Saturday, October 20, 2012

This High-Risk Oil Stock Could Deliver HUGE Rewards

Oh Argentina. Why must you frustrate us so? You're blessed with so many resources and have so much charm. Yet you can't help but alienate everyone that you come into contact with.

  Over the last century, as nations such as Japan, South Korea, Brazil and China worked diligently to join the world's top-ranked economies, you squander away your largesse. Back in 1900, you had the fifth-largest economy in the world, and citizens from Spain, Italy, the U.K. and elsewhere couldn't wait to emigrate to your beautiful cities and fertile plains. You really should be at the top of your game right now.

Your vast storeholds of untapped natural gas could make you an energy giant along the lines of Russia or Norway. Instead, you fritter way such largesse with petty internal grievances. These days, you're no longer even in the top 20, according to the International Monetary Fund, having been surpassed by the likes of Taiwan, Poland and Indonesia.

You're in the headlines once again, doing your best to damage your economy even further. But this time, you won't succeed. Despite yourself, global institutions are likely to thwart you as you move to make yet another misstep.

I'm talking, of course, about the battle of wills being pursued by Argentina's government and energy giant YPF (NYSE: YPF), which is 57% owned by Spain's Repsol. In a bid to please the segment of consumers that voted in the current Kirchner government, Argentina has begun to do an impressive imitation of Venezuela, turning tax-paying energy companies into the enemy. These companies have seen limits imposed on what they can charge consumers while paying ever-higher taxes on any profits they make.

As a result, YPF and others have done whatever any profit-making enterprise does: allocate resources into other countries where financial returns are better. So even as Argentina sits on a huge amount of energy, underinvestment has led the country to be a net importer of fuel.

(Contrast that with neighboring Brazil, which has walked a much finer line between supporting oil giant Petrobras (NYSE: PBR) while also ensuring that its broader society reaps financial gains from a coming energy production boom.)

The battle between Ms. Kirchner's government and Spain's Repsol has now come to head. And looking at YPF's stock chart, it's easy to conclude which side is winning.

Concerns are growing that in a fit of pique, Ms. Kirchner will pull off a radical stunt such as kicking Repsol out and nationalizing YPF. It (probably) won't happen. For speculative investors, it pays to watch events unfold, as potentially outsized gains may be had if I'm right.

Simply put, it appears as if the Argentinean government is bluffing, and they've taken this bluff as far as they can. Fears that YPF will be nationalized dominate the Argentinean media, with more than a few columnists noting that Venezuela's move to kick out for-profit energy firms has been a disaster for that country. PDVSA, Venezuela's national oil firm, has been mismanaged and is said to be buckling under $35 billion in debt, according to Reuters. That debt load has kept PDVSA from maximizing capital spending to deliver peak oil output.

As Reuters noted in early March 2012, "Critics say the Chavez government has not invested enough in increasing output after it fired thousands of PDVSA managers following a 2002 strike at the company. The socialist leader has built up his support by spending oil revenue on social programs."

But Argentineans, which are far more likely to be in the middle class than most Venezuelans, have little appetite for a Robin Hood-style government. Indeed, Ms. Kirchner runs the risk of alienating her voter base by pushing YPF into state hands and leading to a deeper cycle of underinvestment and higher fuel imports.

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