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Fitch: Agreement with Chevron credit neutral to YPF’s ratings

Hydrocarbon Engineering,

YPF has announced a Project Investment Agreement with Chevron to develop unconventional hydrocarbon resources in the province of Neuquen, Argentina. Chevron is initially committed to invest US$ 1240 million to drill more than 100 wells in one year. The joint investment is estimated to total US$ 1.5 billion.

This agreement is credit neutral to YPF’s rating, according to Fitch ratings. YPF’s current and local currency ratings are ‘B-“, and its national scale rating is ‘AA(arg)’. The Rating Outlook is negative.

The agreement will benefit from the incentives introduced under Decree 929/2013*. As a result, a condition for Chevron to make an initial investment of US$ 300 million is that the project is granted a concession over its specific area for a 35 year period by the province of Neuquen.

During the initial phase, the agreement with Chevron is not expected to pressure YPF’s cash flow as the majority of investment will be financed by Chevron. During the second phase each party will invest 50% each. Fitch will assess the impact on the YPF of the second stage of investment in Neuquen when there is public information available in regards to the amount of investment, capex program, the financing resources and reserves and production profile.

YPF’s ratings reflect the company’s government ownership, which generates uncertainty over the company’s future efficiency and profitability, as state owned entities tend to incorporate more social considerations into business strategy. The company’s decreasing reserves and production volumes are additionally manifest.

In December 2012, YPF reported 5.5 years of reserves, well below Fitch’s optimal level of 10 years, One year reserves replacement decreased to 85% from 113% from 2011 to 2012. Meanwhile, production remained stable at approximately 485 000 bpd of oil equivalent as of March 2013.

YPF’s total debt has increased as of March 2013, to US$ 3620  from US$ 1965 in 2011. However, short term debt has decreased to 25% over total debt (US$ 894 million) from 60% over total debt (US$ 1884 million in 2011), mitigating refinancing risk. YPF’s cash position was US$ 843 million, as of March 2013.

*See Fitch: Argentina’s oil and gas incentives not enough to attract new investment for more information.

Adapted from press release by Emma McAleavey.

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