EUCOM Economic Analysis - Part I

[Surferbeetle]

Firn,

We will have to keep on eye on how the nationalization of Respol plays out. Have you run a pre-nationalization analysis that you would be willing to share?

I have been looking at the Euro financial sector....low, low prices...but for a reason

Speaking of banks, here is some interesting work on the globalization and interconnectedness of finance:

Bloomberg: “Money, Power & Wall Street” “Takes No Prisoners”, April 23, 2012, 1:45 pm ET by Azmat Khan

FRONTLINE’s four-hour epic on the global financial crisis — the first two hours of which air tomorrow evening — goes inside the struggles to rescue and repair a shattered economy, exploring key decisions, missed opportunities and the unprecedented and uneasy partnership between government leaders and titans of finance.

“Money, Power and Wall Street is demanding — this isn’t Finance for Dummies,” Evans writes in the review. “But it’s a compact and thorough lesson.”

Episode 1 and Episode 2 are posted at the PBS Frontline Money, Power, and Wall Street website

[Firn]

Firn,

We will have to keep on eye on how the nationalization of Respol plays out. Have you run a pre-nationalization analysis that you would be willing to share?

I do this stuff with small notes and mental number crunching, however I made four key prediction about YPF which all were dead wrong:

1) I believed that Kirchner&Co had learned from the poor performance of their nationalized Aerolneas Argentinas. If not:

2) Price controls and the weak peso created their negative energy balance, by reducing the incentives to invest and making imports more expensive, not Repsol per se. If not:

3) I assumed that they would pay for the shares like they did with Aerolinas. If not:

4) At least it would be only roughly 25% of YPF gone. It never crossed my mind that they would just take the shares from Repsol, leaving the other shareholders unharmed.

So it pretty much went perfectly wrong and the safety margin has completely gone

[Surferbeetle]

...is pretty tough. The market rewards and punishes and i have been on both sides of this type of education

I do this stuff with small notes and mental number crunching, however I made four key prediction about YPF which all were dead wrong:

1) I believed that Kirchner&Co had learned from the poor performance of their nationalized Aerolneas Argentinas. If not:

2) Price controls and the weak peso created their negative energy balance, by reducing the incentives to invest and making imports more expensive, not Repsol per se. If not:

3) I assumed that they would pay for the shares like they did with Aerolinas. If not:

4) At least it would be only roughly 25% of YPF gone. It never crossed my mind that they would just take the shares from Repsol, leaving the other shareholders unharmed.

So it pretty much went perfectly wrong and the safety margin has completely gone

Thanks for sharing your investment thesis, good learning/practice for how to develop investment them.

The Spanish company Repsol YPF SA (company website) is familiar to me via my travels and through their sponsorship of "Doctor" Valentino Rossi (while puttering around on my motorcycles i dream ) and I am aware that Repsol took over Argentina's YPF in 1999; so let's see if we can add some background to your thesis via a quick (free time is tight) internet drive-by?

Oil Overview

There are apparently eight oil refineries in Argentina with a capacity of 625,165 barrels per day. With today's FT's report of Brent at $119.83 USD, and wrongly assuming 100% operational output, that works out to potential daily sales of $74,913.521.95 USD before labor, material, equipment, overhead, and profit costs. Repsol-YPF owns three of these refineries (La Plata, Luja'n de Cuyo, and Plaza Huincul - startup date 1919) with the potential for 331,690 barrels per day and potential daily sales (not including costs) of $39,746.412.70 USD. 'Proved' Argentinian oil reserves are estimated at 2.5 billion barrels in size, while shale oil reserves are estimated at an additional 150 million barrels and there is a report of a discovery called Vaca Muerta, which may hold 927 million barrels. This information is of interest when attempting to forecast future YPF revenues due to oil. With the 100 day moving average currently at $116.40, and the 200 day moving average at $113.60, Javier Blas of the FT forecasts that between seasonal maintenance of refineries, price differences between crude oil grades, and futures contracts any falls in oil prices will be short lived.

• Wikipedia - Argentina's Refineries http://en.wikipedia.org/wiki/List_of...ries#Argentina

• EIA - Argentina Country Study http://205.254.135.7/countries/cab.cfm?fips=AR

• Oil & Gas Journal (OGJ) - http://www.ogj.com/index.html

• FT Commodities - http://www.ft.com/intl/markets/commodities

• Support for oil prices weakens – for now, By Javier Blas, Commodities Editor, April 20, 2012 10:29 am, Financial Times, www.ft.com

Natural Gas Overview

Argentina's substantial natural gas reserves are estimated at 13.4 trillion cubic feet (Tcf) and 774 Tcf of shale gas. YPF competes with Total Austral, CNOOC-affiliate Pan American Energy, Petrobras (Brazil), Pluspetrol (Argentina), Tecpetrol (Argentina), and Apache Energy (U.S.) for natural gas.

• EIA - Argentina Country Study http://205.254.135.7/countries/cab.cfm?fips=AR

Political Risk Overview

Ms Fernandez' appears to be interested in achieving national self-sufficiency in oil and gas production, and it was claimed that Repsol YPF SA did not reinvest enough of its YPF profits to boost Argentinian production. By circumventing rule of law issues via nationalization she invites an international backlash...whose scope, breadth, and composition remains to be seen and which could potentially harm a weak nation still recovering from a financial meltdown in 2003.

The Expropriation Law will apparently be used to determine how to compensate Repsol for the loss of it's 51% stake in YPF.

• Argentina risk: Alert - YPF's expropriation fuels investor concerns, April 18th 2012, Economist Intelligence Unit, www.eiu.com

• Repsol weighs strategy after loss of YPF, By Tracy Rucinski, Fri, Apr 27 06:25 AM EDT, Reuters

• Wikipedia - Argentine economic crisis (1999–2002) http://en.wikipedia.org/wiki/Argenti...sis_(1999–2002)

Technical Overview

Repsol [ REP.MC (Madrid), REP.BA (Buenos Aires) ] stock data in Euro (and as of 27 April 2012) includes a 52 week high of 24.23, 52 week low of 13.92, April 27th 2012 close at 14.70, a tangible book value of 12.90, a 7.5% dividend paid on January 10th 2012, and a beta of 0.9876 as compared to the IBEX 35 Composite Index.

I usually download stock data via google and interrogate the heck out of it via excel...however, no joy with google (i can only find data for the ADR) and i am presently unaware of how to ask the FT interactive chart to reveal the 15 day, 50 day, 100 day, 200 day, and 252 day moving average for share price and volumes....hints would be appreciated.

• Repsol, Home > Shareholders and investors > Financial information > Repsol on the stock exchange > Interactive chart, http://www.repsol.com/es_en/corporac...o/default.aspx

[Surferbeetle]

Oil Overview

There are apparently eight oil refineries in Argentina with a capacity of 625,165 barrels per day. With today's FT's report of Brent at $119.83 USD, and wrongly assuming 100% operational output, that works out to potential daily sales of $74,913.521.95 USD before labor, material, equipment, overhead, and profit costs. Repsol-YPF owns three of these refineries (La Plata, Luja'n de Cuyo, and Plaza Huincul - startup date 1919) with the potential for 331,690 barrels per day and potential daily sales (not including costs) of $39,746.412.70 USD. 'Proved' Argentinian oil reserves are estimated at 2.5 billion barrels in size, while shale oil reserves are estimated at an additional 150 million barrels and there is a report of a discovery called Vaca Muerta, which may hold 927 million barrels. This information is of interest when attempting to forecast future YPF revenues due to oil. With the 100 day moving average currently at $116.40, and the 200 day moving average at $113.60, Javier Blas of the FT forecasts that between seasonal maintenance of refineries, price differences between crude oil grades, and futures contracts any falls in oil prices will be short lived.

• Wikipedia - Argentina's Refineries http://en.wikipedia.org/wiki/List_of...ries#Argentina

• EIA - Argentina Country Study http://205.254.135.7/countries/cab.cfm?fips=AR

• Oil & Gas Journal (OGJ) - http://www.ogj.com/index.html

• FT Commodities - http://www.ft.com/intl/markets/commodities

• Support for oil prices weakens – for now, By Javier Blas, Commodities Editor, April 20, 2012 10:29 am, Financial Times, www.ft.com

Ok...the value of information is what one pays for it, i suppose.

Was not as clear as i could have been and i have made a number of mistakes on my rough order of magnitude cost estimate. By not explicitly accounting for the value/benefits of refined products versus the costs of labor, material, equipment, overhead, and profit my estimated values may be substantially off and my shortcut may not be valid.

• Oil sells for $119.83 USD per barrel of Brent, unrefined. Argentina produces Escalante, Medanito, and Rincon grades which will vary in price from Brent.

• Refining a barrel of oil produces a number of products which ascend the value chain and are higher in price than oil. With 42 gallons of oil in a 'barrel of oil' (and depending upon the grade), a barrel of oil will yield ~19 gallons of gasoline, ~10 gallons of diesel, ~ 4 gallons of jet fuel/kerosene, etc.

References

• Wikipedia - List of crude oil products, http://en.wikipedia.org/wiki/List_of_crude_oil_products

• How Many Gallons of Gasoline in a Barrel of Oil?, Thursday, February 08, 2007, Fat Knowledge For Your Fat Brain, http://fatknowledge.blogspot.com/200...in-barrel.html

• What Fuels Are Made From Crude Oil? EIA, http://www.eia.gov/kids/energy.cfm?p...efining-basics

• Cost Estimates (Rough Order of Magnitude vs Detailed), UT-Austin, http://www.utexas.edu/pmcs/services/cost.html

[Surferbeetle]

Platts Methodology and Specifications Guide, Crude Oil (latest update: April 2012)

http://www.platts.com/IM.Platts.Cont...deoilspecs.pdf

Platts assesses latin american crude grades and publishes the differentials to their benchmark. Most transactions are concluded on a differential to Wti.

The rollover of the Wti benchmark is done on the first day after the 25th day of every month. Platts uses Wti 2nd line for all latin crude assessments.

All latin crude oil assessments reflect market-on-close (mOc) values at 3:15 Pm eastern time. An explanation of the mOc methodology can be found elsewhere in this document. Please check the table of contents (also see related specifications document titled “americas crude oil specifications guidelines”).

Price assessments for latin crudes are basis FOB the loading terminal, and do not include top-off charges. The minimum cargo volume is 350,000 bbl. The assessment window for all latin american crudes is 15-45 days forward from date of publication.

State of plays: Argentina, Repsol & the rise of energy nationalism, Featuring Richard Swann, Robert Perkins, and William Powell, April 27, 2012 09:30:00 EST (14:27 mins), Platts, http://www.platts.com/videos/2012/apr/argentinarepsol

The Argetinian goverment's decision to re-nationalize the Repsol-owned YPF has exposed the ongoing battle between private and national oil & gas companies.Richard Swann and Robert Perkins and William Powell discuss the significance of the "Dead Cow" shale formation in the forced takeover; the questions raised over global investment opportunities for IOCs; China's ongoing acquisition of foreign energy assets; & the global trends in energy nationalisation.

[Surferbeetle]

En un masivo acto, Cristina reivindic el rol del Estado y agradeci a la oposicin por el apoyo a YPF, En el Estadio de Vlez, Informe de Pablo Jimnez, Viernes 27 de Abril de 2012, Ambito.com (Argentina)

Ante un estadio repleto de militantes, Cristina de Kirchner realiz un fuerte llamado a la unidad, celebr la llegada de los jvenes a la poltica y agradeci a las fuerzas de la oposicin por acompaar el proyecto de ley sobre la expropiacin de YPF. De esta manera, reivindic el rol del Estado y argument que la nacionalizacin de la petrolera "es recuperar la direccin nacional".

Durante los 40 minutos de micrfono, donde se permiti algunos guios a los jvenes, Cristina realiz un repaso por los logros de gestin desde que el kirchnerismo lleg al poder en 2003 realzando el rol del Estado. Al mismo tiempo asegur que exigir nuevas formas de intervencin, nuevas formas de participacin del Estado junto al sector privado. "El Estado no puede declinar las responsabilidades polticas, sociales, econmicas e institucionales en la conduccin de un pas", dijo.

A maior parte da populao argentina apoia estatizao da YPF, O Globo | ltima atualizao: 6 dias atrs (Brazil)

Seis em cada dez argentinos apoiam a estatizao da YPF anunciado pelo governo, de acordo com a ltima pesquisa nacional Poliarquia realizada por consultores para o jornal portenho La Nacion. O estudo mostra, no entanto, que o consenso sobre a medida acompanhada por uma forte crtica da poltica energtica argentina: 44% dos inquiridos considerou que a presidente Cristina Kirchner a principal responsvel pelo declnio da produo hidrocarbonetos, outros 36% culpam o setor privado.

A anlise detalhada dos dados revela tambm uma elevada correspondncia entre a opinio dos entrevistados sobre a expropriao e identificao poltica: quase nove em cada dez argentinos, que reconheceu ter votado para Cristina Kirchner nas eleies concordou com a iniciativa do governo. Entre aqueles com uma imagem positiva da presidente, a adeso foi maior: 92%. Leitura reversa revela um aviso aos lderes adversrios que nos ltimos dias foram a favor a expropriao: metade dos entrevistados que votaram neles em 2011 por rejeitar esse tipo de medida.

Expropriao da YPF mais um retrato das duas Amricas Latinas, O Globo | ltima atualizao: 19/04/2012 08h46

RIO A proposta de expropriao da petrolfera espanhola Repsol-YPF pelo governo da Argentina mostra-se cada vez mais uma tentativa derradeira da presidente Cristina Kirchner de abafar a avalanche de denncias contra seu governo e ofuscar as crescentes dificuldades econmicas do pas. Mas a iniciativa que, segundo a Reuters, deve ser a maior nacionalizao na rea de recursos naturais desde o episdio da russa Yukos, uma dcada atrs segue tambm uma tendncia de resgate do nacionalismo em pases latino-americanos cujas economias so baseadas em commodities e conduzidas por populistas como Hugo Chvez, na Venezuela, e Evo Morales, na Bolvia, ambos aliados prximos de Cristina.

Lamenta Caldern expropiacin de YPF e insta a Argentina a rectificar, NEGOCIOS 16 ABRIL 2012 - 6:58PM SILVIA ARELLANO, ENVIADA, Milenio (Mexico)

El presidente Felipe Caldern lament la decisin de su homloga de Argentina, Cristina Fernndez, de expropiar YPF, filial de Repsol, nadie en sus cinco sentidos invierte en un pas que expropia las inversiones.

Indic que aunque desconoce los detalles, ley una nota en donde el argumento de Fernndez es que Repsol estaba produciendo menos petrleo, pero aclar: en un mundo con los precios de petrleo que tenemos, s t obligas a una empresa a poner precios ms bajos de los del mercado, pues estas matando los incentivos para que esa empresa produzca ms, entonces no hay que ir muy lejos por entender que esta pasando con esas inversiones va a ser una medida que le va hacer mucho dao a Argentina desgraciadamente, y lo lamento muchsimo.

[Surferbeetle]

Let's kick around the Repsol YPF SA Estimates a bit more, and see if we can tighten the shot group regarding how much profit YPF generates for Repsol-YPF.

• Platt's estimates that YPF generates 25% of Respsol YPF SA's Operating Income.

• I will make the bold assumption that this translates directly to 25% of Respsol YPF SA's Profit

• The EUR:USD exchange rate is given as 1.323 by the FT today

• The Repsol YPF SA Income Statement ending Dec 31 2011 reports Net Income for the year as 2,193,000,000 Euro. Multiplying by 1.323 EUR:USD, this works out to $2,901,339,000 USD

• 25% of $2,901,339,000 USD results in a yearly profit of $725,334,750 or a daily profit of $1,987,218

• The 25% figure used was taken from statement given at 1:42 minutes in - State of plays: Argentina, Repsol & the rise of energy nationalism, Featuring Richard Swann, Robert Perkins, and William Powell, April 27, 2012 09:30:00 EST (14:27 mins), Platts, http://www.platts.com/videos/2012/apr/argentinarepsol

• Repsol YPF SA Net Income can be found here - Home > Shareholders and investors > Financial information > Financial reports, http://www.repsol.com/es_en/corporac...s_financieros/

• My previously given rough order of magnitude estimate for YPF's Daily Operating Revenue was $39,746.413 USD

• If 7% is retained as profit this works out to a yearly profit of $1,015,520,844 or a daily profit of $2,782,249

• The Economist estimates YPF's yearly profit at $1,300,000,000, and this works out to a daily profit of $3,561,644

• Argentina’s energy industry Fill ’er up, Apr 21st 2012 | BUENOS AIRES | from the print edition, The Economist, http://www.economist.com/node/21553070

So, having happily traveled around Robin-Hood's Barn to estimate the profits attributable to YPF can I at least confidently say that there is a tried and true relationship between profits and share price? Nope...

• Profit expectations and investment, By Seamus Mac Gorain of the Bank’s Monetary Instruments and Markets Division and Jamie Thompson of the Bank’s Structural Economic Analysis Division, Bank of England, http://www.bankofengland.co.uk/publi...n/qb020404.pdf

• This article examines the relationship between expectations of future profits and companies’ physical investment. Theory suggests that increased profit expectations should raise share prices as well as investment. But this correlation between investment and share prices may be rather weak if investors’ opinions of companies’ prospects differ from those of the companies’ managers. Using a simple aggregate investment equation, the article illustrates that measures of profit expectations based on current profits and analysts’ earnings forecasts appear to be more informative for investment than stock prices themselves. This result is consistent with recent research at the Bank using company data.

• I'll start doing pushups for taking you guys through this