Petrobras Argentina SA - Heavily Undervalued, And Worth The Risk?

| About: Petrobras Argentina (PZE)
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In 2011, the Argentine energy industry was shaken by two game-changing developments. First, YPF, S.A. (NYSE:YPF), then a subsidiary of Spain's energy conglomerate Repsol, S.A., announced on November 7, 2011 a supergiant oil and gas field discovery in the Vaca Muerta shale formation in the province of Neuquén, Argentina. The US Energy Information Administration believes that total technically recoverable hydrocarbons from Vaca Muerta could ultimately reach 16 billion barrels of oil and 308 trillion cubic feet of gas.

The announcement caused the American Depositary Receipts (ADRs) of YPF, traded in the New York Stock Exchange, to shoot up 13.36%. The administration of Argentine President Cristina Fernández de Kirchner was however quick to throw cold water on the market's enthusiasm, when it moved to expropriate the controlling shareholding interest of Repsol in YPF, just weeks after the announcement. The market price of YPF's ADRs would soon collapse.

International investors frequently regard proposals for prospective investments in Argentina with suspicion, if not outright hostility. Partly as a result of a long-standing, sour aftertaste from the country's 2001-2002 sovereign debt crisis, which saw the country default on over US$100 billion in bonds, and partly as a result of more recent missteps by the government of Cristina Fernández de Kirchner, the country suffers from a scathing reputation among many investors.

The Argentine government remains largely locked out of international capital markets. Blue chip Argentine companies retain some access to international capital, but generally only on terms that are prohibitively expensive (despite low interest rates around the world, double-digit returns are routinely required), and which would not be on offer by similarly situated companies in other jurisdictions, including neighboring countries such as Chile or Brazil.

Despite the expropriation of Repsol's shareholding interest in YPF, energy giants are hearing the siren calls of Vaca Muerta. Heavily courted by the Argentine government, these energy giants are preparing massive investments in the country. Chevron Corporation (NYSE:CVX) recently signed a US$1.24 billion (initial phase) agreement with YPF to assist in the development of Vaca Muerta, and China's CNOOC Limited (NYSE:CEO) is expected to follow suit. Despite litigation threats from Repsol, Vaca Muerta appears simply too big to ignore.

International investors interested in capturing the high rates of return offered by Argentina's blue chips and the tremendous growth potential of the country's energy infrastructure and resources should consider an investment in Petrobras Argentina SA (NYSE:PZE), the Argentine subsidiary of Brazilian energy giant Petroleo Brasileiro Petrobras SA (NYSE:PBR). Argentina's fickle politics aside, Petrobras Argentina appears massively undervalued by any measure.

Background

Petrobras Argentina is an integrated energy company that is the third largest oil and fourth largest natural gas producer in Argentina, accounting for 7% and 6% of the country's overall oil and gas production. The company also has operations in Bolivia, Ecuador, Peru, and Venezuela. In addition to its oil and gas exploration and extraction activities, the company is engaged in refining crude oil, producing petrochemicals, distributing gasoline through a retail network of service stations, and in generating and transmitting electricity.

The core of Petrobras Argentina's operations is its oil and gas exploration and production business segment. As of Dec. 31, 2012, the company had interests in 39 oil and gas blocks mostly in Argentina, of which 23 were production blocks, and 16 were blocks within exploration areas or awaiting production authorization. The company was the contractual operator of 26 of the 39 blocks in which it had an interest.

A fully integrated oil and gas company, Petrobras also has a robust refining and distribution business segment. The company has a refinery located in Bahía Blanca in the Province of Buenos Aires, with a total refining capacity of 30,500 barrels of oil per day. In addition, the company has a 28.5% interest in a separate refinery with a refining capacity of approximately 26,400 barrels of oil per day and a natural gas processing capacity of 20.4 million cubic meters of gas per day. On the retail level, the company distributes its gasoline and other refined products through a network of 271 gas stations, 260 of which are Petrobras-branded gas stations.

Petrobras Argentina is also a key manufacturer of petrochemical products in Argentina, producing a wide array of products for the domestic and foreign markets, such as intermediate gasoline, aromatic solvents, hexane and other hydrogenated paraffinic solvents, propellants for the cosmetic industry, monomer styrene, rubber, and polymers. Petrobras Argentina is the only producer of styrene, polystyrene and elastomers and the only integrated producer of plastics derived from oil production in Argentina.

Petrobras Argentina has an integrated petrochemicals complex at Puerto General San Martín, in the Province of Santa Fé, with an annual production capacity of 50,000 tons of gases (LPG and propellants), 155,000 tons of aromatics, 290,000 tons of gasoline and raffinate, 160,000 tons of styrene, 58,500 tons of synthetic rubber, 180,000 tons of ethylbenzene, and 31,000 tons of ethylene. It also has a state-of-the-art polystyrene plant (the only of its type in South America) in the city of Zárate, in the Province of Buenos Aires, with a production capacity of 65,000 tons of polystyrene and 14,000 tons of bioriented polystyrene per year, and an ethylene plant located in San Lorenzo with a production capacity of 19,000 tons per year..

Petrobras Argentina is also engaged in the "gas and energy" business. Although aggregated for financial reporting purposes, this business segment consists of two distinct activities: gas marketing, processing, and transportation, and electricity generation and transmission. Petrobras Argentina is engaged in the marketing of gas produced by its oil and gas exploration and production division. The company also holds a co-controlling interest in Transportadora de Gas del Sur, S.A. (NYSE:TGS), which operates southern Argentina's pipeline gas transportation complex and is also the country's largest processor and marketer of natural gas liquids.

In addition, Petrobras Argentina is a major player in the Argentine electricity market, where the company operates in the generation and, to a lesser extent, in the transmission segment. Petrobras Argentina generates electricity at the Genelba thermal power plant and the open cycle gas-fired turbine in the Province of Buenos Aires, the Pichi Picún Leufú Hydroelectric Complex in the Comahue region, on the Limay River, in the Province of Neuquén in Argentina, and in the Ecoenergía thermal power plant in Bahía Blanca, in the Province of Buenos Aires. In addition, Petrobras Argentina is engaged in the energy transmission business through its 69.99% equity interest in Enecor S.A., which has a 95-year concession, expiring in 2088, to construct, operate and maintain approximately 22 km of electricity lines, and a 500 Kilovolt ("Kv")/132 Kv transforming station in the Province of Corrientes, Argentina.

The ADRs of Petrobras Argentina closed at US$4.54 on August 30, 2013 (each ADR represents 10 of the company's common shares). The company's stock was heavily punished by the market as a result of the Argentine government's expropriation of Repsol's controlling shareholding interest in YPF.

On November 8, 2011, the day immediately following YPF's announcement of the Vaca Muerta shale oilfield discovery, the ADRs of Petrobras Argentina closed at US$13.77 per ADR. As the Argentine government unveiled and then implemented its plans to nationalize Repsol's controlling interest in YPF, the dividend adjusted stock price of Petrobras Argentina has gradually slid more or less in tandem with (although not as steeply as) that of YPF. The price of the stock has recently somewhat firmed up, but has not retouched the levels that prevailed prior to the Argentine government's action against Repsol.

Petroleos Brasileiros has a 67.2% shareholding interest in Petrobras Argentina. Petroleos Brasileiros has recently sought to sell its stake in Petroleos Argentina as part of its global asset divestiture efforts. However, in May 2003, Petroleos Brasileiros announced that it had suspended the auction of its Argentine subsidiary, as the bids received to date had not met its reserve price.

Steady Financial Performance

As can be seen from the table below, during recent accounting periods Petrobras Argentina has demonstrated a fairly steady financial performance when measured in Argentine pesos. For the first half of 2013, Petrobras Argentina earned a net income of 465 million Argentine pesos. For the years 2012, 2011, and 2010, Petrobras earned net income of 670 million, 694 million, and 631 million Argentine pesos, respectively. These relatively stable profits come on the back of upwardly trending Argentine peso revenues. As can be seen, Petrobras Argentine achieved sales of 7,899 million Argentine pesos in 2009, compared to sales of 10,310 million, 11,104 million, and 12,765 million Argentine pesos for, respectively, 2010, 2011,and 2012, and sales of 7,216 million Argentine pesos for the first half of 2013.

Petrobras Argentina, SA

Selected Financial Information

(In millions of Argentine pesos, except for per common share and per ADR information)

(As of Dec. 31, except as noted)

2013, as of June 30

2012

2011

2010

2009

Sales

7,216

12,765

11,104

10,310

7,899

Net Income

465

670

694

631

876

Net Income per Common Share

0.205

0.305

0.346

0.309

0.433

Net Income per ADR

2.05

3.05

3.46

3.09

4.33

Part of the company's revenue growth can be accounted for by the effects of inflation. Indeed, historically Argentina has been an inflationary economy, and currently continues to experience high levels of inflation. Partly as a result, its currency has tended to depreciate relative to the currencies of less inflationary economies, such as the U.S. dollar. Indeed, in recent accounting periods the Argentine peso has substantially depreciated relative to the Argentine peso.

The table below indicates the U.S. dollar sales, aggregate net income, and net income per ADR that Petrobras Argentina has achieved in various accounting periods. These financial results have been converted from Argentine pesos using the exchange rate that prevailed on the last day of the applicable accounting period.

Petrobras Argentina, SA

(in millions of U.S. dollars, except as noted)

(As of Dec. 31, except as noted)

2013, as of June 30

2012

2011

2010

2009

Sales

1,342.86

2,595.57

2,579.97

2,593.06

2,078.68

Net Income

86.53

136.23

161.25

158.70

230.53

Net Income per ADR

0.38

0.62

0.80

0.78

1.14

Value per US$1 in Argentine Pesos (at official exchange rate)

5.3736

4.9180

4.3040

3.9760

3.8000

As can be seen, when measured in U.S. dollars, Petrobras Argentina's revenues have been fairly steady since 2009. Its net income trend is not as robust as when measured in Argentine pesos, but continues to reflect significant stability.

Steady Profitability Across Business Segments

For the second quarter of 2013, all segments of the company's business reflected positive gross profits. Indeed, on a year-over-year basis, the company has a track record of consistent profitability across its business segments (with the notable exception of an operating loss in the oil and gas segment for 2011), as the table below indicates.

Petrobras Argentina, SA

Operating Income Per Business Segment

(in millions of Argentine pesos)

(As of Dec. 31, except as noted)

Business Segment

2013, as of June 30

2012

2011

2010

Oil and Gas Exploration and Production

857

1,071

(108)

602

Refining and Distribution

48

11

250

94

Petrochemicals

126

151

140

137

Electricity and Gas Transportation

134

548

579

349

Eliminations between Businesses

(370)

(549)

(682)

(416)

Total Operating Income

795

1,233

179

766

A Solid Balance Sheet

Petrobras Argentina has a solid balance sheet, with limited debts relative to the company's total assets and shareholders' equity. As of June 30, 2013, the company had current assets (i.e., assets readily convertible into cash within one year) of 6,532 million Argentine pesos, compared to current liabilities of 4,151 million Argentine pesos. The company's current ratio thus stood at a robust 1.57.

Indeed, Petrobras Argentina is a relatively low debt company. As of June 30, 2013, the company had long-term liabilities of 4,344 million Argentine pesos. This compares to total assets of 19,571 million Argentine pesos, and shareholders' equity of 11,076 million Argentine pesos. Thus, as of the second quarter of 2013, the company was largely paid for by its shareholders.

The table below provides a snapshot of the company's balance sheet.

Petrobras Argentina, SA

Selected Financial Information

(In millions of Argentine pesos)

(As of Dec. 31, except as noted)

As of June 30, 2013

2012

2011

2010

Current Assets

6,532

6,024

5,124

6,578

Non-Current Assets

13,039

12,823

12,217

11,767

Total Assets

19,571

18,847

17,341

18,345

Current Liabilities

4,151

4,342

2,632

3,283

Long-Term Liabilities

4,344

3,935

4,366

5,109

Total Liabilities

8,495

8,277

6,998

8,392

Shareholders' Equity

11,076

10,343

9,953

9,541

As of close of the second quarter of 2013, Petrobras Argentina's total liabilities to equity ratio stood at 0.77. This is low for a (small) integrated oil company, which functions in the context of a capital intensive industry where its peers frequently exhibit total liabilities to equity ratios well in excess of 1. The company's low indebtedness is however often seen in blue chip companies in Argentina. These companies lack access to international markets other than at fairly expensive interest rates. Over the years, such companies have accordingly lightened up their debt loads and relied on their existing equity as a primary means of financing their operations.

Oil and Gas Production and Reserves

Petrobras Argentina releases yearly summaries of its oil and gas production and reserve-related activities. During 2012, Petrobras Argentina averaged oil and gas production of 101,600 barrels of oil equivalent per day, including 90,800 barrels of oil equivalent per day in Argentina alone. Crude oil production accounted for approximately 52,040 barrels per day, while natural gas accounted for approximately 297.2 million cubic feet per day.

The following table describes the company's average daily production of oil, including liquid hydrocarbons other than crude oil, for 2012, 2011 and 2010. As can be seen, the company's average daily production of liquid hydrocarbons has remained fairly steady, increasing slightly in 2012 after a small dip in 2011.

Year ended December 31,

2012

2011

2010

(average barrels per day)

Argentina

44,769

39,863

40,003

Venezuela

6,387

7,756

7,545

Rest of Latin America

885

946

3,468

Total

52,040

48,565

51,016

The following table sets forth the company's average daily gas production for 2012, 2011 and 2010. As can be seen, the company's gas production in Argentina has remained relatively stable on a year-over-year basis, although declines have been registered elsewhere in Latin America (particularly as a result of the company's shrinking operations in Bolivia).

Year ended December 31,

2012

2011

2010

(average thousands of cubic feet per day)

Argentina

276,191

275,786

276,805

Venezuela

2,420

3,534

4,236

Rest of Latin America

18,605

21,906

26,146

Total

297,216

301,226

307,187

As of December 31, 2012, Petrobras Argentina's combined crude oil and natural gas proved reserves were estimated at 215.3 million barrels of oil equivalent. Of this amount, approximately 57% consisted of proved and developed reserves, while approximately 43% consisted of proved undeveloped reserves. Crude oil accounted for approximately 41% of the company's combined proved reserves, while natural gas accounted for approximately 59%. Of the company's total combined proved resources, 85% were located in Argentina, with the remainder located elsewhere in Latin America.

The table below sets forth the company's estimated net proved developed and undeveloped reserves of crude oil and natural gas.

Reserves as of
December 31, 2012

Reserves category

Oil
(mmbbl)

Natural
gas
(bncf)

Oil
Equivalent
(mmboe) (1)

PROVED

Developed

62

373

124

Argentina

49

358

109

Venezuela

13

15

15

PROVED

Undeveloped

27

386

91

Argentina

15

354

74

Venezuela

12

32

17

Total proved reserves (developed and undeveloped)

89

759

215

(1)

Gas is converted to oil equivalent using a factor of 6,000 cubic feet of gas per barrel of oil equivalent.

An Undervalued Company

Petrobras Argentina is a lightly leveraged company. However, its stock is priced as if the company were experiencing financial distress. On August 30, 2013, the company's stock closed at a price of US$4.54 per ADR. The company's total capitalization stood at US$912.83 million.

As of August 30, 2013, the company's stock traded at a (trailing twelve months) price to earnings ratio of 5.82 per ADR. The stock was priced at a significant discount to balance sheet net asset value. On that day, the company's ADRs traded at a price to book ratio of only 0.42.

Relative to the company's somewhat modest market capitalization of US$$912.83 million as of August 30, 2013, Petrobras Argentina's oil and gas reserves are a substantial resource. Assuming no value for any of the company's assets or activities other than its proved and developed reserves (127.72 million of barrels of oil equivalent, as of Dec. 31, 2012), the market is assessing a relatively cheap valuation of US$7.15 for each barrel of such reserves. Likewise assuming no value for any of the company's assets or activities other than its proved total reserves (developed or undeveloped) (215.3 million barrels of oil equivalent, as of Dec. 31, 2012), the market is assessing a similarly cheap value of US$4.24 for each barrel of such reserves.

Petrobras Argentina has a solid history as a dividend payer. In 2012, 2011 and 2010, the company paid cash dividends of 211 million Argentine pesos (US$0.14 per ADR), 183 million Argentine pesos (US$0.1617 per ADR), and 275 million Argentine pesos (US$$0.2853 per ADR), respectively. The company also issued a one-to-one stock dividend in 2012. Based on its most recent cash dividend and its current stock price (as of August 29, 2013) (and ignoring the impact of the 2012 stock dividend, which would double the yield on future cash dividends for investors purchasing before its effective date), this represents a cash yield of 3.08%.

Tapping into the Vaca Muerta Formation?

The Vaca Muerta formation, the discovery of which was announced by YPF in 2011, is a supergiant gas and oil shale field. According to the US Energy Information Administration, with some (technically recoverable) 16.2 billion barrels of oil and 308 trillion cubic feet of gas, the Vaca Muerta field comprises some of the largest currently known shale reserves in the world outside of China and the US. If fully developed, the Vaca Muerta formation alone should allow Argentina not only to meet its domestic needs but also to become a hydrocarbons exporter. According to YPF in a media interview, developing just 15% of Vaca Muerta would balance Argentina's energy deficit and end the country's need for exports.

Petrobras Argentina is eminently well-positioned to benefit from the Vaca Muerta formation. As of December 31, 2012, Petrobras Argentina had interests in approximately 16,431,000 gross exploration acres in Argentina, of which approximately 1,482,000 were located in shale oil/shale gas areas, including the Neuquén basin where Vaca Muerta is located. Indeed, the company currently is actively drilling into shale oil deposits in Vaca Muerta and its vicinity.

The table below details key information concerning the company's producing fields and their location. As can be seen, the company is heavily active in the Neuquén basin. The production figures are on a net basis. Although the expiration dates for the concessions below may be extended in some instances, they do not include any extensions.

2012 Production

Oil and
Gas
Wells

Production Areas

Location

Basin

Oil (1)

Gas (2)

Oil
Equivalent (3)

Interest


Expiration


Argentina:

25 de Mayo - Medanito S.E.

La Pampa and Río Negro

Neuquén

3,730

3,188

4,261

643

100.00

%

2016

El Mangrullo

Neuquén

Neuquén

33

18,160

3,060

17

100.00

%

2025

Jagüel de los Machos

Río Negro and La Pampa

Neuquén

2,702

3,817

3,338

197

100.00

%

2015

Puesto Hernández

Mendoza and Neuquén

Neuquén

1,689

-

1,689

682

38.45

%

2016

Bajada del Palo

Neuquén

Neuquén

779

1,204

980

77

77.00

%(7)

2025

Santa Cruz II

Santa Cruz

Austral

443

3,028

948

66

100.00

%

2017/2028

Río Neuquén

Río Negro and Neuquén

Neuquén

368

11,463

2,279

128

100.00

%

2017/2027

Entre Lomas

Río Negro and Neuquén

Neuquén

2,038

2,902

2,522

496

77.00

%(7)

2016/2026

Aguada de la Arena

Neuquén

Neuquén

49

5,596

982

13

80.00

%

2036

Santa Cruz I.

Santa Cruz

Austral

1,220

36,764

7,347

113

71.00

%

2017/2035

Sierra Chata

Neuquén

Neuquén

54

9,545

1,645

59

45.55

%

2023

Atuel Norte

Mendoza

Neuquén

3

-

3

6

33.33

%(6)

2015

La Tapera - Puesto Quiroga

Chubut

San Jorge

61

-

61

-

35.67

%(6)

2017

El Tordillo

Chubut

San Jorge

2,172

-

2,172

664

35.67

%(6)

2017

Aguaragüe

Salta

Noroeste

78

3,503

662

36

15.00

%(6)

2017/2023

Estancia Agua Fresca

Santa Cruz

Austral

626

1,168

821

17

50.00

%

2034

Gobernador Ayala

Mendoza

Neuquén

145

-

145

27

22.51

%(6)

2036

Charco del Palenque

Río Negro

Neuquén

195

748

320

16

77.00

%(7)

2038

Total Argentina

16,385

101,086

33,233

3,257

Outside Argentina:

Colpa Caranda

Bolivia

Sub Andina

324

6,809

1,459

63

100.00

%

2029

Oritupano Leona

Venezuela

Oriental

1,305

-

1,305

112

22.00

%(6)

2025

Acema

Venezuela

Oriental

69

204

103

13

34.49

%(6)

2025

La Concepción

Venezuela

Lago Maracaibo

782

682

896

57

36.00

%(6)

2025

Mata

Venezuela

Oriental

181

0

181

16

34.49

%(6)

2025

Total Outside Argentina

2,661

7,695

3,944

261

Total

19,046

108,781

37,177

3,518

(1)

In thousands of barrels.

(2)

In millions of cubic feet.

(3)

In thousands of barrels of oil equivalent. Gas is converted to oil equivalent using a factor of 6,000 cubic feet of gas per barrel of oil equivalent.

Argentina's Fickle Energy Politics

The Argentine government's seizure of Repsol's controlling shareholding interest in YPF so soon after YPF's announcement of the Vaca Muerta discovery shook Argentina's business landscape. The administration of Cristina Fernández de Kirchner was quick to realize that it could not develop the Vaca Muerta resource without foreign partners. The country initially had a difficult time finding foreign partners, partly as a result of political risk aversion by such prospective partners, and partly as a result of litigation or litigation threats by Repsol against those potential partners.

The Argentine government's efforts did ultimately pay off. On July 16, 2013, Chevron and YPG signed an agreement to jointly develop the shale oil and gas deposits of Vaca Muerta. The deal is expensive for Argentina. The YPF-Chevron deal provides for a 16 percent rate of return on investment for the companies. Again, Argentina finds itself paying double digits for investments in the country.

Despite its cost, the YPF-Chevron deal is a coup for the Argentine government. It is potentially massive in scope. Chevron is initially expected to invest US$1.24 billion, including a down payment of US$300 million. The YPF-Chevron joint venture will drill 115 wells, expecting output of 11 million barrels of oil in the first year. Chevron will have an option to continue the joint venture after its initial stage. From the second to 35th year, the joint venture would drill 1,562 wells, aiming to produce 782 million barrels at a rate of 23.7 million barrels a year, for an approximate investment of US$15.4 billion. Until 2048, the joint venture encompasses capital expenditures of as much as US$16 billion.

Argentina expects to execute a separate shale oil and gas partnership with CNOOC of a scope comparable to the joint venture between YPF and Chevron. Argentina is also actively pursuing other potential partners, including The Dow Chemical Company (DOW).

Meanwhile, Argentina continues battling with Repsol over the compensation that company is due for the country's expropriation of its controlling interest in YPF. To date, the Argentine government has not paid compensation on Repsol's expropriated shares, although Repsol remains a minority shareholder in YPF. Argentina and Repsol remain far apart as to their respective assessments of the value of the Spanish concern's expropriated shares.

Repsol has filed multi-billion dollar arbitration claims against Argentina before the International Centre for the Settlement of Investment Disputes (ICSID). Repsol is also pursuing litigation against YPF, Argentina, Chevron, and YPF's other actual or potential partners in other forums and tribunals, including courts in Argentina, the United States, and Europe. Many observers believe that Repsol and Argentina will eventually reach an amicable understanding, and that Repsol will ultimately return to Argentina as an active participant in the development of the country's energy resources, including Vaca Muerta.

Could the Argentine government seize control of Petrobras Argentina? Absent a blanket nationalization of the country's energy industry, this is unlikely. In the Argentine energy space, Petrobras Argentina has an advantage over its peers. Petrobras Argentina is a subsidiary of Petroleos Brasileiros, which is majority owned and controlled by the government of Brazil. Argentina and Brazil are close commercial partners, members of the Mercosur trading block, and subject to its trade and investment accords. Although Argentina thumbed its nose at Repsol, it is unlikely that the administration of Cristina Fernández de Kirchner could pull off the political capital for a similar stunt against Petroleos Brasileiros.

A more likely political threat would come in the form of an unfavorable tax regime on exports of hydrocarbons, foreign exchange controls, or price controls. A linchpin of the tax policy of the Fernández de Kirchner administration has been a graduated tax rate system on the country's exports that, when applied to hydrocarbons, essentially caps the price received by hydrocarbon companies on their products. The government's rationale in imposing a 100% withholding tax to export price amounts in excess of a predetermined amount is to prevent "windfall" profits. Currently, when the international price for crude oil exceeds US$80 per barrel, the Argentine government will impose an incremental withholding tax rate to crude oil exports, effectively capping the price the producer receives at US$70 per barrel.

Argentina's foreign exchange controls are draconian. The Argentine government is persistently thirsty for U.S. dollars and other "hard" currencies. These requirements are ever changing, and impact both outgoing and incoming flows of capital. Of note, the government has recently required that hydrocarbon exporters repatriate their foreign exchange earnings.

Price controls primarily affect Petrobras Argentina's refining operations. To control inflation, the government limits the price of derived hydrocarbon products sold in Argentina. If price levels are set too low, the spread between raw hydrocarbons and refined products that generates the profits of the company's refining operations would narrow. Indeed, the profitability of those operations is currently constrained precisely because of those price controls.

The administration of Cristina Fernández de Kirchner has been damaging to Argentina's already shaky standing with international investors, and, as such, has increased the country's already elevated costs of capital. However, Argentina remains a robust democracy. The Fernández de Kirchner government is not eternal. Her current term expires in 2015. To most observers, it appears increasingly unlikely that Fernández de Kirchner will be able to secure the two third congressional majority needed to amend the country's constitution and open her way to a third term in office. Should Cristina Fernández de Kirchner fail to stand in the country's next elections, Argentine stock markets likely would soar in anticipation of the arrival of the more technocratic, business savvy style of governing that is prevalent elsewhere in Latin America.

Conclusions

Petrobras Argentina is a relatively unleveraged company the stock of which is priced as that of a company undergoing financial distress. The company's stock is very cheap, whether measured on the basis of the company's balance sheet, oil and gas reserves, or ongoing profitability.

Lured by the prospects of Vaca Muerta, energy giants such as Chevron are making large investments in Argentina. This may seem to some as making a deal with the devil, given the Argentine government's recent expropriation of Repsol's shareholding interest in YPF in what has been criticized as an opportunistic asset grab. It does however indicate the massive value to the global oil and gas industry of Vaca Muerta.

Petrobras Argentina is well-positioned to exploit this resource, whether as a partner of YPF or independently through its already existing drilling and exploration acreage. Argentina will likely become a major energy exporter in coming years, and an investment in Petrobras Argentina at current stock prices could be lucrative.

Disclosure: I am long PZE, PBR, TGS. 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.