon Mobil (XOM) and Apache (APA) have also approached YPF to sign deals.

Falkland Islands Project

Apart from the Vaca Muerta "war" above, Petrobras Argentina (NYSE:PZE) had its Veta Escondida concession revoked in April 2012 and the Canadian oil junior Azabache Energy (OTCPK:AZBCF) had its Neuquén concession revoked in April 2012. On top of that, we may see the modern version of the Falklands War in 2013. According to the latest news, Argentina has set itself on another collision course with Britain by planning to use seized YPF S.A. to search for oil around the Falkland Islands. The Venezuelan oil giant PDVSA is teaming up with the formerly owned by Repsol energy company. This prospect of an Argentina and Venezuela move into Falklands exploration came as a US company prepared to move into the area for the first time. Noble Energy (NYSE:NBL), a Texas based exploration and production group, is buying interests in licenses held by Falklands Oil and Gas off the islands' northern and southern coasts. Over the next three years Noble estimates it will be investing between $180M-$230M to develop its interests.

The companies

1) Apco Oil and Gas International (NASDAQ:APAGF): It has interests in eight oil and gas producing concessions and two exploration permits in Argentina, and three exploration and production contracts in Colombia. Its producing operations are located in the Neuquén, Austral and Northwest basins in Argentina. It also has exploration activities in both Argentina and Colombia. I know this company because of two reasons:

a) WPX Energy (NYSE:WPX) was included in one of my recent articles and WPX is the major shareholder in Apco with a 69% stake in it.

b) Apco holds significant acreage (150,000 net acres) in Colombia which has a very strong upside potential as I have already mentioned in another article.

In March 2012, Apco made its first oil discovery in Colombia. The Maniceño-1 well in Llanos 32 Block (20% WI) flowed oil at a rate of 7,558 bopd. In addition, the well flowed naturally at a rate of 3,036 bopd over a subsequent six-hour period. This well was put into production in July 2012. A second exploration well in Llanos 32 Block - the Samaria Norte 1 well (20% WI) - successfully tested oil recently and is waiting on approval to be put on a long-term production test of the Guadaloupe formation.

In May 2012, Apco Oil suspended its dividend to fund capital investment. This profitable company trades below its book value (PBV=0.9), it has a low 2012 PE=6 and it is almost debt free. The Funds from Operations (FFO) annualized for 2012 will be around $45M. The long-term debt is only $8M so the DCF ratio is as low as 0.18.

2) Petrobras Argentina: It operates as an integrated energy company. It engages in oil and gas exploration and production activities, refining, distribution and petrochemical manufacturing in Latin America. Petróleo Brasileiro S.A. (NYSE:PBR) owns 67.2% of Petrobras Argentina's outstanding shares.

The company trades below its book value (PBV=0.4) with a 2012 PE=7. Based on the Q3 2012 report, the net income increased yoy along with expanding profit margins. The net income increased by 109.8% when compared to the same quarter one year prior, rising from $15.07 million to $31.61 million.

It also has reasonable debt levels. As of Q3 2012, the debt-to-equity ratio is very low at 0.25 implying that there has been very successful management of debt levels.

The operating cash flow yoy has weakened as the net operating cash flow in Q3 2012 has decreased to $154.37 million or 36.65% when compared to the same quarter last year. However the company trades 1.3x its operating cash flow which is a very low metric.

Petrobras Argentina disclosed last June the discovery of a new oil and gas field in Estancia Agua Fresca concession area, located in the province of Santa Cruz. Preliminary test results indicate the presence of gas and 52° API oil, with estimated reserves of approximately 6M barrels of oil equivalent. La Cancha where Petrobras has 50% WI, is the second discovery within the concession area which also includes the Agua Fresca field, with a current daily production of 473 cubic meters of oil and 90 thousand cubic meters of gas.

3) Transportadora de Gas Del Sur (NYSE:TGS): The company operates in three segments: natural gas transportation, natural gas liquid production and commercialization, and midstream services and telecommunications. This is another Argentinean company that trades well below its book value (PBV=0.5) and with a very low 2012 PE=5.

TGS's largest segment converts natural gas to liquid petroleum which is sold to the world markets. TGS pipelines transport about 60% of all of Argentina's Gas. Transportadora de Gas Del Sur has a total of 5598 miles of pipeline, 4754 miles of which is owned by the company and the remainder leased.

TGS is restricted from having their own retail gas business so it actually transports and resells natural gas to retailers. Its contracts are regulated and performed at a fixed rate. This sector is an oligopoly in Argentina as there is only one major pipeline competitor currently.

YPF S.A. found a huge deposit of unconventional natural gas in late 2011 that would be equivalent to a quarter of the country's proven reserves in the Patagonian province of Neuquén. This discovery is in close proximity to two existing TGS lines and thus it could help insure future revenue growth for TGS.

TGS has plenty of cash on hand and the profit margins are good. In addition, the company has been paying a dividend during the last 5 years and the last lofty dividend ($1.48) was an abnormally large one-time distribution. However the company has not revealed any specific dividend policy so I cannot make any safe conclusion about the future dividends. I believe that an annual dividend of $0.06 is quite sustainable.

4) Gran Tierra (NYSEMKT:GTE): It has a diversified portfolio of assets (7 million net acres) that spread from Colombia and Argentina to Peru and Brazil. Argentina is not its core area but it contributes almost 20% into the total production of approximately 19,500 boepd (96% oil and liquids). Its Argentinean activity follows the Dead Cow's siren at the Neuquen Basin and it has some acreage at the Noroeste Basin too.

The company had considerable growth YOY both at the top and at the bottom line from 2009 until 2011 but things seem to have stalled in 2012. It had some operational issues during the first half of 2012 and this is why the FFO were negative. However it seems that the management team has turned the ship around and the first positive FFO showed up in Q3 2012.

Gran Tierra has PBV=1.2 and it holds zero bank debt but it has a rather high 2012 PE=15. It trades for a decent $77,000 per flowing barrel. According to the latest report, it has 49MMBoe (85% oil and liquids) so it is priced for $30 per Mboe which is not a bargain either.

5) Americas Petrogas (OTCPK:APEOF): It has conventional and unconventional (shale and tight sands) oil and gas interests in numerous blocks (Totoral, Yerba Buena, Bajada Colorada, Los Toldos II, Los Toldos I, Huacalera etc.) in the Neuquen Basin of Argentina where another Canadian junior, Madalena Ventures (OTCQX:MDLNF), also operates. It is the third largest holder in the Neuquen Basin with 1.4 million net acres and it has some major joint venture partners like Exxon Mobil, Apache and Gran Tierra Energy. The company has also operations in Peru through GrowMax Agri Corp. which is owned 80% by Americas Petrogas and continues to advance on its potash and phosphates projects in the Sechura Desert.

During October 2012, the average production exceeded 3,000 bopd. So it trades for $100,000+ per flowing barrel and well above its book value (PBV=2). None of them is a low metric.

It also loses money for the first six months of 2012 and the estimated annualized Funds From Operations for 2012 are only $13M. The company is debt free and as of the latest report it holds a significant amount of cash (~$85M) to fund its operations. All that being said, Americas Petrogas is not cheap currently and the nationalization fear has not been priced into its current valuation yet. If the stock price goes significantly lower, I will consider it as a buying opportunity.


Kirchner's interventionist policies have set significant setbacks in investment confidence and overall appetite for working with the Argentine government. Many Argentinean stocks could be worth much higher than their current price based on their fundamentals, but the current administration scares investors worldwide. Hunting for bargains or stocks with compelling valuations in Argentina is not a bad idea. However the timing matters and maybe things could get worse before they get any better in that South American country.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PZE over 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.