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Trafigura targets Argentinian potential

Trading heavyweight acquires stake in President Energy, undeterred by the country’s financial and political risks

The political revival of former Argentinian president Cristina Fernandez de Kirchner, and the return to power of a Peronist left-leaning government in last October’s national election, struck fear into investors at the prospect of the country rolling back the business-friendly energy reforms of the previous Macri regime. Their dread was compounded by a looming IMF deadline on Argentina’s monumental debt. 

But while the arrival of a new government, headed by incoming president Alberto Fernandez and supported by vice-president Kirchner, has yet to define its new energy strategy, commodity trading firm Trafigura has demonstrated confidence in the country’s trajectory—acquiring a stake in the Neuquen basin, location of the nascent Vaca Muerta shale play.

“The much-improved balance sheet and arrival of an extremely well-informed participant is a big tick in the box for President” Wright, Finncap

Trafigura will take a 6pc interest in Argentinian-focused producer President Energy. Under the terms of the deal, the trader will secure the stake via an initial subscription to raise $4mn in new President Energy shares, at a price of 4.04p/share, with the option to exercise a further $6mn in new shares at 4.65p/share. The financing will then be used to pay down the advances made by Trafigura on a $10mn production offtake agreement already approved between the two firms in July. 

“The much-improved balance sheet and arrival of an extremely well-informed participant is a big tick in the box for President,” says Jonathan Wright, director of research at investment bank Finncap. “It represents further verification of the quality and value of President’s assets with Trafigura the second industry participant—after private Argentine oil company CGC—to recognise its investment appeal.”

Last year, Argentinian oil company CGC sold its Angostura acreage to President in exchange for around a 2.8pc stake in the firm. The new assets helped boost President’s Rio Negro province portfolio in the Neuquen and added around 527bl/d oe to production—almost a 10pc increase.  

IYA Global, a company owned by President’s chairman and chief executive Peter Levine, says it will also now convert up to $4.83mn in debt into equity. Combined, the rebalancing will reduce President’s overall debt by $6mn, with the potential of removing up to $14.8mn. Net debt in 2019 stood at $27.7mn. The board has pledged to pay off all third-party debt by the end of the first half of 2021.

Many of the largest IOCs have entered Argentina’s upstream over the last decade hoping to capitalise on the country’s enormous shale potential. But lack of midstream gas infrastructure and mounting national debt—resulting in a record $50bn loan from the IMF and price caps on crude sales to domestic refiners—have slackened growth.

The return of Kirchner, with a track-record of state-interference—including the renationalisation of Argentinian energy firm YPF in 2012—only heightens anxieties that the new government could impede further development. The Fernandez victory in Argentina’s primary election sent the value of the Argentinian peso plunging by 30pc. In October, the central bank imposed currency controls ahead of the national election to prevent further loss.

“YPF president Guillermo Nielsen said that Fernandez would promote a special regime for companies investing in Vaca Muerta” Labaqui, Medley Global Advisors

This was despite Fernandez pledging to support further activity in the Vaca Muerta while on the stump. “YPF president Guillermo Nielsen said that Fernandez would promote a special regime for companies investing in Vaca Muerta, with the purpose of stimulating investment and increasing unconventional oil and gas production,” says Ignacio Labaqui, senior analyst at macroeconomic intelligence firm Medley Global Advisors.

Investors will just have to hope that the new administration upholds its pre-election promises. On 1 January, President’s Levine issued a letter to the company’s shareholders seeking to ease investor fears. “On a macro level the worst fears of the market doomsters and slashing analysts regarding Argentina’s new government and its position on the oil industry have not been realized,” he wrote, seeking to reassure investors that the firm remained “cautiously optimistic”.

Forging ahead

Trafigura’s arrival in the Neuquen basin is a further significant vote of confidence that the Fernandez administration will maintain the status-quo. “Trafigura is targeting Argentina as they want to be in a position to take advantage if and when the Vaca Muerta shale play takes off production wise,” says Ashley Kelty, equity research analyst at bank Whitman Howard. “Trafigura are attracted as it provides a greater likelihood of new offtake agreements and potentially the opportunity to co-invest in new fields, without having to actually manage the fields.”

50pc – President year-on-year growth ambition

In 2017, Swiss trader Mercuria began operating in the Neuquen basin when the company merged with Argentinian-focused firm Andes Energia. Trafigura had previously purchased the downstream assets of Argentinian firm Pampa Energia in 2017—adding over 250 service stations and the Ricardo Elicabe refinery near the Bahia Blanca LNG terminal—but the President deal significantly boosts its presence in the Vaca Muerta.

Trafigura will now hold a stake in four blocks within the Neuquen basin, as well as three in the northern Noroeste basin, bordering Bolivia and Paraguay. A gas pipeline is currently being constructed to exit gas out of the Estancia Vieja field. When completed in February, it will boost production by a factor in excess of 10. Last year, total production for President across all assets reached 2,600bl/d oe. This year the firm has set full-year guidance at between 4,000-5,000bl/d oe and last February set itself the target of 50pc year-on-year growth over the course of the next three years.

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