Argentinean integrated energy company YPF (NYSE:YPF) is a very unique investment case. Government ownership and macroeconomic instability in Argentina are major sources of risk for investors in YPF. On the other hand, the company offers exceptional opportunities for growth in shale oil and gas production, and profitability is consistently increasing over the past several quarters. Is it the right time to invest in YPF?
The half-empty oil barrel
YPF was separated from Spain's Repsol in April 2012, and the company is now majority owned by the Argentinean government. Argentina has already cancelled its financial obligations and settled its legal dispute with Repsol; however, government ownership is always a source of concern for investors, especially considering that the current Argentinean administration is widely known for its populist orientation.
As part of a long-standing dispute with external creditors, Argentina missed payments on its foreign debt obligations on July 31, representing the country's second default in 13 years. Argentina is trying to circumvent U.S. courts by paying restructured bond holders in Buenos Aires. However, such a maneuver will hardly restore the country's reputation and provide fluid access to international capital markets.
Making things worse, the Argentinian economy has been consistently deteriorating over the past several quarters, and there is no reason to expect a reversal in the trend anytime soon, especially considering the political and financial instability affecting businesses and consumers lately.
The county is going through a recession, and the inflation rate is around 40% according to the Congressional Index, which is an estimate made by private economists and consultants regularly released by opposition members in Congress.
The tank is full
The economic situation is clearly uncertain for investors in YPF. However, it's important to keep in mind that investing decisions need to be based on future possibilities, not past performance or present conditions. The country is having presidential elections in October 2015, and all of the leading candidates, even from the governing Peronist party, are believed to be much more market-friendly than the current administration.
Most analysts expect Argentina to take a turn toward more rational economic policies next year, and this seems to be one of the main factors behinds YPF's huge run of more than 98% over the past 12 months.
Not only that, but major shale oil and gas reserves in Argentina could also mean extraordinary opportunities for growth in the years ahead for investors in YPF. According to estimates by the U.S. Energy Information Administration, Argentina has one of the world's biggest shale gas and oil reserves, with 802 trillion cubic feet of technically recoverable gas and 27 billion barrels of technically recoverable oil. This would give Argentina the second largest shale gas reserves behind China, and the fourth largest shale oil reserves behind Russia, the U.S., and China.
While YPF might be considered riskier because of the economic uncertainty in Argentina, the company also offers superior potential for growth in the promising area of shale resources.
Importantly, YPF's ability to access international financing to develop these reserves is a crucial variable to keep in mind when analyzing its growth prospects. To a considerable degree, a bet on YPF is a bet that Argentina will go through a more market-oriented economic path and recover access to international credit in the future.
For what it's worth, even as the Argentinean government has applied populist policies in different areas of the economy, YPF has been allowed to increase production and raise its prices in inflation-adjusted terms, so profitability has been rising over the past several quarters.
This could be indicating that political authorities are willing to leave ideological considerations aside when it comes to YPF and its needs to operate with an adequate degree of profitability.
Considering the risks, YPF is not dramatically cheap in comparison with other integrated energy players in Latin America based on current earnings. However, the company is positioned to be the leading beneficiary from enormous shale reserves in Argentina for years to come, and this means exceptional opportunities for growth.
For investors willing to bet on a more market-oriented economic environment in Argentina over the coming years, YPF offers substantial upside potential, even if the stock may remain particularly volatile because of economic uncertainty in the short term.