This Stock Is up 140%, but There's Still Room to Run

Over the past three years, YPF S.A. (NYSE: YPF  ) investors have certainly experienced a great deal of macro turbulence.  Shares of the Argentine integrated oil and gas company fell from $40 to $10 as the government nationalized Repsol YPF's  (NASDAQOTH: REPYY  )  stake in YPF in 2012 and the country's currency depreciated because of inflation and poor growth.

Things are slowly getting better, however. The Argentine government settled the nationalization issue with Repsol YPF by paying the company $5 billion for its stake. Foreign companies like Chevron (NYSE: CVX  )  added to their investment in Argentina this year as well. And after a year of no growth, the World Bank predicts that Argentina will grow again next year. 

YPF's stock price has followed that optimism, rising over 140% in a one-year span. Here are three reasons why shares may continue to rally.

Dominant position in Argentina
YPF is the dominant oil and gas company in Argentina. YPF's refining capacity represents over half of Argentina's total capacity, while the company's oil and gas production represents 37% of Argentina's total production. Because of the company's dominant position, it is profitable and can finance much of its growth organically. 

Vast shale potential
According to the U.S. Energy Information Administration, Argentina has one of the largest technically recoverable shale reserves in the world, with 27 billion barrels of shale oil and 802 trillion cubic feet of natural gas. 

While some of that resource is not economically retrievable, a significant percentage is. Furthermore, YPF owns 90 concessions in Argentina's most productive basins. 

The company regards its concessions in Vaca Muerta as particularly promising. Some parts of the unconventional formation's geography are similar to the Eagle Ford in the United States. 

Possible future joint ventures with foreign oil companies to unlock that potential
To attract foreign investment, the Argentine government enacted generous tax incentives for foreign oil companies last year. Because of the incentives, Chevron formed a partnership with YPF to develop the Vaca Muerta play together. If the Argentine government extends those tax incentives or Argentina's macro situation improves, more foreign oil companies could invest in joint ventures with YPF. YPF's production and profit numbers would likely improve as a result.  

The bottom line
YPF has certainly rallied a great deal, but it is not without risk. Conservative investors or investors with short timelines should avoid YPF because the risks are ambiguous and the short-term payoff is uncertain.

Even though Argentina has great unconventional resource potential, it currently does not have the necessary infrastructure to take advantage of that potential. It will take significant capital investment and many years before Argentina can export its oil and gas resources to other countries. Until that time comes, YPF's revenues and profits will be limited to Argentina's weak economy.

Furthermore, because the Argentine government owns 51% of the company, YPF's goals may be different from that of a traditional oil company. The Argentine government could, for example, run the company as a piggy bank for the state rather than optimizing it for profits.

The company's valuation is also not as attractive as it seems. Many investors point to the EV/EBITDA ratio of around 4, but the ratio is higher in dollar terms because the value of the Argentine peso on the black market is weaker than the current exchange rate.

That being said, given the improving political situation and vast resource potential, YPF could be a good investment for the aggressive investor. YPF shares could represent an opportunity to get in on the ground floor in the next shale revolution. With YPF's rally so far, it certainly seems like Mr. Market feels that way.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3012568, ~/Articles/ArticleHandler.aspx, 8/31/2014 4:32:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement