10-01-02 When Repsol bought Argentina's YPF for $ 15 bn in cash in 1999, the acquisition was hailed as a brilliant, if expensive, strategic move. YPF, the biggest oil and gas company in Argentina, transformed a small European refiner into one of the world's eight largest integrated oil and gas companies.
At a time of big international mergers in the oil industry, the YPF purchase took Repsol out of the also-ran class of oil companies and made it, if not a major player, at least a respected one. In 2000, with oil prices above $ 30 a barrel, Repsol-YPF recorded its best-ever results, with net profits up by 140 % at EUR 2.4 bn ($ 2.1 bn). But the gamble has backfired with Argentina's financial crisis and growing international isolation.
Repsol revealed that it was negotiating a one-off "contribution" to Argentina's bankrupt government, totalling between $ 300 mm and $ 500 m, if the Peronist administration agreed to drop plans to tax oil exports. The uncertainty surrounding Argentina's economic plan following the devaluation of the peso leaves many questions unanswered.

Will Repsol-YPF, which derives 45 % of its operating income from Argentina's rich oil and gas fields, be allowed to repatriate profits? Will price controls dent its revenues in Argentina, where it controls 40 % of the retail market? And what exchange rate will the company be allowed to use when invoicing for oil exports? Repsol-YPF could only say negotiations were at a very delicate stage.
The company's silence is making investors nervous. Repsol's share price has plunged more than 10 %. Its market capitalisation, at EUR 17.4 bn, is now only one-third of Italy's ENI, and less than 8 % of the UK's BP. The principal concern is over Repsol's ability to service its EUR 19.7 bn debt, including EUR 5.3 bn which matures this year. Its gearing is 100 %, about three times the sector average.

With Repsol only two notches above junk status, the price of its bonds on the international markets is falling on concern that Moody's, the rating agency, may downgrade Europe's most indebted oil company for the second time in three weeks. One bondholder said: "We are dealing with politics, which can be irrational. I am trying to work out the probability of inconceivable or irrational acts." Bondholders do not rule out that Eduardo Duhalde, Argentina's new president, may attempt to nationalise YPF.
Jeremy Hawes, a senior vice-president at Moody's, said: "I don't expect the company to go to sub-investment grade in the near future unless we discover that the combination of the economic measures implemented by the Argentine government and the final [outcome] of the devaluation have a very material effect on Repsol's results."
Merrill Lynch, the US investment bank, estimates that the impact of Argentina's 29 % devaluation and an estimated 20 % tax on oil exports would cost Repsol EUR 440 mm this year. This in turn would lower estimated net profit by 27 % to EUR 1.2 bn in 2002. However, Merrill Lynch believes asset disposals and cash flow will be sufficient to allow Repsol to meet its debt servicing obligations this year. Another question mark hangs over the company's ambitious investment plans over the next five years.

Last July, Alfonso Cortina, Repsol's chairman, said the company planned to invest EUR 23 bn during this period, including EUR 11 bn in Latin America. In addition to expanding production in Argentina, Repsol wants to build a gas pipeline from Bolivia, where it owns gas fields, to California.
But Mr Cortina is under fire because he has been unable to lower Repsol's debt by shedding assets fast enough. At the start of last year, he said the company's debt would be lowered by EUR 7 bn, or about one-third of the total, during 2001. But until the end of September, the company had only managed to lower its net debt by EUR 300 mm
As a result, Repsol's debt was downgraded throughout last year because of slow progress in reducing leverage and delays in disposals. "Repsol's current gearing position leaves it out of line with the sectorand financially stretched in a cyclical downturn. Specific risks in Argentina compound this problem," Goldman Sachs said.

In Spain, Repsol is also under pressure because of a decline in guaranteed revenues once the government decision to break up the gas monopoly held by Gas Natural, in which Repsol holds a 45 % stake. Spain's electricity companies are aggressively entering the gas market, which in turn has prompted Repsol to enter the electricity market by building its own combined cycle power generation plants.
Under the timetable for gas liberalisation, Gas Natural will have to sell 65 % of Enagas, its pipeline company, this year. The government has also ordered Repsol to reduce its stake in its oil pipeline subsidiary CLH. While the disposals will allow the company to reduce its overall debt, its earnings in Spain will also be affected.