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Repsol revalues YPF stake at US$5 billion

A man walks past a petrol station owned by Spanish oil major Repsol in central Madrid.

The two-year battle for compensation after the expropiation draws to a close

MADRID — Spanish oil major Repsol will take a 1.3 billion euro (US$1.8 billion) hit on its stake in energy firm that was seized by Argentina, as a two-year battle for compensation draws to a close.

Repsol has revalued its majority stake in Argentina’s largest energy company at US$5 billion, to reflect the size of an imminent financial settlement that will end one of the rockiest chapters in the oil major’s history. The compensation package is expected to be signed before a Repsol board meeting next Tuesday.

Ending the dispute over YPF, which Argentina nationalized in 2012, will allow Repsol to focus on expanding its international exploration and production operations to better compete with larger European rivals such as Eni and Total without a legal battle hanging over its head.

Repsol had been carrying the value of YPF on its books at 5.4 billion euros. It will make a 1.28 billion euro writedown in its 2013 results, it said in a regulatory filing yesterday, to reflect the difference between the book value and the size of the compensation.

It was not clear whether Repsol would use some US$2.9 billion of capital gains from the sale of gas assets to Shell to offset the impact of the YPF loss on 2013 results, due to be published next Wednesday, because part of the Shell deal was closed this year.

Repsol has left the door open to paying part of the compensation to shareholders in the form of a special dividend, but prefer to keep cash for potential acquisitions, analysts said. The company has said it is eyeing opportunities in North America.

Repsol has left the door open to paying part of the compensation to shareholders in the form of a special dividend, but prefer to keep cash for potential acquisitions, analysts said. The company has said it is eyeing opportunities in North America.

Shares in Repsol, which have lost 3 percent so far this year, were up 0.19 percent at 18.20 euros compared with a slight decline in Spain’s blue-chip index .IBEX.

Repsol will receive already issued Argentine US dollar-denominated bonds and a new ad-hoc 10-year bond, under the terms of the package. Argentina will issue a US$5.5 billion nominal bond as part of the settlement.

Repsol’s board is likely to approve the settlement on Tuesday following a long push by leading shareholders Caixa and Mexico’s Pemex to end the two-year conflict with Argentina.

Banking powerhouse Caixa has interests in both Argentina and Mexico through a complex web of cross shareholdings. The bank wrote down the value of its 12 percent stake in Repsol in January in anticipation of a compensation deal.

Pemex — with nearly 9.4 percent of Repsol — has close ties to the Argentine government which had struggled to capture foreign investment to develop its vast Vaca Muerta shale field due to threats of lawsuits from Repsol.

While minority shareholders have been more skeptical about a US$5 billion settlement, half of Repsol’s initial demands for $10.5 billion, analysts said the deal will easily pass at a meeting in the spring given the backing from major shareholders.

“The fact that Argentina is finally recognizing US$5 billion of debt to Repsol is a major feat. This deal is going through,” said Intermoney analyst Alvaro Navarro.

The Repsol’s Administrative Council accepted in November 2013 the preliminary agreement reached among Argentina, Mexico and Spain involving a compensation for the expropriation of the Spanish firm’s 51 percent stake in the energy giant YPF.

The announcement came after Economy Minister Axel Kicillof, accompanied by Argentine ambassador to Spain Carlos Bettini met with representatives of Repsol and the Spanish government. Since then, meetings have been held to reach a final agreement.

Investments to come?

A negotiated agreement between Repsol and YPF could be what Argentina’s energy sector needs to boost investments in the country’s promising shale fields. The country has been trying to woo foreign investors with its potential for unconventional production ranked among the highest in the world by the US Energy Information Administration.

When President Fernández de Kirchner signed the expropriation of 51 percent of YPF’s shares from Spain’s Repsol on May 4, 2012, she vowed it would mark a new era for Argentina’s oil and gas production after years of steady declines.

A key part of this strategy involved the massive Vaca Muerta shale formation, mostly located in the Patagonian province of Neuquén. In late 2011, Repsol seemed to give new life to Argentina’s stagnant hydrocarbons exploration when it announced its “largest ever oil find” in Vaca Muerta. The company said that the resources in Vaca Muerta could double Argentina’s gas and oil production within 10 years.

It could prove to be one of the biggest shale fields in the world. But in order to free the hydrocarbons trapped in rocks, a technique involving drilling with a practice called hydraulic fracturing must be used. And it’s far from cheap. At the time, Repsol said it would require an investment of around US$25 billion a year.

When YPF unveiled an ambitious five-year plan shortly after the state take-over, it placed particular emphasis on shale exploration, saying it planned to partner with international oil companies to explore Vaca Muerta.

Yet Repsol’s threat of legal action, and the continuing uncertainty of how it could affect investments in Argentina, has left many investors on the sidelines, wary of getting involved in a bilateral dispute.

Herald with Reuters

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