Bloomberg News

Dirty Oilmen Get Clean Sheets Every 12 Hours: Argentina Credit

December 17, 2013

In the desert town of Anelo, Alejandra Diaz’s task at eight o’clock each morning is to make sure the oilmen have clean sheets.

As the manager of the 70-room Sol de Anelo, her staff has 40 minutes to clean the hotel’s designated “hot beds” before the next set of occupants arrive from their shifts in the shale oil fields of Neuquen province. Opened in 2005 as an eight-room roadside stop for tourists en route to the Andes mountains, Anelo’s largest hotel now offers 10 percent of its rooms for 12 hours at a time to accommodate the crush of oil-industry workers who have descended upon the town of just 1,700.

“We’re devoted to the oil industry now, no more tourists, just oil workers,” the 41-year-old Diaz said in an interview from Anelo, about 1,223 kilometers (759 miles) southwest of Buenos Aires, Argentina’s capital.

The boom, which prompted Mayor Dario Diaz to proclaim that Anelo would become Latin America’s “shale capital,” is being supported by companies such as Chevron Corp. (CVX:US) and YPF SA, which are investing billions of dollars to tap the world’s second-largest shale gas deposit, known locally as Vaca Muerta, or Dead Cow. Those ambitions have also drawn Royal Dutch Shell Plc (RDSA) and Petroleo Brasiliero SA, causing Neuquen’s borrowing costs to plummet from distressed levels as oil royalties surge.

Accelerating Boom

“The boom we’ve seen in Neuquen from Vaca Muerta will only accelerate in coming years,” Veronica Sosa, an economist who tracks provincial finances at Economia y Regiones SA in Buenos Aires, said in a telephone interview. “Investor demand for assets with exposure to shale will keep driving yields lower as the collateral these bonds have are appealing.”

Since rising to a record 12.1 percent 13 months ago, yields on Neuquen’s $236 million of dollar-denominated secured bonds due 2021 have tumbled 4.46 percentage points to 7.74 percent, the lowest in 21 months. The notes have returned 27.73 percent this year alone. Emerging-market corporate and government debt have posted losses this year.

More than 50 percent of Neuquen’s oil royalties are pledged to debt payments, Sosa said. Its bonds are guaranteed by production from companies such as Total SA and Pan American Energy LLC, while the dollar bonds due in 2014 are backed by concessions with Chevron, YPF and Petroleo Brasileiro SA. (PETR4)

YPF Issuance

Chevron plans to transfer almost $1 billion by year-end to complete an initial pilot venture. State-run YPF raised $500 million of five-year securities yesterday in its largest overseas bond sale on record to accelerate exploration of non-conventional energy resources.

The yield on the YPF bonds fell 60 basis points, or 0.60 percentage point to 7.89 percent at 5:04 p.m. in Buenos Aires, according to Trace. The price rose 2.47 cents to 104 cents on the dollar.

While new shale investments haven’t yet offset the province’s declining energy output, Neuquen’s tax collection increased by 50 percent during the last year as oil services companies were incorporated. Provincial royalties from oil production jumped 16 percent in August from a year earlier while employment in the oil industry has risen 10 percent.

Argentina is offering energy companies the ability to export 20 percent of output and repatriate dividends if they invest more than $1 billion over five years as the government struggles with what YPF Chief Executive Officer Miguel Galuccio called a “serious” energy deficit. Argentina’s energy imports surpassed exports by $5.8 billion through October.

Energy Deficit

South America’s second-largest economy after Brazil will need an estimated $300 billion to develop its shale resources, Juan Jose Aranguren, the head of Shell Argentina, said in a Dec. 9 interview. Shell plans to triple its investment in exploration to about $500 million in 2014.

“Argentina needs a huge capex for YPF and to cover its $13 billion annual deficit on the balance of payments,” Siobhan Morden, the head of Latin American fixed-income strategy at Jefferies Group LLC in New York, said by e-mail. “Especially if it’s only scraps of $500 million here and there.”

If YPF’s initial $1.2 billion pilot with Chevron is successful by March 2014, the joint venture will invest as much as $16 billion to pump shale oil and gas from the area surrounding Anelo, bringing almost $9 billion of royalties to Neuquen, said lawmaker Luis Sapag in a telephone interview.

“To have a complete idea of how big the rush can be, you just need to understand that the JV with Chevron is to develop 3 percent of the 37 percent acreage YPF owns in Vaca Muerta,” Sapag said. Vaca Muerta is about the size of Connecticut and holds an estimated 23 billion barrels of oil equivalent.

Mad Max

YPF has secured another joint venture deal with Dow Chemical Co. and hopes to partner with Mexico’s state-run Petroleos Mexicanos to develop shale deposits in Vaca Muerta, Galuccio said in September. YPF’s $500 million of five-year securities were issued to yield 9 percent yesterday.

“If you want to play the Argentina oil boom, YPF is on sale right now,” Russ Dallen, head trader at Caracas Capital Markets, said in an e-mail.

In the arid fields of Vaca Muerta, reminiscent of the apocalyptic world in a Mad Max film, rigs are popping up and trucks carrying water to inject into wells crisscross the sand. At the SOIL28 well, field manager Hugo Guinez oversees one of three daily fracking operations by blasting 1,100 cubic meters of water and 12,500 kilos of sand (27,557 pounds) into a 3,100 meter-deep well (10,171-feet).

When the job is finished for the day, Guinez says “this deserves a toast later in Anelo.”

To contact the reporters on this story: Pablo Gonzalez in Buenos Aires at pgonzalez49@bloomberg.net; Daniel Cancel in Buenos Aires at dcancel@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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