BY LATIN AMERICA ADVISOR
Spanish-Argentine oil and gas company Repsol-YPF announced last month it was selling a 14.9 percent stake in its Argentine unit, YPF, to Argentina's Petersen Group for $2.2 billion, with the option for the Petersen Group to buy another 10.1 percent over the next four years. What does the deal mean for YPF? Do you expect falling output by YPF to continue?
Isabella Alcañiz, Assistant Professor of Political Science at the University of Houston: This deal may benefit Repsol-YPF in that the Petersen Group, led by the Eskenazi family, has very close ties with the Argentine government (Enrique Eskenazi, a banker from the province of Santa Cruz, has done business with the Kirchners since Nestor Kirchner was governor of Santa Cruz). The transaction further allows Repsol to pursue its (now quite noticeable) interests in other markets. Direct access to the government of President Cristina Kirchner is a major advantage for YPF, in particular in the current climate of tension between the oil sector and the government—exacerbated by the difficult energy crisis. However, in terms of increasing the productivity of YPF in Argentina, it is not clear how much the Peterson Group will contribute to Repsol-YPF. The Eskenazi family has built its conglomerate on banking and construction, and has no experience or expertise in oil and energy. Repsol-YPF touts the strategic partnership as critical in shoring up the financial structure of YPF in Argentina. Yet this will only be the case if the Eskenazi family contributes its financial means to the oil company. Finally, given the closeness between the Argentine government and the Eskenazi family, some critics interpret the transaction as evidence of increased regulation and even the possible (re)nationalization of YPF in the future.
Juliette Kerr, Senior Research Analyst for the Americas at Global Insight: The deal is good news for YPF, as the entry of a local partner could help strengthen the former state oil company's relations with the government. The government of former President Nestor Kirchner demonstrated a strong preference for companies deemed to be of strategic importance to be controlled by Argentine shareholders, and there have been no clear indications that his successor, Cristina Fernandez de Kirchner, will adopt a different approach. At the same time, the partnership with the Petersen Group will allow Repsol to share the financial burden of meeting its continued commitments in Argentina. However, there have been no indications that the deal will result in any new investments over and above those already planned by Repsol in the country. Instead, the divestment of a stake in YPF will allow the Spanish company to continue its strategy of diversifying its upstream assets away from Argentina. For Repsol, production growth is expected to come from other areas apart from Argentina. However, this does not mean that YPF's production outlook will not improve in the future, especially if there is an improvement in the operating environment for energy investors. Its producing fields are declining, but there is the potential for new discoveries in Argentina, particularly in offshore areas. Ultimately for YPF, as with other companies present in the country, investments in new projects will require government assurances that they will receive favorable returns on their investments.
Luciano Gremone, Associate Director of Corporate Ratings at Standard & Poor's: In the past five years, YPF has been able to pay significant amounts of dividends while also reducing its financial debt to very conservative levels. We recognize that the company is currently underleveraged and could potentially raise debt in the future while maintaining strong credit ratios. However, YPF faces medium-term challenges mainly related to sustaining or increasing its production levels and maintaning an adequate average life of its reserve base, currently at 5.8 years (taking into account 2006 production levels). Given that the Petersen Group will finance the acquisition with sizable amounts of debt at a holding company level, this would add certain pressure on YPF to maintain its current aggressive dividend policy. This becomes particularly relevant in light of YPF's capital expenditure needs to maintain an adequate reserve base to avoid increasing its business risk profile. YPF's credit quality evolution would depend on the above-mentioned factors, the company's business plan, and expected financial policy with a new local partner (Repsol plans to announce its strategic plan during first-quarter 2008), and our perception of Repsol's incentives to support its subsidiary.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.