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Repsol and Argentina look to move on from YPF nationalisation

Repsol will receive around $5 billion in compensation for its stake in YPF

Divorces can be messy affairs, as the initial stages of the acrimonious split between Repsol and Argentina showed. Yet nearly two years after Argentina’s expropriation of Repsol’s majority stake in YPF, the two sides have come to terms in a deal that marks a new start for both.

The deal struck between the two will see Repsol receive around $5 billion in compensation for its 51% stake in YPF through a package of Argentine sovereign bonds. It is a complex arrangement that accounts for fluctuations in the market value of the bonds and includes guarantees that protect Repsol against default or efforts to restructure the debt.

In exchange, Repsol has agreed to drop its legal action against Argentina and remove the threat of litigation against companies that invest with YPF in the Vaca Muerta shale.

Negotiation

The $5bn in compensation is far less than Repsol’s initial demands of $10.5bn for the YPF stake. But analysts always saw that as a starting point for negotiations rather than a realistic outcome. And the deal has won praise. Deutsche Bank analyst Mark Bloomfield said the terms “appear more solid than anticipated”, while analysts at Investec called it a “watertight deal”.

Repsol’s chief executive, Antonio Brufau, who drew criticism from some Repsol investors over the YPF debacle, also praised the deal, saying: “This is a fair and reasonable agreement which we believe avoids the normal intensity of a long litigation process, and returns value to our shareholders after expropriation.”

As well as the compensation to be received from the Argentine government, the deal frees Repsol to sell its remaining 12% stake in YPF. At YPF’s prevailing market capitalisation, that stake is worth around $1.3bn. Analysts say they expect Repsol to sell down the stake over the next couple years. Brufau said the company “will analyse all available options”. The sale of the YPF stake could bring the total windfall from the deal to more than $6bn.

Brufau has stressed that the deal ended Repsol’s time in Argentina, a key aspect of the deal considering Repsol’s board had rejected an earlier proposal that would have partly compensated the company with a stake in the Vaca Muerta shale. “Fortunately, we have many Argentineans with us, which is one of the best assets we get from this situation, but other than that, nothing. And we don't plan to be back in Argentina,” Brufau says.

While Repsol is now in a solid financial position to move on from the Argentine nationalisation, the company has been re-shaped by the episode. Most obviously, it lost its foothold in the Vaca Muerta shale, which would likely have become a major focus of the company. It was also forced to sell off its liquefied natural gas (LNG) business, one of its strongest units, to Shell in a deal worth $3.8bn to bolster its balance sheet and protect its credit rating.

The company has also lost some of its appetite for political risk, pledging to focus new investments in parts of the world where its investments will be seen as more secure. As well as Argentina, the company has seen its production hit by the civil strife in Libya. “We have strengthened our portfolio by acquiring more acreage in OECD countries such as Canada, the US, Portugal and Norway,” Brufau says.

And as the company looks to put its Argentine windfall to use, it is likely to look to acquisitions in OECD countries, especially North America. “I consider Canada and the US very important areas to be deeper than what we are today,” Brufau says. “Canada is not that significant (for us), and many opportunities there are cheaper than in the US, more efficient and, technologically speaking, similar.”

New direction

For Argentina and YPF the deal also marks an important step forward. The government’s expropriation and refusal to compensate Repsol, combined with erratic policymaking in recent years, had scared off investors even as the Vaca Muerta shale has emerged as one of the most promising outside North America.

With a deal in sight, YPF has been pushing to accelerate shale development in the country. It has signed a deal with Chevron that could eventually see the companies invest $16bn in the Vaca Muerta. It has also signed joint shale development deals with Malaysia’s state oil company Petronas and Argentina’s Pluspetrol. YPF also bought Apache’s Argentine business, which included a large acreage position in the Vaca Muerta, for $852m.

Argentina’s oil and gas production has plummeted in recent years as companies have eschewed investment in the country, turning Argentina into an importer. The growing energy deficit has had a dire effect on the broader economy as energy imports have drained the country’s already stretched supply of dollars. Developing the Vaca Muerta shale is the country’ best chance to return to energy self sufficiency, and has become a central goal for Cristina Kirchner’s government.

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