How to profit from Argentina’s seizure of oil company YPF

published 18 April 2012

You have to feel sorry for leaders of banana republics these days - developed world governments have stolen all their best tricks.

Britain, America, Europe and Japan are all printing money; you've got capital controls in the form of limits on cash transactions in various parts of Europe; and capital controls by the back door in the US, in the form of draconian legislation that makes it pointlessly risky for overseas financial companies to accept American clients.

How can you top all that?

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Argentina's president, Cristina Fernandez, has just gone with an old classic a straightforward asset grab. Shareholders in Spanish oil company Repsol look set to have their 57% stake in Argentina's biggest oil company ripped from them.

That's bad news for them. And it's not a good sign overall. It'll embolden more governments to make similar moves.

But believe it or not, this is a trend that you can profit from.

It always boils down to politics

Earlier this week, the Argentinian government announced that it was nationalising the country's largest oil company, YPF.

The trouble is, more than half of YPF was owned by Spanish oil company Repsol - it now looks set to lose almost all of that stake. Repsol is seeking at least $10bn in compensation, but it's hard to see it having much luck.

The FT quotes RBC Capital Markets analyst Peter Hutton: "Argentina already has more disputes pending against it at the World Bank's International Centre for Settlement of Investment Disputes than any other country."

Why has Argentina decided to do this? It's the usual story politics. The country is in a pretty lousy economic state: inflation is rampant; oil production has fallen because the state keeps interfering to artificially hold down domestic prices, meaning there's no incentive to invest.

Rather than accept that its own policies are flawed, the Fernandez government would rather fiddle the inflation figures and try to keep the voters happy with populist rhetoric. Hence all the carping about the Falklands, and now the nationalisation of YPF.

On top of that, there may be an internal political angle, according to John Paul Rathbone in the FT. In short, Fernandez may have fallen out with an Argentinian oligarch family who own a big stake in YPF. The nationalisation could be linked to this too.

So it's all about politics and corruption as usual. In any case, pundits across the world rightly condemned the move. The general line taken is that this sort of theft can't be tolerated. That's fair enough, although unenforceable.

The other argument that is always made when this sort of thing happens is that the country in question is shooting itself in the foot. No one else will work with them.

This is perhaps a bit more idealistic. Investors are a remarkably forgiving bunch when they think there might be a profit to be made. There's always the temptation to believe that you're smarter than the next person, and that you'll be nimble enough to get in and out to snatch the quick buck before it's pulled off the table.

As Stefan Wagstyl points out in the FT's beyondbrics column, "oil companies have rarely been slow to trample on each other's toes For example, after Russia seized the assets of the Yukos group in the early 2000s, Moscow didn't find it difficult to find potential partners for the state-controlled Rosneft company which now owns most of the former Yukos oil fields".

Profiting from resource nationalism

As my colleague James McKeigue pointed out in a recent MoneyWeek magazine cover story, this isn't the last we'll see of this sort of thing. Governments across the world are keener than ever to get what they see as their fair share' of their resource profits. It's called resource nationalism', though theft' might be a better word in some cases.

What does this mean for investors? In effect, if governments are going to grab all the best assets for themselves, then it's bad news for oil companies. However, they're still going to need external expertise to develop these oil fields. And that's potentially good news for oil services companies. You can read James' story here: Profit from the government grab for oil and commodities.

However, as far as I'm concerned, I'd rather not play chicken with unpredictable governments. For me, it's another good reason to favour North American natural gas producers.

Developed countries are more than happy to jack up tax rates on resource companies. Britain is a perfect example of that. But at least you can be pretty sure as a shareholder that a whole company won't be snatched from under you.

Natural gas producers are risky, of course, but oil and gas is a risky sector. I looked at one promising-looking stock in the arealast week. My colleague Phil Oakley will be looking at another in this week's issue of MoneyWeek, out on Friday.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.