Global investing isn't for the faint of heart. There are constant worries over politics, elections, the rule of law, economic policies, global trade... let's face it, when you invest outside the U.S., you're not in Kansas anymore. Anything can happen and sometimes does.
Perhaps the most cautionary tale is investing in Argentina. Billionaire and hedge fund manager Paul Singer and his Elliott Management have had to sue the country to get paid on bonds the government defaulted on. Spanish oil giant Repsol had its 51% stake in YPF (NYSE: YPF) seized as Argentina sought to assert more control over its natural resources. This has kept Argentina off the radar screens of most investors.
YPF is a major integrated oil and gas company that not only explores for oil but also refines it. The company has interests in nearly 90 oil and gas fields in Argentina and is sitting on proven reserves of 590 million barrels. YPF also owns more than 1,500 YPF-branded service stations and interests in three power stations.
For the third quarter, profit jumped 87% from the same period last year as YPF boosted oil and gas production. Net sales rose 34% due to both higher prices and increased output.
Output is likely to continue growing as the company just partnered with Dow Chemical (NYSE: DOW) to explore for shale gas in the resource rich Vaca Muerta shale formation. YPF estimates that the Vaca Muerta formation could hold as much as 661 billion barrels of oil and 1.2 trillion cubic feet of natural gas. YPF also just made a conventional oil discovery that is expected to add 15 million barrels to its proven reserves.
Last year, Argentina seized Repsol's stake in YPF, claiming that Repsol was not investing enough in exploration and production in the country. This added to the uncertainty of investing in Argentina and kept many investors away. However, times are changing as Repsol and Argentina's government are now in negotiations to compensate Repsol for its stake in YPF. Resol is expected to receive around $5 billion for its stake.
This deal is key for YPF and Repsol, as YPF is looking to cement closer ties with Mexico's national oil company, Pemex. YPF is looking for help from Pemex in developing the Vaca Muerta shale formation. Resolving the issue with Repsol is critical to YPF's relationship with Pemex since Pemex owns 9.4% of Repsol.
During this past summer, YPF reached a deal with Chevron (NYSE: CVX) whereby Chevron would invest $1.2 billion in developing 97,000 acres in the Vaca Muerta. This is a small percentage of YPF's 3 million acres in the Vaca Muerta and signifies the economic potential for YPF. Chevron received a 50% interest in the concession for its investment. If similar deals were to happen, the value of YPF's remaining acreage would be $37 billion, or more than three times its current market cap.
Risks to Consider: The biggest risk for investors in YPF is the political situation in Argentina. President Cristina Fernandez de Kirchner has played hardball in fighting for Argentina's national interests. However, tensions are easing as the Argentinean government is the largest shareholder in YPF. The nation has a vested interest in seeing YPF perform well, the same as minority shareholders. International fears are further being assuaged as the government negotiating with Repsol over its seized stake in the company.
Action to Take --> YPF has the lowest enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiple among its peers. It's trading at a multiple of 4.1, compared with 5.3 for Brazilian oil giant Petrobras (NYSE: PZE), 5.6 for BP (NYSE: BP), and 7 for Exxon Mobil (NYSE: XOM). Taking into consideration the potential value of YPF's reserves, the stock could easily trade above $50 in the next 12 to 18 months, for upside of 50%.