YPF to cut investments on low prices, lack of credit

YPF to cut investments on low prices, lack of credit

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Argentina's state-backed energy company YPF plans to scale back its investments next year due to low prices and a lack of access to financial markets, but it will seek to sustain oil production growth by focusing on its core assets in the Vaca Muerta shale formation, CEO Daniel González said.

"We are planning for a year without access to credit," González told reporters at the Argentina Oil and Gas Expo in Buenos Aires on Tuesday. "We are going to invest what we make."
The company, the biggest oil and natural gas producer in Argentina, has not decided how much it plans to invest next year, but González suggested it would be less than the $3.3bn from 2018.
YPF has suffered three blows to its business since President Mauricio Macri lost a mid-August primary for the October 27 general election. Macri, considered a market-friendly conservative, was defeated by Alberto Fernández, a moderate left-leaning politician whose running mate is former President Cristina Fernández de Kirchner.

Macri's loss led to a more than 20% depreciation of the Argentine peso against the dollar and pushed the government to ask investors to accept late payments on outstanding bonds on concerns of a looming default. Both measure cut YPF's revenue and closed off access to financing.

The third blow was a 90-day freeze on crude, diesel and gasoline prices until November 14, which has slashed YPF's main source of revenue by 20% at a time when demand is dwindling as the economy falls deeper into recession. YPF has cut its investments by $120m due to the price freeze and its revenue has declined by $100m to $120m per month, González said.

YPF is in position to weather the storm, González said, adding that its financing needs to cover debt maturities next year are low.

The oil company faces $1.08bn in debt maturities in 2020 and $1.45bn in 2021, before the repayment schedule declines from 2022 to 2024 and then increases again to $1.5bn in 2025, according to data from Refinitiv.

YPF's benchmark 2029 8.5% bond is trading at a price of 76.125, yielding 12.5%, or roughly 1,088 basis points over 10-year US Treasury notes.

While YPF is not planning to go to the debt markets, it will keep an eye on interest rates and investor appetite to see if the conditions are right to do so.

"We are going through a moment of political turbulence and uncertainty," González said. "This is not the first time that the market is closed, but what we have seen in the past is that just when the markets open again the first company that has access to credit is YPF. We are always ready to move and take advantage of this access to credit."

In the meantime, YPF will reduce investments in exploration, testing new blocks and other ventures to focus on developing three core oil blocks in the massive Vaca Muerta oil shale formation, but with fewer drilling rigs, González said.

However, he added that its improvements in efficiency mean that production will continue to grow even with less activity.

The target for production, currently around 240,000 barrels per day, is to eventually become a regular exporter and help reduce its exposure to local price uncertainty. YPF consumes most of its crude production at its own refineries, but must buy 20% locally to cover its needs, González said.

As production grows, he said the company will plug that deficit so that it can start exporting on a regular basis. He said the industry likely will increase exports to 60,000 barrels per day from the Neuquén Basin, the southwestern home to Vaca Muerta, in 2020 from virtually zero this year. The plan is to continue to expand them to 500,000 barrels per day in 2024, meaning that production would likely double to 1m barrels per day by that time from this year.

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