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Cry for Argentina: Nationalization of YPF Will Damage Economy

By Jim Fink on April 27, 2012

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You have to feel sorry for Spain. Standard & Poor’s just downgraded the country’s sovereign debt rating to BBB+, its economy is burdened by a crushing debt load, radical fiscal austerity, a deep recession with growth not expected to resume until 2014, and an unemployment rate of  24.4%. The last thing the country needs is to be robbed.

YPF Nationalization Hurts Repsol

But a $10 billion robbery is exactly what Spain faces in Argentina. In the biggest defeat for Spain since the British navy destroyed the Spanish Armada in 1588, Argentina has decided to strip Repsol (OTC: REPYY.PK) — Spain’s largest company — of its majority interest in the Argentine oil company YPF (NYSE: YPF). Specifically, Argentina will reduce Repsol’s stake from a 57.43% controlling stake to 6.43%, and divide the 51% expropriated between the national government and the country’s provincial governments. The new ownership structure will be as follows:

Percent Ownership after YPF Nationalization

Entity

Percent Ownership

National government

26.03%

Grupo Petersen (private Argentine company)

25.46%

Provincial governments

24.99%

Publicly traded

17.09%

Repsol

6.43%

 

Repsol, which purchased 97% of YPF from the Argentine government for $15 billion in 1999, sold off a 25.5% stake to Grupo Petersen starting in 2007 and an additional 17% to the public in a March 2011 IPO. Repsol now says that YPF as a whole is worth $18.3 billion, which means that its expropriated 51% stake is worth $9.3 billion and its entire 57.43% stake is worth $10.5 billion. Repsol’s stock has cratered in 2012 by more than 35%, which is understandable given that YPF accounted for a quarter of the company’s operating profit and more than 40% of its proven energy reserves. No wonder that Standard & Poor’s decided to downgrade Repsol’s credit rating!

Repsol is demanding that the Argentine government pay it compensation for the expropriation based on its $18.3 billion valuation, but predictably the Argentine government disputes this valuation of YPF and says it will pay Repsol much less. How much less Repsol will be paid is unknown until Argentina’s “valuation court” renders a decision on the matter.  Rest assured that the valuation decision will be based on political considerations and not economics.

Adding insult to injury, China’s Sinopec (NYSE: SHI) was reportedly willing to pay Repsol $15 billion for its majority YPF stake but pulled the offer upon news of the Argentine nationalization. It is also unclear whether Grupo Petersen intends to pay back a $1.9 billion loan Repsol gave it as part of its purchase of its YPF stake. My guess is that Repsol will have to write off the debt in exchange for Grupo Petersen agreeing not to exercise a buyback change-in-control provision.

Argentina is a Socialistic and Authoritarian Investment Landmine

Argentina has been a treacherous place to invest since 2001 when the country defaulted on $100 billion in foreign debt – the largest debt default in history.  Even now, a decade later, Argentina is shut out of international credit markets for its deadbeat behavior.  Since 2003 the country has been ruled by the Kirchner family – first Nestor until 2007 and then by his wife Cristina from 2007 until the present. Cristina is a member of the left-wing Peronist party and is the first elected female president in Argentina’s history. She was recently diagnosed with thyroid cancer, had her thyroid surgically removed, and then declared that she had been misdiagnosed and did not suffer from cancer. Weird, right? I’m not sure whether to feel sorry for her or accuse her of lying about her health in order to protect her image as a strong leader.

As is typical of left-wing economies, Kirchner’s rule has been marked by runaway inflation, capital flight, import restrictions, investment-killing price controls, job-killing protectionism, inefficient and sluggish state-run companies that lose money and survive on subsidies, and increasing interference in media organizations. For example, the current inflation rate is more than 20 percent, yet the government has fined anyone who publishes the true figure and insists that inflation is running less then 10 percent. While Argentina’s economy has exhibited above-average growth over the past decade, this is entirely due to the commodity boom – soybeans in particular – and nothing to do with innovation or industrial competitiveness. As Besides YPF, Kirchner has stolen – err, I mean nationalized – water companies, electric companies, airlines, and $30 billion in private pensions.

Kirchner is following in the infamous footsteps of Hugo Chavez and turning Argentina into the next Venezuela. She is instituting a non-democratic political dynasty based on a militant youth organization called La Campora led by her 34-year-old son Maximo, and whose members are being put in charge of nationalized companies like YPF and Aerolíneas Argentinas.

Kirchner’s lack of respect for private property and the rule of law will not only hurt Repsol, but Argentina itself. No foreign company will risk investment dollars in a country that routinely expropriates foreign investments. Argentina has substantial energy reserves in the form of natural gas shale – estimated to be larger than exist in all of Europe — but these reserves need an estimated $25 billion per year in investments to come to market. Kirchner’s socialistic requirement that companies operating in the country supply the Argentine public with energy at uneconomic prices has deterred necessary drilling investments, which in turn have caused energy production to suffer. In 2011, energy-rich Argentina became a net importer of energy for the first time in 17 years and the $3.5 billion import cost is expected to double to $7 billion in 2012

Exxon Mobil (NYSE: XOM) has some Argentine investments, but a spokesman recently stated that it would put further investments on hold:

Our investment must be supported with fiscal terms and product pricing that provides a return commensurate with the risk we are undertaking and must be underpinned by stable fiscal and regulatory policy.

The European Union has denounced the YPF nationalization and plans on punishing Argentina at the World Trade Organization. Repsol is threatening to sue any company that invests in its expropriated YPF assets.

Bottom line: investing in Argentina is extremely risky until (if?) the rule of law returns.

 

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  1. avatar
    MichaelM Reply May 5, 2012 at 4:01 PM EDT

    This is a good lesson for investors that went to invest in Argentina or looking at doing so. Argentina is a banana republic ruled by a populist, demagogue, populist government that will not stop at anything to stay in power regardless of the cost to the country. The best thing that foreign investors can do is pull out of argentina as soon as they can and force the collapse of the economy. That’s the only way that the public will get rid of this morally bankrupt government.

  2. avatar
    roberto amado-cattaneo Reply April 29, 2012 at 12:07 PM EDT

    Very well written summary of the catastrophic situation in Argentina. The Kirchners are sinking the country and nobody can stop them. La Campora will slowly position themselves to rule and control everything in the future, like it was under Peron and Eva Peron. They control the votes of the working class and until somebody gets smart and starts changing that around Argentina will have for many years the KIrchners and their sons and threir chronies ruling a beatifull and plentiful land, once called the Paris of South Amarica.