Guido Bizzozero – Senior Analyst (Oil & Gas), Allaria Ledesma, Argentina
Guido Bizzozero, senior oil and gas analyst at Allaria Ledesma, assesses the energy industry’s performance before and after the current government, how the market has reacted to recent changes and the future outlook for oil and gas options in the local stock exchange (Merval).
Could you please introduce yourself to our international readers and describe the main responsibilities of the oil and gas research department of Allaria?
Oil and gas prices will not be cheap forever and importing energy is not the solution for the future.
Since 2003, I have covered the oil and gas industry in Argentina as well as other sectors such as telecommunications, banks, and utilities. Our Equity and Fixed Income Research Team is composed of eight members. We cover all the main industries on the local stock exchange, while also keeping an eye on international markets (US and LATAM). In Argentina there are several oil and gas companies quoted at the local stock exchange, from producers to transporters and distributors. Our main oil and gas integrated company is YPF. We have an outperform view on this sector and a Buy recommendation on YPF.
Allaria Ledesma is considered the leader within brokerage companies in terms of capital transaction volume. What are the key drivers behind this success?
Allaria Ledesma has almost 50 years of history in the market; it was founded by Ernesto Allaria (father) as a unipersonal broker. Between 1993 and 1995 Allaria Ledesma and Cia was born as a company and our research team was built. Currently, Ernesto Allaria (son) is the president of the company and is also a reference in the local market as the chairman of Merval. Allaria Ledesma is the lead broker in the local market with more than 10% of transaction volume. This is the result of more than 100 people working every day to give a responsible and quick solution to our retail and institutional, local and international, client portfolio.
Merval has enjoyed great performance since January 2016 with the highest earnings among all stock markets from emerging countries. What has driven this success?
As expected with a new administration in the national government, as well as in many important provinces, investors bet on a change in the political and economic path. President Macri is adjusting many things that needed to be solved such as intervention in the FX market, subsidies to energy, and holdouts.
Argentina is expected to grow again in 2017, after the tough transition of this year, with some “politically incorrect” measures such as raising utility tariffs and the public recognition of inflation higher than 30 percent. Argentinian stocks were too cheap and the future outlook is positive; therefore investors started to buy local shares looking forward to growth in 2017.
The participation of energy companies in Merval is around 45 percent. How strategic is this industry to Allaria Ledesma?
The energy sector is key to the development of Argentina. In the last 15 years, the former government decided to subsidize gas and electricity consumption to the whole population instead of saving energy and increasing reserves for the future. As a result, energy consumption reached record high levels. Thus, Argentina is now importing gas and energy from foreign countries such as Chile and Bolivia.
The new administration is currently trying to reduce subsidies and keep only a social tariff for poor people. Meanwhile, it is expected a new tariff scheme that will allow companies to invest, pay salaries, and debt as well as finance working capital leaving a logical profit in the bottom line for them. The market is waiting for those measures, some of which were started this year, because without gas and electricity the economy will not be able to grow.
Oil and gas producers, transporters, distributors, as well as energy generators are betting on a solution for these energy companies. In the Merval Index we highlight the following energy companies: YPF, PAMP, EDN and TRAN. The composition of Merval’s Index is related to the volume transacted in the market. Consequently, the fact that 45% of the Merval Index is represented by the energy sector reflects the interest of investors in that sector in the last months.
What recent trends have you identified in the share value of energy companies in general and of YPF in particular?
The new government is first solving the complex subsidy situation that the previous administration left behind. Residential and commercial users will have to pay what until few months ago was subsidized by the National State. Tariff increases started with 300 percent to 400 percent hikes in residential bills.
However, more adjustments are expected to come during this year and 2017 considering that all rates had been frozen during the last 15 years and inflation and devaluation skyrocketed. YPF is an integrated company and its core business is in downstream. Thus, fuel prices at the pump are what matters to its business. So far, in 2016 there has been an increase of 31 percent in fuel and diesel prices. However, it is still not enough to offset the 60 percent YTD peso devaluation and almost 35 percent annual increase in labor costs.
Nevertheless the company is still working in cost reductions, improving processes and starting up a new refinery in the second half of this year that will allow YPF to reduce purchases of crude oil to third parties. A lower activity is expected in the local oil and gas industry during this year as a consequence of the decrease in international oil prices. YPF had already announced a cut of 20 to 25 percent in CAPEX for this year, nevertheless we forecast a more normalized scenario for 2017.
The Argentinian oil and gas market has previously enjoyed its own subsidized pricing model. However, since December 2015 subsidized prices have been reduced by 12% and the unions have been resisting cost reductions. How do the shareholders perceive the productivity and efficiency challenges of the country?
Subsidies in Argentina are still in the economy praxis. During the last three years oil and gas producers received subsidies in order to promote production; Nobody was willing to produce gas at USD 2.5 per million BTU while the country was paying USD 15 to 20 per million BTU for imported liquid gas.
Currently, the subsidy offered to companies is up to USD 7.5 per million BTU which could be seen as a good incentive, but it was not enough two years ago when international prices were above that figure. Now, Argentina needs to keep subsidizing the industry in order to develop reserves as a result of a more challenging international oil and gas environment. The key for growing in the future is to keep developing oil and gas reserves, with a focus on gas as our energy matrix is gas-based.
Local investors are used to this complex situation. However, the international community sometimes cannot understand why our internal oil prices are above the BRENT considering that two years ago they were below it. In addition, there is no explanation for why a family in a nice neighborhood is paying USD 5 per month for electricity or gas while they pay USD 35 per month for cable TV. All these corrections will be made, or are at least expected to be made, by the new government as they promised in the presidential campaign. So far, the trend goes on in that way.
To what extent have the recent discoveries of large volumes of unconventional resources (notably Vaca Muerta) in Argentina affected the share values of energy companies?
In my opinion, the unconventional discoveries are still not being discounted in the share value of the companies. For instance, you see YPF quoting below 3x FV/EBITDA 17E of 7x EPS 17E. Vaca Muerta still needs to be developed and the state should give subsidies and tools to companies in order to develop and increase reserves for the future.
Oil and gas prices will not be cheap forever and importing energy is not the solution for the future. YPF is the main player there and the state owns 51 percent of shares, therefore it will pay it back.
Considering that the government is seeking to gradually align Argentinian oil prices to the international ones, how do you foresee this convergence materializing and how do you anticipate the risk to share prices?
Prices will get where they need to be in order to increase reserves and keep jobs in the industry. Companies should have rational oil, gas, and energy prices. Reaching “market” prices may take time as a result of 15 years of state intervention and no future planning.
We have consumed our reserves and part of the demand increase is not rational as a consequence of cheap prices. People need to understand that energy is not for free and that they have to pay for it. Subsidies should be only tailored to poor people.
The market is exited with the future and there are some buying power energy companies related to generation, distribution and transportation of electricity. However, as we can see during the last months Pampa Energia, a big energy holding, has recently bought the controlling stake of Petrobras Energia (PESA) from Petrobras Brasil. The market should see this movement as a sign to bet on the oil and gas industry too. There are three options in the local market: YPF, PESA and PETR, and the most liquid and cheapest one is YPF.