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Last week, the Argentine oil giant YPF (NYSE: YPF ) issued new bonds for $1 billion. The instrument has a 10-year time frame (the expiration date is April 4, 2024) and carries an 8.75% interest rate. This is good news for YPF and for Argentina in general. Why?
First, this is the largest bond ever issued by an Argentine company. In addition, compared to the last international debt issuing that the company placed in December 2013, this one holds a lower rate and it doubles the time frame; financially, this is a lot more convenient. The previous issuing was the first international issuing for the company in 15 years, and it showed that YPF can access the international markets and that it generates enough confidence. In fact, this last issuing over-subscribed more than five times.
A little bit of history
In order to understand where YPF stands now, you need to go back in time. The company was privatized in the late 90s, when the Spanish oil company Repsol (NASDAQOTH: REPYY ) bought it. Unfortunately for Repsol, in 2012 the Argentine government nationalized 51% of YPF, generating a huge drop in the stock's price. The company went from almost $40 to a bottom close to $11. Since Repsol didn't receive a penny, legal issues and even an international conflict began.
Fortunately now, the stock is trading at around $30, and this comeback is related to several facts. To start with, the Argentine government settled a $5 billion agreement with Repsol over the nationalization. This automatically brought confidence on YPF and allowed the company to reach the international markets. The oil company also focused on increasing production and raised domestic fuel prices dramatically, boosting YPF's profits.
A major asset behind
YPF's biggest desire is to develop its vast shale oil and gas formation called Vaca Muerta located in Patagonia. According to the U.S. energy department, this formation holds 16.2 billion barrels of oil and 308 trillion cubic feet of natural gas. Intense.
That's why the company is seeking to attract investment, and it is certainly managing to do so. In addition to capital, YPF requires shale production know-how, and here is where its $1.24 billion agreement with Chevron (NYSE: CVX ) comes into place. According to the press release, the initial program will include the drilling of 100 wells in a 5,000-acre tract that is part of a 96,000-acre concession. This agreement will bring cash, technology, and experience to the table, reducing overall upstream costs.
What this means for Argentina
The regaining of confidence in YPF reinforces investors' view on Argentina's mid- and long-term potential. Let's be honest, the country is still showing fiscal and monetary weaknesses. This can be seen in the strong 20% devaluation the country experienced in late January along with continuous inflationary pressure that accelerated in 2013 and this year.
Lately, though, Argentina has been showing pro-market orthodox initiatives that include maintaining the exchange rate and capturing the excess of pesos in the market to contain inflation expectations. There is also a willingness to resolve the unpaid $9.5 billion debt held with the Paris Club and renegotiate with the remaining holdouts from its 2002 sovereign debt default. These two initiatives should help unlock the issuing of new sovereign bonds in the international markets and calm down the ongoing run on the peso.
Despite the solid international interest shown for this new issuing, the rate that YPF got is relatively high compared to the rates that normally applies to oil companies. This shows you that the issues in the country are not over, but certainly they are improving.
YPF has become a national policy for the Argentine government. A strong effort is being put into increasing production and profitability. Investors should be confident that the long-term prospects for YPF and Argentina are extraordinary.
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