Argentina
Argentine Energy Companies Face Additional Headwinds Due to Doubts About Energy Framework, Tariffs Under New Administration
Fri 08/23/2019 13:33 PM
The Peronist landslide presidential primary victory at the beginning of the month led investors to pull out of Argentina’s fixed-income market, fearing the return of the previous administration’s price and capital controls. Energy companies were the most affected, suffering the worst performances in the global bond market. YPF Luz, Genneia and MSU Energy plummeted by more than 20 points this month on doubts about what energy policy could be pushed forward by a new administration.
Argentine state-owned oil and gas conglomerate YPF’s 8.5% $1.5 billion notes maturing in 2025 plunged 20.3 points to 79 during last month after the primary results on Aug. 11, while Pampa’s 7.375% $500 million notes maturing in 2023 dropped 18.4 points to trade at 81 during the same period, and Compañía General De Combustibles’ 9.5% $300 million notes maturing in 2021 fell by 18 points to 82. The one-year price performance of YPF’s 2025s, Pampa’s 2023s and CGC’s 2021s are reproduced below:
Sources remain uncertain about what policies could be implemented because of the mixed signals given by the candidate favored to win the elections and the unstable macroeconomic scenario in Argentina. However, former energy ministers, secretaries and officials consulted by Reorg provided potential scenarios that investors can expect and agree that under a new Fernandez-Kirchner administration, it is unlikely that energy policies will revert toward an aggressive tariff freeze.
President Mauricio Macri’s former energy minister and ex-CEO of Shell Argentina, Juan José Aranguren, assured Reorg that he did not believe that price or capital controls would become a permanent policy. “Once calm returns to the markets, I’m confident that the same errors won't be repeated. However, macroeconomic stability will be essential to know what we can expect in terms of energy prices,” Aranguren said. He now runs the energy consulting company Consilium.
Some expect that during the next four-year term, the upstream segment in oil and gas exploration and production will be among the most affected within the energy sector. “Most probable, under either Macri or Fernández administration, is that they would seek to break the current link between the price of oil for the [local] market to the U.S. dollar,” potentially hurting margins in U.S. dollar terms, said former Undersecretary of Fuels Cristian Folgar. A new energy framework could include peso-denominated energy prices for the domestic market and new regulation to boost energy exports, with the aim of attaining “acceptable” average energy prices for local companies, Folgar added.
For gas and electricity distribution and transportation companies, sources said they expect price increases to moderate, after Macri’s recent decision to postpone new tariff updates on utilities. “Most probable scenario is that tariff updates to continue with certain delays,” potentially lagging local inflation rates to boost disposable incomes and consumption in the short term amid the economic crisis, the same source added.
In a similar vein, a source who had been a high-ranking official in the previous Kirchner administration’s energy secretariat explained to Reorg that the next administration would not be able to avoid the impact of economic maladies on its energy policies - whether Peronist or not. “Argentina’s depreciation will put pressure for energy priorities to shift toward the short term, as social needs such as people having enough money to eat will influence many decisions that the government takes,” the source explained.
The new economic context, with expected higher inflation rates following the sharp peso depreciation last week, led to Macri’s last-minute decision to implement price controls on gas and oil for 90 days on Aug. 14, with the aim of containing the depreciation’s pass-through effect on inflation. On that day, YPF’s 8.5% $1.5 billion notes maturing in 2025 dropped 4.5 points, followed by Pampa Energia’s 9.1% $300 million notes maturing 2029, which fell 3.6 points, and Genneia’s 8.7% $500 million notes maturing 2022, which were down 3.2 points.
Under that same policy, the government decided to postpone a 22% tariff increase for utilities earlier this year, corresponding to the July-to-September period agreed with gas distributors under the full tariff revision. The measure, which aimed to boost consumption amid a 57% year-over-year inflation increase as of May, included a subsidy granted by the federal government to compensate for the tariff deferral. However, after the recent peso depreciation, the collection of such deferral is expected to hurt utilities’ finances.
The new government policy led energy corporations to revise their estimates and file legal injunctions immediately. After the government fixed Brent crude oil prices at $45.19 per barrel with an international market price of $59 per barrel, YPF estimated that the new controls could cause it to lose $100 million to $120 million in EBITDA per month and cut capex by a similar amount.
As investors wait on the sidelines until they have a better idea of what the next administration plans to do, the Peronist Frente de Todos candidate Alberto Fernández, who trounced Macri by 15% points in the primaries, continues to give confusing signals. Increasing political uncertainty about the new economic policy under a Peronist administration could continue with an investor selloff of the local peso and Argentine issuers on doubts about the country’s capacity and willingness to honor incoming debt maturities.
YPF’s and Pampa’s capital structures are below:
Argentine state-owned oil and gas conglomerate YPF’s 8.5% $1.5 billion notes maturing in 2025 plunged 20.3 points to 79 during last month after the primary results on Aug. 11, while Pampa’s 7.375% $500 million notes maturing in 2023 dropped 18.4 points to trade at 81 during the same period, and Compañía General De Combustibles’ 9.5% $300 million notes maturing in 2021 fell by 18 points to 82. The one-year price performance of YPF’s 2025s, Pampa’s 2023s and CGC’s 2021s are reproduced below:
Sources remain uncertain about what policies could be implemented because of the mixed signals given by the candidate favored to win the elections and the unstable macroeconomic scenario in Argentina. However, former energy ministers, secretaries and officials consulted by Reorg provided potential scenarios that investors can expect and agree that under a new Fernandez-Kirchner administration, it is unlikely that energy policies will revert toward an aggressive tariff freeze.
President Mauricio Macri’s former energy minister and ex-CEO of Shell Argentina, Juan José Aranguren, assured Reorg that he did not believe that price or capital controls would become a permanent policy. “Once calm returns to the markets, I’m confident that the same errors won't be repeated. However, macroeconomic stability will be essential to know what we can expect in terms of energy prices,” Aranguren said. He now runs the energy consulting company Consilium.
Some expect that during the next four-year term, the upstream segment in oil and gas exploration and production will be among the most affected within the energy sector. “Most probable, under either Macri or Fernández administration, is that they would seek to break the current link between the price of oil for the [local] market to the U.S. dollar,” potentially hurting margins in U.S. dollar terms, said former Undersecretary of Fuels Cristian Folgar. A new energy framework could include peso-denominated energy prices for the domestic market and new regulation to boost energy exports, with the aim of attaining “acceptable” average energy prices for local companies, Folgar added.
For gas and electricity distribution and transportation companies, sources said they expect price increases to moderate, after Macri’s recent decision to postpone new tariff updates on utilities. “Most probable scenario is that tariff updates to continue with certain delays,” potentially lagging local inflation rates to boost disposable incomes and consumption in the short term amid the economic crisis, the same source added.
In a similar vein, a source who had been a high-ranking official in the previous Kirchner administration’s energy secretariat explained to Reorg that the next administration would not be able to avoid the impact of economic maladies on its energy policies - whether Peronist or not. “Argentina’s depreciation will put pressure for energy priorities to shift toward the short term, as social needs such as people having enough money to eat will influence many decisions that the government takes,” the source explained.
The new economic context, with expected higher inflation rates following the sharp peso depreciation last week, led to Macri’s last-minute decision to implement price controls on gas and oil for 90 days on Aug. 14, with the aim of containing the depreciation’s pass-through effect on inflation. On that day, YPF’s 8.5% $1.5 billion notes maturing in 2025 dropped 4.5 points, followed by Pampa Energia’s 9.1% $300 million notes maturing 2029, which fell 3.6 points, and Genneia’s 8.7% $500 million notes maturing 2022, which were down 3.2 points.
Under that same policy, the government decided to postpone a 22% tariff increase for utilities earlier this year, corresponding to the July-to-September period agreed with gas distributors under the full tariff revision. The measure, which aimed to boost consumption amid a 57% year-over-year inflation increase as of May, included a subsidy granted by the federal government to compensate for the tariff deferral. However, after the recent peso depreciation, the collection of such deferral is expected to hurt utilities’ finances.
The new government policy led energy corporations to revise their estimates and file legal injunctions immediately. After the government fixed Brent crude oil prices at $45.19 per barrel with an international market price of $59 per barrel, YPF estimated that the new controls could cause it to lose $100 million to $120 million in EBITDA per month and cut capex by a similar amount.
As investors wait on the sidelines until they have a better idea of what the next administration plans to do, the Peronist Frente de Todos candidate Alberto Fernández, who trounced Macri by 15% points in the primaries, continues to give confusing signals. Increasing political uncertainty about the new economic policy under a Peronist administration could continue with an investor selloff of the local peso and Argentine issuers on doubts about the country’s capacity and willingness to honor incoming debt maturities.
YPF’s and Pampa’s capital structures are below:
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