A vote of confidence for Argentina
Chevron's investment is great news for YPF. The Argentine company has great potential but lacks the capital to develop that potential. YPF, for example, owns 40% of the total acreage in Vaca Muerta, which is estimated to have as much as 21 billion barrels of prospective oil equivalent, but YPF's 2013 capital expenditure budget was only 29.8 billion pesos, or $3.72 billion using current exchange rates.
Many experts believe fully developing Vaca Muerta's reserves will require an investment numbering in the tens of billions of dollars, something that YPF simply does not have.
With Chevron's $1.6 billion investment this year, YPF now has the capital to develop Vaca Muerta faster -- which means YPF will realize profits faster.
Chevron's investment is also good news for the Argentine government, which owns 51% of YPF.
The Argentine government ostracized many oil producers by nationalizing a significant part of Repsol YPF S.A.'s (NASDAQOTH: REPYY ) stake in YPF in 2012.
That nationalization arguably led to much of Argentina's current troubles. Because of that nationalization, foreign investors withdrew their capital and the country's balance of payments worsened. As a result, Argentina's currency depreciated and inflation spiked. With Chevron's investment, foreign capital is going into Argentina rather than away from it. While this deal is too small to solve Argentina's balance of payments problems, it may lead to other oil super-majors investing in Argentina. If enough foreign investors invest in Argentina, the country's macro problems will turn around.
Finally, the investment represents good risk/reward for Chevron. The Energy Information Administration estimates that Argentina has the third largest reserves of shale gas in the world at 802 trillion cubic feet. If things work out, Chevron will have access to a substantial percentage of that resource for a relatively low price. If things deteriorate, $1.6 billion is just a small part of Chevron's total capital expenditure budget of $39.8 for 2014.
The bottom line
YPF is a very controversial stock. Given its large energy reserves, it could eventually be worth many multiples of its current price. Given that Argentina nationalized part of that company before, it could also be worth very little if the government nationalizes it again.
In my opinion, the probability that Argentina nationalizes YPF in the near future is low. Argentina has much more to gain by working with foreign oil producers rather than against them. Chevron's deal represents a vote of confidence in Argentina and could yield substantial dividends for everyone involved in the long term.
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