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I think there’ a huge opportunity for investors to make money on the energy side in Argentina. The Vaca Muerta (translated in English as “Dead Cow”) Field in Argentina has attracted some of the biggest investors in the world and there are a few opportunities that I feel have been overlooked.
If I would have made this statement last year everyone would have thought I was crazy. Ever since the Argentine government’s expropriation of Repsol’s ($REPYY) 51% stake in YPF S.A. (YPF) , both retail and institutional investors had been shying away from one of the largest known shale plays on the planet. However, with the $5 Billion settlement Repsol received last month, the game is on and the opportunity in Argentina looks to be even bigger than ever! According to a NY Times article written by Stanley Reed and Raphael Minder on Feb. 25, 2014, “The United States Energy Information Administration estimates that Argentina ranks behind only the United States and China in shale gas reserves” (NY Times Feb 2014). This is a shocking statistic considering Argentina wasn’t even on the map 10-15 years ago.
There have been a number of transactions around the Vaca Muerta involving some of the largest energy companies in the world. Chevron (CVX) , Total S.A. (TOT) , Shell ($RDS.A) and Wintershall have been chomping at the bit to get a piece of the action, investment in the country is increasing at a drastic rate, and the overall sentiment is becoming ever more positive. All of this adds up to a huge opportunity for investors who decide to take advantage of it.Consider some of the more recent deal-making:
1. Chevron and YPF signed a $1.24 Billion agreement to explore the Vaca Muerta formation in September 2013
2. Dow Chemical Co. (DOW) and YPF signed an agreement in September 2013 to invest up to $120 million in the Vaca Muerta
3. Wintershall/GyP announced an agreement to explore for oil in the Vaca Muerta formation
The Wintershall/GyP deal valued the acreage in the Vaca Muerta at $7,500/acre, while the Dow Chemical/YPF deal valued the acreage at around $10,000/acre. With increased investment in the area, I am focusing on companies that have large land positions.
YPF is an obvious choice, being Argentina’s state owned company. YPF’s stock has done very well of late, rising from $21/share to $29/share in the last two months and giving investors a 38% return on their money. Take a look at the chart below and see for yourself:
Since most of my personal investments are in risk-on leveraged plays, they should not be considered by investors who can’t stomach volatility. However, I feel that if you get into the right companies early enough in their cycle, your investment can be de-risked and you can potentially make a very hefty return. Three to four months ago, a lot of these stocks on the TSX Venture Exchange were sitting with no bid in sight. Today, the interest is coming back and we are starting to see a lot more retail and institutional support. It is still very important to note that even with improved market conditions, it doesn’t mean that all junior stocks are going to have a run like they once did before the 08’ crash. Things are definitely moving in the right direction but it is still a slow process. Investors need to make sure that they are sticking with good quality management with the right share structure and proven assets-this is the key to success in this business. One of the only good things that the downturn in the market did for investors was eliminate many of the underfunded, badly run companies. Only the strongest survived and now is the time to take advantage of them.
With that being said, I wanted to highlight two companies that I myself have taken a position in that have exposure to Argentina and the Vaca Muerta:
Madalena Energy (MDLNF) is a company that I’ve been in for about a year, and that I continue to support every day. What triggered me to invest is the fact that this is an acreage play in the Vaca Muerta. Even though the company has great producing assets in Alberta, what excites me most are their assets in the Vaca Muerta shale. MVN has three blocks, each with substantial acreage (their Curamhuele block covers an area of 50,400 net acres, Coiron Amargo has 34, 973 net acres and Cortadera holds 49,600 net acres) that could be very attractive to majors looking for a point of entry. Based on recent activity in the area, one joint venture/transaction involving just one of MVN’s blocks could be worth more than their entire market cap today. MVN’s Coiron Amargo block, for example,has 34,973 net acres. The Wintershall/GyP deal which was announced last month valued the acreage at $7,500 each, while the Chevron, and Dow Chemical/YPF deal which was announced last month value the land at $10,000/acre…If you take any of these figures into account, we can see where all the excitement around the stock has come from. Haywood Securities just led a $23 million bought-deal financing at a premium to the market (at $0.70) and I think there is a lot more room to go from here.
Another company I like and took a position in is Jagercor Energy ($JAMTF). Even though Jagercor does not yet have an asset in place, they are assembling a stellar team that not only has access to the best projects in the area but one that can finance them as well. Matias Bullrich, a director at Jagercor, has amassed a great network of contacts on Wall Street during his 15 year stint at Morgan Stanley (MS) and as a Portfolio Manager at SAC Capital where he spent a lot of his time structuring major energy deals in Argentina
Jagercor’s President and CEO is another highly regarded operator with a great track record. Mr. Russo brings 20 years of experience in the oil and gas industry in Argentina, a great deal of it with YPF SA. Mr. Russo also worked as Operations Manager, responsible for the Loma La Lata production area which is currently the most important gas field in Argentina.Now that the company has completed their recently announced private placement for $1.6 million, we should expect a potential project to be vended in. JEM is definitely a very risky investment, but one that I think has the tools in place to make it a great success in 2014.
As always, please do not hesitate to get in touch with me anytime. I look forward to hearing from you.