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YPF expropriation endorsed by Argentine Senate

by Paul Whitfield  |  Published April 26, 2012 at 12:51 PM
Argentina's government moved a step closer to forcibly taking control of YPF SA on Thursday, April 26, after the Argentine senate voted overwhelmingly in favor of expropriating their nation's biggest oil and gas producer.

Sixty-three of a possible 70 senators endorsed a bill proposed by President Cristina Fernandez de Kirchner that would take a 51% stake in YPF from its majority shareholder, Spanish energy giant Repsol YPF SA. Three senators voted against the bill, while four abstained.

Kirchner launched her bid for YPF last week, claiming that state control was necessary to reverse years of underinvestment by Repsol. Madrid-based Repsol claims that it invested about €20 billion ($26.41 billion) in YPF between 1999 and 2011 and blamed any disappointment in the unit's growth on government policy regarding the award of prospecting-leases and by artificial price constraints on domestic oil and gas sales. Repsol said it would seek about $10.5 billion in compensation for the nationalization.

YPF last year discovered large oil and gas deposits in Patagonia's Nequen province, a find that Repsol executives have claimed triggered a series of actions by the Argentine state aimed at damaging the company so that it could be taken over by the Argentine state at a lower price.

Kirchner's bill is expected to receive overwhelming support when it goes before Congress next week. The government last week ejected Repsol executives from YPF's headquarters in Buenos Aires.

The incident has caused a major diplomatic rift between Spain and Argentina, with Madrid pledging to fight the expatriation of a key asset of its biggest oil company. Mariano Rajoy, Spain's prime minister, described the bill as "unjustified" and "a serious precedent.' Madrid has said it is considering economic sanctions and has already won the support of the European Union. European Commission president José Manuel Barroso said he expected Argentina to "uphold their international commitments and obligations" and seek a "mutually agreed solution."

YPF contributed about a quarter of Repsol's operating profits last year, paid into the group in the form of about $600 million of dividends. Repsol's debt position has also been damaged by the move as the YPF unit carried a relatively low leverage ratio compared to the rest of the business. Standard & Poor's last week cut Repsol's credit rating to BBB-, one level above junk, and warned of further downgrades unless Repsol can cut a debt to equity ratio that many analysts put at between 50% and 60% ex-YPF.

Repsol is 25% owned by the Eskanazi family, which owes about $2.7 billion to Repsol and a handful of banks and which has an option to sell its stake in YPF to Repsol in the event that the Spanish company loses control of the unit. According to a Bloomberg report that cited two people close to the situation, Sebastian Eskenazi, YPF SA's former CEO, told Repsol chairman Antonio Brufau that he won't immediately seek to enforce a buyback option on YPF.

YPF estimated last year it would need about $25 billion a year to develop its untapped reserves. The Argentine government is widely expected to turn toward Chinese investors for support.

Shares in Repsol YPF traded Thursday afternoon at €14, down €0.265 or 1.86% on their previous close. The stock has lost about 20% of its value in the past 10 days.

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Tags: Antonio Brufau | Argentina | Cristina Fernandez de Kirchner | Eskanazi family | European Union | expropriation | José Manuel Barroso | Mariano Rajoy | Sebastian Eskenazi | Standard & Poor's | YPF SA

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Paul Whitfield

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