Argentinean integrated energy company YPF (NYSE: YPF ) is in the midst of a lot of uncertainty, since macroeconomic volatility in Argentina and government ownership are important risk factors for investors in the company. On the other hand, YPF also offers substantial upside potential from current levels if things work out well. Let’s look at YPF stock and examine three reasons it could rise materially in the coming years.
Solid financial performance
YPF was renationalized from Spanish Repsol in April 2012, and the Argentinean government now owns 51% of the company. Keeping in mind that the Cristina Kirchner administration has applied populist economic policies across the board, investors have valid reasons to monitor YPF and its ability to operate profitably in the current political context.
In addition, the Argentinean economy is facing serious difficulties. The country defaulted on part of its sovereign debt obligations on July 31 because of a long-standing legal dispute with some of its creditors. Economic activity is contracting, and inflation is off the charts, in the area of 40% per year according to estimates by private-sector economists.
However, none of this has stopped YPF from generating solid financial performance over the past several quarters. The combination of growing production levels and prices rising faster than costs has allowed YPF to deliver expanding profit margins when measured in U.S. dollar terms.
In July of last year, the Kirchner administration signed tax exemptions and other special benefits for international companies willing to invest more than $1 billion in the Argentinean energy sector. Immediately after that, a $1.24 billion joint venture between YPF and Chevron was made official to develop the Vaca Muerta formation.
Argentinean authorities seem to understand that they need to avoid excessive government intervention to attract international investors and develop the country’s promising shale oil and gas reserves. As long as that continues being the case, YPF should continue delivering solid financial performance for shareholders.
Abundant growth prospects
According to the U.S. Energy Information Administration, Argentina has one of the largest shale gas and oil reserves on the planet in its Vaca Muerta formation, with 802 trillion cubic feet of technically recoverable gas and 27 billion barrels of technically recoverable oil. Based on these estimates, Vaca Muerta is the fourth largest shale oil reserve in the world, and it comes in second place behind China in shale gas.