Bloomberg News

Repsol Drops to S&P’s Lowest Investment Grade After YPF Seized

April 19, 2012

Automobiles refuel at night at a Repsol YPF SA gas station in Madrid. Photographer: Angel Navarrete/Bloomberg

Automobiles refuel at night at a Repsol YPF SA gas station in Madrid. Photographer: Angel Navarrete/Bloomberg

Repsol YPF SA’s (REP) rating was reduced to the lowest investment grade by Standard & Poor’s, days after Argentina’s government seized its local YPF SA (YPF:US) unit and rejected the company demands for $10.5 billion of compensation.

Spain’s largest oil company was cut to BBB- from BBB with a negative outlook, meaning the rating could be further reduced if Madrid-based Repsol doesn’t cut debt this year, S&P said yesterday in a statement. Argentina, which took control of YPF on April 16, won’t provide “near-term” compensation, S&P said.

“When somebody mentions they don’t expect Repsol to get any compensation in the short-term, they are probably correct,” Boris Segura, a strategist at Nomura Securities International, said yesterday in a telephone interview from New York. “Argentine authorities are insisting they will not come anywhere close to the figure that Repsol is demanding.”

Argentine President Cristina Fernandez de Kirchner said the takeover reflects a failure to boost production and investment in Buenos Aires-based YPF, the country’s largest oil company. The government is seeking to reduce fuel imports that doubled to $9.4 billion last year.

Repsol’s financial risk, excluding YPF, is “significant” compared with “intermediate” before the takeover, S&P said.

Deteriorating Metrics

“The nationalization of YPF will materially worsen Repsol’s credit metrics,” S&P said. “YPF accounted for a significant share of group production and cash flow.”

YPF represented 40 percent of Repsol’s 2011 consolidated group earnings before interest, taxes, depreciation, and amortization, or Ebitda, it said.

Repsol slid 4.8 percent to 14.67 euros in Madrid, the lowest since April 30, 2009, according to data compiled by Bloomberg. The stock has tumbled 16 percent this week, as of yesterday.

Repsol probably won’t receive a “near-term” payment of a loan made to the Petersen Group, which was dependent on YPF dividends, S&P said. The Petersen group, controlled by Argentina’s billionaire Eskenazi family, holds 25 percent of YPF after purchasing shares from Repsol since 2008.

The Eskenazis counted on YPF dividend payments (YPF:US) of as much as 90 percent of profit to repay Repsol and about $680 million of bank loans. The family is in talks on financing alternatives for more than $2 billion of loans used to acquire the shares, according to a company official, who asked not to be named because the talks aren’t public.

Petersen owes Repsol 1.45 billion euros ($1.9 billion) after it bought a stake in YPF, Repsol said April 16.

Expropriation Fears

World Bank President Robert Zoellick said Argentina’s nationalization of YPF is seen as a “mistake” by most of the region’s leaders. He shares views expressed this week by Mexican President Felipe Calderon that “no one in their right mind” would invest in a country that nationalizes companies, he said in an interview with Bloomberg Television.

The YPF takeover may prompt companies with investments in Argentina to boost production, while deterring new investors from tapping deposits that include shale oil and natural gas, said Felipe Hernandez, an analyst at RBS Securities Inc.

Argentina will rely on “solid data” to value its takeover of 51 percent of YPF’s shares and not use estimates from Repsol, Deputy Economy Minister Axel Kicillof said at an April 17 Senate hearing.

“You could see some companies willing to get more in line with the interests of the government out of fear of expropriation,” Hernandez said in a phone interview from Stamford, Connecticut. “Though it’s hard to see companies that aren’t in Argentina wanting that exposure.”

Expanding Production

France’s Total SA (FP), Europe’s third-largest oil producer, is in talks with Argentina about increasing natural-gas output.

Total discussed plans to increase gas production in the country by 2 million cubic meters a day and expand exploration with YPF at a meeting between government officials and Ladislas Paszkiewicz, Total’s senior vice president of the Americas, the Planning Ministry said in a statement yesterday.

Argentina’s government may not have the experience or funds to develop large energy projects, Hernandez said.

Argentina sets prices on oil and gas below international prices, reducing incentives to invest. The country’s oil reserves fell 18 percent between 1998 and 2010, according to data compiled by the Argentine Oil and Gas Institute.

To contact the reporter on this story: Heather Walsh in Bogota at hlwalsh@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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Companies Mentioned

  • YPF
    (YPF SA)
    • $26.82 USD
    • -0.62
    • -2.31%
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