BUENOS AIRES: Argentina oil spending is going up and is one reason according to Credit Suisse to buy oil and gas explorer YPF (YPF), whose shares are up 2%.
Oil prices in Argentina are higher than those in international levels, partly financing the higher spending. One large shale basin in Argentina, Vaca Muerta, is “world class,” note Credit Suisse Analysts Andre Sobreira, Vinicius Canheu and Regis Cardoso. They have an Outperform rating on YPF, and a target price of $32 per ADR; that implies more than 23% upside from the current price near $25.89.
“From a wider country perspective, there is, across businesspeople, consultants, economists, and investors, a willingness to believe the country can undergo a meaningful de-risking, regain access to international markets, and start to move past its economic issues in a new presidential mandate. From a company-specific perspective, YPF is uniquely positioned to benefit from all those themes: not only it is the company spearheading unconventional development, but also one of the most liquid investment vehicles for investors to get exposure to Argentina.”
They note that YPF needs debt to function, but:
“With capex running around $6 billion per year, EBITDA coming down from a peak of $5 billion per year to maybe $4-4.5 billion (in a margin-squeeze environment), $800 million of net interest expenses and roughly $800 million per year of debt expiring in the next years, financing
is crucial for YPF. The company has been remarkably successful to tap the domestic and international markets for its funding needs, and YPF is still underlevered at around 1.0x net debt to Ebitda (earnings before interest, taxes, depreciation and amortization).”
How does it compare to other exploration and production companies?
“YPF has been performing relatively in line with most global peers. That performance has been driven by (1) an ‘in-line’ upstream (lower capital intensity compensated the effect of lower profitability driven by lower Argentine oil prices), by (2) a best-in-class Downstream (extremely high profitability driven by market structure and by lower raw material – ie crude – costs in Argentina, coupled with capital efficient with little need for new refineries in the country) and (3) by poorer corporate / other divisions performance. [In addition,] YPF has changed … since the nationalisation and under new management, upstream capital intensity has increased to provide for growth, and a fire at a refinery plus some upgrades have also boosted downstream capital use.”
In a Credit Suisse measure of return on invested capital, YPF’s upstream performance is number three behind peers OMV (OMVKY) and Marathon Oil (MRO), and just ahead of Chevron (CVX). In the downstream, it is just behind Spain’s Repsol and Chevron. They note that YPF’s 14% production growth “includes the acquisition of Apache (APA) assets in Argentina. Ex-Apache, growth would have been 6%. YPF has an ambition to post a 3-5% growth profile going forward.”
