Holding tight to Argentina’s YPF

Author: Chris Rees, TenStocks

Disclosures: Long YPF, AVEO

Holding tight to Argentina’s YPF Christina Fernandez de Kirchner, Argentina’s president, ignored world opinion and the adults in the room.

She went ahead with the expropriation of Repsol’s controlling portion of YPF. The Tenstocks at Covestor portfolio took a hit on this decision. But we still managed to come in to May up around 30% year to date.

One of the elements we missed in this story was the power handed over to a young charismatic Marxist by the name of Axel Kicillof. Mr. Kicillof is reported to have said he had hypnotized the president.

Backed by the Campora, a social media savvy activist youth group, Mr. Kicillof has had a spectacular rise to fame and infamy. He was instrumental in the 2008 seizure of Aerolineas Argentina from the Marsans Group, the legal owners. Under Mr. Kicilloff’s stewardship AA employees per plane increased to over 300 (the industry average is about 70) and it’s drowning in red socialist ink.

Wikipedia reports:

“ In late November 2011, the government announced an austerity plan for the company in order to reduce the deficit it has been incurring since it was taken over from Marsans; the plan includes the revision of unprofitable routes, the reduction of pilot/aircraft rates, and the withdrawal of obsolete equipment, among others.”

Is this any way to run an airline?

In any event, Axel thinks he will have better luck running an oil and gas company.

There is a sweet irony in the surge of nationalism that accompanied the YPF expropriation. Campora activists plastered cities with anti-YPF propaganda as part of a concerted vilification campaign.

At the same time, Christina renewed sabre rattling and flag waving over the Falkland Islands, which Argentina, in another stroke of reckless decision making, invaded in 1982.

As Christina evokes Eva Peron, investors and the Argentine people would do well to consider the words and actions of Margaret Thatcher, the Iron Lady, who was swift to teach Argentina the folly of implementing ill-conceived ideas. Britain retook the Falklands within months. Disgraced by defeat the then Argentine president Leopoldo Galtieri resigned as leader of the military junta.

Maggie Thatcher also has some words of wisdom for the ambitious Axel Kicillof: “Socialist governments traditionally do make a financial mess. They always run out of other people’s money.”

As capital flees Argentina, Axel and friends get ready to ‘value’ YPF.

Investors in Argentina and across the globe have been valuing YPF in the market on a daily basis for years and prior to the smear campaign the market valued YPF at around $40 a share.

So what do we do with our stake in YPF?

We hold tight. YPF will either try to emulate the workable Petrobras (PBR) model or the disastrous PDVSA Gas example of Hugo Chavez’s Venezuela.

The key indicator of future success or failure will likely be employees per barrel produced. Also, the oil and gas in Argentina has been there for millions of years and not much is likely to come out of the ground under the leadership of Axel Kicillof.

Simply put, we think the asset will last longer than the current administration.

In other news, we added to our Aveo Pharmaceuticals (AVEO) position in April. We believe the market currently underestimates the potential for Tivozanib, Aveo’s renal cell carcinoma drug.