Investing In The Argentina Shale Boom

Includes: ARGT, TS, YPF
by: Mary Daniel

Argentina energy company YPF’s (NYSE:YPF) potential 1 billion barrel discovery could lead Argentina in to a shale oil and gas boom similar to the one that transformed the U.S. energy industry. The reserves adjacent to a Patagonian field were over six times larger than originally anticipated. The former state monopoly hopes to have more production details on a third well by the beginning of the year. YPF owns interest in proven reserves that hold more than 5.4 billion barrels of oil equivalent and produces more than a million barrels of hydrocarbon oil equivalent per day. The company has processing plants in Argentina and Spain. It is the largest private energy company in Latin America. YPF pays a steady dividend to its shareholders and the share price remains relatively stable.

Tenaris SA (NYSE:TS) is a manufacturer of steel casing and tubing for oil companies that also stands to profit from YPF’s shale discovery. Argentina houses one of Tenaris’ largest production facilities. TS is a smaller company and as such pays out a smaller dividend. YPF and Tenaris are both top holdings in the Global X FTSE Argentina 20 Fund (NYSEARCA:ARGT). Energy stocks make up the majority of the firm’s holdings. Most analysts believe the fund is overweight, but its earnings per share and sales growth numbers speak for themselves.

Already this year Argentina is ranked third globally in terms of technically recoverable shale gas resources. This South American country boasts some of the world’s largest and best-quality reserves of shale hydrocarbons. Argentina is looking to emulate the U.S.’ transition into a shale superstar. Argentina’s royalties are low relative to other resource-rich countries and the country is also offering higher prices for shale gas and oil. This creates an advantageous situation for a shale boom. Still, hydrocarbons output for Argentina has declined recently amid heavy regulation and market unfriendly policies. The Argentinean government expects to increase their imports of natural gas by 20% next year. Next year YPF plans to spend $40 million to drill three wells with high expectations. The company estimates that within five years a third of YPF’s production will come from the newly discovered shale and that the company will be self-sufficient in supplying its refineries.

A recent U.S. Department of Energy report estimated that Argentina may have more recoverable shale gas resources than is currently present in the whole of Europe. The only foreseeable problem might arise in the form of regulatory and political actions. Decree 1722 effective October 26, 2011, for example, requires that 100% of the sales proceeds from hydrocarbon and mineral exporters returns to Argentina. Most mining companies do believe that the decree will not prove much of an obstacle. Their understanding of the decree is that they will simply have to convert their profits into Argentine dollars before transferring it outside of the country.

Argentina’s energy sector stands to profit greatly from YPF’s recent discovery. This will also weigh greatly on Argentina’s economy as a whole. The country recently posted a 9.3% growth in GDP for the third quarter of this year. This sharply exceeded expectations. Argentina currently lays claim to one of the fastest growing economies in the world. In addition to the GDP growth and potential surge in the energy sector, high inflation is fueling a consumption boom as unions are winning higher wage increases. This points to an economy ready to grow even further. Inflation will erode the competitiveness of exporters and Brazil’s demand for Argentine goods is slowing. The Argentine economy is poised for growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.