First make the company unprofitable by price controls, then blackmail it by revoking its concessions, then steal it – that seems to have been the playbook of Argentina's government regarding YPF Repsol (OTCQX:REPYF).
President Christina Fernandez-Kirchner noted in her press conference on the seizure that
Argentina will manage YPF “professionally,” Fernandez said, adding that the country is one of the few that doesn’t control its own oil.
Deputy Economy Minister Axel Kicillof will help De Vido to run the company, according to Fernandez.
Argentina is expropriating YPF for the “public good,” a government official said in yesterday’s speech.
By this she means: Argentina is one of the few countries where the oil industry was not yet fully nationalized, as if that were a bad thing. The reality of the situation is that the high share of government control all over the world over the oil industry has created a major supply problem, as governments can not possibly 'manage oil companies professionally'. As all state-owned enterprises, nationalized oil firms are inefficient and wasteful – they are not businesses, they are bureaucracies. To wit, a bureaucrat – the deputy economy minister – will now 'help to run the company'.
The stock market's assessment of the seizure speaks for itself:
YPF's stock market capitalization has collapsed. Note that the bounce late in the day was occasioned by speculation that the seizure will be subjected to international arbitration to obtain full value of YPF's Argentine assets. Whether Argentina will feel bound by such arbitration is a different matter - click chart for better resolution.
As several commentators have observed, this seizure makes Argentina into an even bigger pariah than it already was following the default in the early 2000ds.
To argue, as Fernandez-Kirchner does, that it is happening 'for the good of the country' is beyond ludicrous. In all likelihood YPF will now become a demesne and feeding trough for her political cronies. Oil production will probably collapse even further (it is already in deep trouble due to the government's price controls).
A few snips from the Bloomberg article linked above highlight the problems created by the seizure:
“They are going to be closing the country as an investment destination,” Anish Kapadia, an analyst at Tudor Pickering Holt & Co. in London, said yesterday in a telephone interview from the city. “What’s surprising is that they are expropriating assets rather than going through a fair market means to get hold of a stake in the company. That sets a terrible precedent.”
Argentina, which defaulted on a record $95 billion of debt in 2001, needs to regain control of Buenos Aires-based YPF to avoid becoming “an unviable country,” after oil production slumped, Fernandez said to the accompaniment of cheers from supporters at the presidential palace. Compensation for the seizure will be determined by the National Appraisal Tribunal, Fernandez said, without giving more details.
In other words, the government wants to determine itself how much it will pay for the assets. This is how it plans to transform the seizure into an outright theft. As the analyst quoted above notes, Argentina is "setting a terrible precedent". The disdain for property rights won't be without consequences: as an investment destination, Argentina has just died again.
Not surprisingly, Spain is incensed
over the seizure, as Spain's Repsol owns almost 60% of YPF. Meanwhile, the majority owners of the shares of the combined entity are – Spain's banks! It's not as though they can use yet another hit to their balance sheets. In fact, that's about as useful as a hole in the head to them.
The four biggest holders of YPF Repsol shares are Spanish banks – click chart for better resolution.
The majority stake in YPF is owned by Spanish oil firm Repsol, whose shares fell by 8% in early trading in Madrid. Promising a "clear and overwhelming" response, Spain summoned the Argentine ambassador to express its concern.
The nationalisation has alarmed foreign investors but is said to be popular among ordinary Argentines. [just wait until they find out what it means for them, ed.]
Repsol has vowed to demand compensation, saying it could seek international arbitration over its 57% stake in YPF. "These acts will not remain unpunished," Repsol executive chairman Antonio Brufau told reporters.
The head of the European Commission, Jose Manuel Barroso, said he was "seriously disappointed" by Argentina's decision. The EU expected "the Argentinian authorities to uphold international commitments and obligations", he said.
Argentina's ambassador to Madrid, Carlo Antonio Bettini, was due to visit the foreign ministry at midday (10:00 GMT), the ministry told the BBC News website.
Earlier, Spanish Foreign Minister Jose Manuel Garcia-Margallo said the "climate of friendship" between the two countries had been broken.
The nationalisation was announced to applause on Monday at a meeting between Argentine President Cristina Fernandez de Kirchner, her cabinet and provincial governors. Reading out a statement at the meeting, an official said YPF had been "declared a public utility and subject to expropriation of 51% of its assets".
The government took over the management of YPF with immediate effect while the bill on expropriation was sent to the Argentine Congress. Supporters of the nationalisation celebrated in Buenos Aires, waving placards that read "YPF – we're going for everything". Graffiti appeared on a city centre wall that read "Repsol, get out of YPF".
Mrs Fernandez de Kirchner stunned investors in 2008 when she nationalised private pension funds and she has also renationalised the country's flagship airline, Aerolineas Argentinas.
Apparently things are going so swimmingly in Argentina following the pension fund seizure and the re-nationalization of the airline that more and more assets need to be seized to keep the placard-wavers in the streets of Buenos Aires pacified. Readers would do well to remember that the seizures of the Nazis and the Bolshevik revolutionaries were also accompanied by enthusiastic placard-waving mobs. Alleged 'popular support' for a bad policy doesn't magically make the policy any better.
As you can see, we highlighted the term 'expropriation' a few times above. This is to make sure everybody fully understands what the government is trying to do. 'Expropriation' is definitely not the same as 'buying a stake' from Repsol. It is plain and simple theft.
Repsol has vowed to fight the seizure. As this article in the WSJ reveals, one reason for the action is that there is capital flight from Argentina. The government hopes it can cut down on oil imports by seizing YPF and forcing it to make investments that are clearly unprofitable due to its price controls (yes we know, it doesn't make a whole lot of sense). Why is there capital flight from Argentina? Is capital fleeing because Argentina's economic policies are so good? Just asking. Maybe one of the placard wavers can explain.
From the WSJ article:
YPF accounted for about 35% of Repsol's 2011 consolidated earnings before interest, taxes, depreciation and amortization, and 21% of the group's after-tax income. Argentine price caps on YPF oil and gas sales have prevented Repsol from reaping the full benefits of high prices in global oil markets.
Compensation, to be determined by an Argentine tribunal, could take months or years to reach Repsol coffers, and in any case is likely to be far less than the company's preferred value.
Repsol YPF SA (REP.MC) Tuesday said the value of its Argentinian unit is worth $18.3 billion, leaving the value of its stake in the company at $10.5 billion. The company said the YPF valuation equates to $46.55 per share.
We can be sure that Argentina's government doesn't plan to pay anywhere near to that amount. The UK Telegraph reports:
Despite the threat of nationalisation, reports in the Chinese media suggested that China's second-largest oil company, Sinopec, was in talks with Repsol to buy YPF for more than $15bn. Mr Brufau declined to comment on the rumours, although he said that Repsol had received interest from foreign compaines over YPF.
Spain, which has several sizeable operations in Argentina, warned that it would take "clear and forceful measures" in response. "It's a hostile decision against Repsol, thus against a Spanish business, and thus against Spain," Jose Manuel Soria, Spain's industry minister, said on Monday.
In Madrid, Jose Manuel Garcia-Margallo, Spain’s foreign minister, said measures against Argentina would be announced in the next few days.
“This has broken the climate of friendship that existed between Spain and Argentina,” Mr Garcia-Margallo added. “Spain had worked with Argentina during its hardest hours.”
The Argentine government has been tightening the noose on Repsol over recent months, withdrawing operating licences and accusing the company of failure to invest adequately in its Argentine operations. Repsol has denied these claims.
Spain is one of the biggest foreign investors in Latin America. Banking groups Santander and BBVA, and telecoms giant Telefónica have operations in Argentina.
It seems plain stupid to aggravate your biggest foreign investor, but there it is. Argentina is firmly embarked on the economic road to hell and it seems it is not even paved with good intentions.