YPF finds more shale reserves, describes strategy
By: Michael Warren
BUENOS AIRES, Argentina — Argentina's state-controlled YPF energy company announced on Thursday the discovery of a new reserve of shale gas and oil that could help make the South American country an energy exporter in the years ahead.
"We have for the first time perforated a new 'mother rock' in Argentina," YPF CEO Miguel Galuccio said.
He said the new reserve, located in the provinces of Chubut and Santa Cruz near the Golfo San Jorge, is entirely separate from the vast "Vaca Muerta" or "Dead Cow" reserve that has given Argentina the world's third-largest shale potential behind the U.S. and China.
Galuccio, who will spend much of September presenting YPF's growth strategy to major American energy companies, said secrecy regulations bar him from providing estimates of how much crude oil and natural gas might be in the new find.
But he said the discovery could represent another great opportunity for profits from 50-50 partnerships with YPF in the years ahead. Overall, he said, foreign oil companies partnering with YPF can expect a 15 percent to 20 percent return on their investments.
YPF hopes to invest $37.2 billion through the end of 2017 - all but $4.6 billion of which will come from its own resources and bond issues. Of this, 73 percent will be devoted to production, 22 percent to improving refinery capacity and 4 percent to new exploration, according to the five-year strategic plan Galuccio laid out to financial journalists.
Those percentages reflect what sets Argentina apart from many other countries - its reserves are already identified and it already has the pipelines, electricity networks, roads and other infrastructure in place to exploit them.
The trouble is that the government spooked investors by expropriating control of YPF from Spain's Grupo Repsol in April without paying compensation. Some analysts predict that no big oil company will commit significant new money until Argentina pays the $10.5 billion that Repsol says it's owed.
After three months as YPF's CEO, Galuccio has not announced any major new inflow of foreign capital despite repeatedly promising that he will personally do all he can to protect such investments. He acknowledged that "the conflict with Repsol" has scared some off.
"I would not hide the fact that after an expropriation there will be people who will wait and see how things develop," he said. "But we're a company aligned with a government in a country with a huge potential in oil and gas. I do believe this is the right model."
Despite providing no clarity on the question of compensating Repsol, Galuccio said YPF is proving it can be a reliable partner.
"We're showing signs that we'll be extremely consistent. We've honored almost all our debts; we've continued to be listed in the New York Stock Exchange," he said. "I think the fear will disappear over time as long as we show results."
YPF laid out its challenges in a 400-page legal filing to the U.S. Securities and Exchange Commission in April that said the company ended 2011 nearly $1.8 billion short of "working cash." Most of its $12 billion in debts were due in less than a year, with clauses requiring immediate repayment if control of the company changed.
But Galuccio denied Thursday that YPF faces a crippling cash crunch. He said the company's debt ratio is comparatively low and all its debt holders except for Repsol have agreed to delay collecting. YPF will issue a peso bond in Argentina beginning next week to fund immediate production increases, and the company might issue bonds internationally by early 2013, he said.
"Much has been said about the financial stability of the company, so today I want to send a message not only to Argentina but to the foreign markets as well: The financial stability of YPF is assured," he said.
YPF shares traded in New York dropped sharply after his presentation, then closed down 1 percent at $12.59.
Taking on major new debt is not part of YPF's five-year growth strategy, which aims to reverse production declines, supply Argentina's growing economy without more expensive fuel imports and even establish Argentina as a net energy exporter.
The plan calls for more than 70 percent of YPF's growth to be financed through its own oil and gas sales. While the ambitious plan calls for reversing a decade of declining production capacity and increasing production by 32 percent in just five years, Argentina can still recover its energy capacity without new foreign investment if it must, he said.
The key is that YPF will reinvest most of its profits in developing the energy needed by Argentina, Galuccio said. He said just 5 percent of profits will be paid out in shareholder dividends, compared to 75 percent or more when Repsol controlled the company.
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