Spain vowed to retaliate against Argentina’s exporters and energy supplies as Repsol YPF SA (REP) demanded $10.5 billion in compensation after the South American nation seized its YPF SA (YPFD) unit.
Repsol Chairman Antonio Brufau said today he will use all legal means to win full payment for losing the oil producer. President Cristina Fernandez de Kirchner deliberately deceived investors, executives and her own people with moves that distract voters from her nation’s economic problems, Brufau said. Repsol’s shares fell the most in seven months.
“They are going to lead the country into chaos,” Brufau said at a press conference in Madrid. “A responsible country should plan based on reality and not how they would like things to be.”
Fernandez justified the takeover by blaming Repsol for insufficient investment in new oil production that’s forcing the nation to import more energy. She may struggle to reverse that trend as investors said the moves deter them from buying Argentine assets.
The cost to insure against an Argentine default surged the most among nations worldwide yesterday while a similar security to hedge Repsol’s risk jumped to the highest since January 2009.
Argentina needs an estimated $25 billion a year during the next 10 years to develop South America’s biggest shale fields, the Vaca Muerta, where YPF discovered reserves forecast to hold as much as 23 billion barrels of oil equivalent.
Vaca Muerta Discovery
The Argentine government, which in November endorsed Repsol’s management of YPF, turned against the Spanish majority- owner after it announced the Vaca Muerta discovery in February because it didn’t want Repsol to benefit from the bonanza, Brufau said.
“Vaca Muerta is behind this, without a doubt,” he said. “We have often read that this has to belong to the state instead of being in private hands,” he said, referring to local press reports quoting Argentine officials.
Fernandez replaced YPF Chief Executive Officer Sebastian Eskenazi with Planning Minister Julio De Vido and plans to send a bill to Argentina’s Congress to take a 51 percent stake in the company.
In Madrid, Spain’s Industry Minister Jose Manuel Soria pledged retaliation. “The consequences will be in the areas of diplomacy, trade, industry and energy,” Soria said in an interview on state radio station RNE today. He declined to be more specific before measures are implemented and said they will be announced in the coming days.
European Union Response
The European Union postponed a meeting with Argentine officials scheduled for this month to weigh its response to the move, European Commission spokeswoman Pia Ahrenkilde Hansen said. Repsol’s first option for winning compensation may be an appeal under an investment treaty between Spain and Argentina, the commission said.
“I am seriously disappointed by yesterday’s announcement,” European Commission President Jose Barroso told reporters in Brussels today. “We expect the Argentine authorities to uphold their international commitments and obligations, in particular those resulting from a bilateral agreement on investments with Spain.”
Argentina’s oil reserves fell about 18 percent from 1998 to 2010, according to the Argentine Oil and Gas Institute. Price caps on oil exports also made investments less attractive.
Repsol is responsible for about 54 percent of the country’s decline in reserves and production since buying YPF in 1998, according to a copy of the Argentine bill.
The company had a “predatory attitude” toward Argentina that warranted the takeover, it said.
Brufau challenged Argentina’s figures saying YPF’s oil reserves increased 5 percent between 2007 and 2010 compared with a 4 percent decline for the country as a whole.
The seizure of YPF won’t help investment, said Sam Zell, Chairman of Equity Group Investments.
“They’re desperate,” Zell said at the Bloomberg Link conference in Doha, Qatar. “They’re running out of options. I don’t know what they’re going to nationalize next, but I know I don’t want to be there.”
YPF lost eight potential investors in the deposits after the government withdrew financial incentives for producers and forced companies to repatriate export revenue, a person familiar with the talks said in February.
Valuations for YPF
Repsol’s 57.4 percent stake in YPF was worth 4.1 billion euros ($5.4 billion) at the end of last year, the Madrid-based company said in a regulatory statement yesterday. The company is valued at $18.3 billion according to the formula set out in its bylaws and Repsol owns 57.4 percent, Brufau said.
Repsol received two or three “good” offers for its YPF stake before it was seized by the Argentine government including one written offer valuing the company at $15 billion to $18 billion, Brufau said on a conference call with analysts today. He said he plans to use the offer documents as evidence in court hearings.
The unit accounted for 21 percent of profit and 34 percent of investment in 2011. Repsol also said it is owed 1.54 billion euros by Grupo Petersen, which was YPF’s second-biggest shareholder.
“Expropriation cases seldom go well for the party being expropriated,” said Jason Gammel, an analyst at Macquarie Capital Europe Ltd. in London. “It’s clearly a wholly negative event. It’s value destruction.”
Repsol shares lost 6.1 percent in Madrid, the most in seven months, to close at 16.42 euros while Fitch Ratings placed the BBB classification of the company’s long-term debt on negative watch.
The cost of insuring Repsol’s bonds against default with swaps soared as much as 27 percent to the highest since January 2009, according to Bloomberg data. The swaps rose as much as 85 basis points to 397 basis points, the biggest one-day jump since Oct. 22, 2008, and retreated to 348 basis points, up 12 percent.
The company’s bonds plunged, sending their extra yield compared with benchmarks to record highs. The spread on the company’s 850 million euros of 4.25 percent notes due February 2016 rose to 402 basis points more than the swap rate, from 335 basis points yesterday.
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