2 Ways to Play Argentina's Coming Shale Boom

The U.S. may be awash in oil and gas thanks to shale deposits and new technology, but foreign shale reserves are actually larger than America's. This article highlights the potential for a strong shale oil and gas boom in Argentina and highlights two stocks to buy (and one to avoid) as a method for investors to cash in.

Jun 16, 2014 at 1:12PM

For years now America's energy renaissance has made headlines and attracted the interest of investors, many of whom have grown rich. The scale of America's shale resources is impressive indeed:

  • Shale oil: total estimated reserves 223 billion barrels (58 billion economically recoverable today).
  • Shale gas: 2,421 trillion cubic feet (Tcf) of natural gas (665 trillion recoverable).
However, those figures pale in comparison to what the Energy Information Administration (EIA) estimates are available outside the US: 3.134 trillion barrels of oil, and 20,451 Tcf of natural gas. In fact, when it comes to economically recoverable shale oil reserves, Russia is No. 1 with 75 billion barrels, followed by the US, China, and Argentina respectively. When it comes to shale gas reserves, the US is No. 4 behind China (1,115 Tcf), Argentina (802 Tcf), and Algeria (707 Tcf). 
 
In this article I'd like to point out Argentina's potential as the world's next great oil and gas juggernaut. However, there are substantial political and economic risks involved with investing in Argentina, which is why I'd advise investors to avoid YPF (NYSE:YPF), Argentina's largest oil and gas producer, and instead cash in on this potential boom with oil service experts Baker Hughes Incorporated (NYSE:BHI)  and Schlumberger Limited (NYSE:SLB).
 
Risks associated with Argentinian oil and gas production
YPF, as the largest oil and gas producer in Argentina, seems like the obvious first choice when it comes to profiting from an Argentinian shale boom. And unlike the other major Latin American oil and gas producer, Petrobras, which I recently recommended against investing in, YPF has several things going in its favor. 
  • In recent years its been able to raise prices on its oil and gas.
  • Its CEO, Miguel Galuccio, is a former Schlumberger executive and appointed by Argentina's current president.
  • Revenues have been growing strongly, an average of 27% annually over the last three years.
  • It has recently signed agreements with Chevron, Baker Hughes, and Schlumberger as part of a five year, $37.2 billion investment program aimed at increasing oil production 29% and gas production 23% by 2017. 
  • It has access to the Vaca Muerta shale formation, estimated to hold 16.2 billion barrels of oil and 308 Tcf of natural gas.
  • Its operating and net margins are slightly above industry average.
Indeed, unlike the horribly mismanaged Petrobras, YPF seems to be well run -- so why not invest? One simple reason: political risk
 
In 2012 Argentina's government expropriated 51% of Repsol's shares in YPF. It provided no compensation (though Repsol was later able to sue the government and settled for $5 billion in Argentinian bonds).
 
The nationalization of YPF didn't necessarily hurt investors directly and, in fact, soon afterwards the government raised prices substantially.
 
However, with Argentina's inflation rate at 35%, the days of energy price increases are likely coming to an end, which means YPF's earnings growth prospects are dimming in the face of populist political pressure -- the government has already capped gas prices at $2.5/Mbtu conventional and $5.5/Mbtu shale gas. With a strong precedent set for government seizures and meddling, long-term investors should look elsewhere to cash in on this potential energy bonanza.
 
Why Baker Hughes and Schlumberger are better choices
There are three reasons for investing in Baker Hughes and Schlumberger instead of YPF: technology, political pull, and dividend growth opportunity.
 
Regarding these companies' strong political connections, consider that Argentina's president appointed a former Schlumberger executive to be president of YPF (as well as forced YPF to recruit Baker Hughes' Juan Geroby to head the company's unconventional resources division). When dealing in Latin America, political clout is a very good thing to have.
 
No matter who is drilling for oil and gas, drilling in shale requires the best technology, such as Schlumberger's StimMAP, Baker Hughes' Intellifrac 3D seismic mapping technology, and Baker Hughes' Logging While Drilling systems, which monitor subterranean pressures in real time. 
 
On top of this, analysts at S&P Capital IQ expect both Baker Hughes and Schlumberger to be very strong dividend growers over the next decade, with dividend growth rates of 16% CAGR and 12.5% CAGR respectively.  

Foolish takaway
When it comes to investing in foreign oil and gas production, the direct route, (foreign oil and gas producers) can be fraught with excess dangers and risks that long-term investors need not expose themselves to. So called "pick and shovel" providers (oil services companies), are a much better risk-adjusted method for cashing in on the potential shale boom.
 
Baker Hughes and Schlumberger not only have the business and political connections to operate in the Byzantine world of foreign boardrooms and oil and gas exploration, but also offer great dividend growth opportunities.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

 

Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers