November 29, 2014
Repsol likely to approve YPF compensation
Spanish company’s board will meet today and could mark end to bilateral dispute
Repsol’s board of directors is expected to approve today a US$5-billion compensation deal with Argentina over its 2012 expropriation of the Spanish oil major’s majority stake in YPF.
Spain’s Repsol is expected to report a 54-percent fall in fourth quarter clean net profit from a year ago, depressed by Libya outages and weak refining margins, though the focus will be on the possible end to its two-year conflict with Argentina over the expropriation of YPF.
The agenda of tomorrow’s board meeting is confidential, but it is widely expected that the compensation will be discussed, and likely approved.
In a sign of the imminent nature of the deal, Repsol on Friday announced it will take a 1.3-billion-euro (US$1.8 billion) hit on its former YPF stake, noting it had revalued its majority stake in Argentina’s largest energy company at US$5 billion.
Although the agreement has been in the works since November, a key sticking point for Repsol has been in the guarantees President Cristina Fernández de Kirchner was willing to offer in order to carry out the operation. The Spanish company’s concerns over having sufficient guarantees on the compensation only grew after January’s steep 22-percent peso devaluation.
Yet now the approval seems imminent as industry sources from both continents say it is unlikely the Repsol board would backtrack on such a high-profile deal at the last minute.
Once approved by the board, the deal would also have to receive a majority vote in Argentina’s Congress.
The Financial Times reported over the weekend that while Argentina would deliver dollar-denominated sovereign bonds, their face value would be higher than the $5 billion of the deal. That surplus “reflects the fact that markets attach a heavy discount to government bonds from Argentina, which is seen by investors as more likely to default on its debts than other countries,” according to the British newspaper.
The Fernández de Kirchner administration has also offered guarantees to make sure Repsol receives the promised US$5 billion even if the market value of the sovereign debt decreases.
“The debt is extinguished not when Repsol gets the bonds, but when Repsol has the $5 billion,” a source told the FT. At the same time though, the Spanish firm would not benefit if the bonds increse in value at a higher rate than the market expects.
The bonds that will be issued to YPF are likely to include a new 10-year paper for a value of approximately US$3 billion while the rest would be paid with bonds that are already circulating in the market.
Ending legal squabbles
Repsol had been seeking US$10.5 billion in compensation for the expropriation and had launched lawsuits in New York, Madrid and Buenos Aires. It also vowed to legally challenge any company that sealed a partnership deal with YPF, claiming they would be benefitting from assets that were obtained illegally.
The firm had also filed a complaint with the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). A key part of the compensation deal would involve Repsol dropping all its legal claims against Argentina and YPF.
Even if it is lower than Repsol was initially seeking, the Spanish company could see clear benefits to sealing the deal.
Ending the dispute over YPF 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.
The company has said it is eyeing opportunities in North America and one source said it has hired JP Morgan to identify targets.
At the same time, Argentina has expressed optimism that the agreement could lead to a surge in energy investments, particularly in the Vaca Muerta formation.
Vaca Muerta 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.
Repsol Chairman Antonio Brufau will give a conference call tomorrow, with focus on the oil major’s post-YPF strategy.
Herald staff with Reuters, DyN, Télam