If You Own Any of These Oil Stocks, Trouble Ahead

stock marketThe Argentine government’s demands to take over the shares in Argentine oil firm YPF SOCIEDAD ANONIMA (NYSE/YPF), which is currently majority-owned by Spanish firm Repsol YPF, S.A. (Pink Sheets/REPYY), make for another blow to individuals and firms with an investment strategy in that region. This is a shocking and sudden change to Repsol ownership in YPF, reducing its stake from approximately 57.4% down to six percent. The new structure would have the Argentine government own a 51% share in YPF. Repsol countered this shocking move by demanding compensation of $10.5 billion for its shares of value. The Argentine government will most likely reject this out of hand. Total cost for Repsol in YPF has been in excess of $13.0 billion.

Repsol stated their belief that this is manifestly unlawful and gravely discriminatory and contravenes the obligations undertaken by the Republic of Argentinafor privatization of YPF. Repsol is looking at taking some form of legal action; however, we all know that the chance of them winning is slim to none. Oil stocks that are involved in areas of political instability usually trade at a discount to the market, as investors need to calculate the higher odds of a situation like this occurring. As higher oil prices push oil stocks into regions of more questionable character, this will also raise the risks for investors that some or all of the funds will get essentially confiscated by the local governments.

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Chart courtesy of www.StockCharts.com

In my article, Oil Stocks Face a Cloudy Future in Brazil, I warned of the dangers for oil stocks in South America. The issue was with news of Chevron Corporation (NYSE/CVX) executives denied the ability to leave and facing prosecution for criminal charges in Brazil. There aren’t that many U.S. oil stocks that are primarily active in the Argentina; however, oil stocks in general must be researched thoroughly to ensure that, even though high oil prices remain, your investment is relatively safe from political regimes’ ability to confiscate your firm’s assets. Several analysts have now reduced their price targets for YPF’s American depositary receipts to the $7.00 region from over $35.00 after this move by Argentina.

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Chart courtesy of www.StockCharts.com

The shares of Repsol have plunged, as you would expect with this situation. You should be careful with other oil stocks in this area, such as Americas Petrogas Inc. (TSXV/BOE). Small oil stocks, like Americas Petrogas, are especially vulnerable, as they aren’t as diversified as larger oil stocks. Even though oil prices remain high, it doesn’t mean much if your oil stocks lose access and revenue from a property seized by the government.

It is unfortunate that oil stocks have to deal with political regimes in an area like Argentina that has high levels of hydrocarbon available. The potential for oil and gas is great in Argentina. As oil prices remain high, investors might want to bet that the political situation might be averted and cooler heads will prevail, but I seriously doubt it. Looking at near by Venezuela and President Chavez, you can see that some political regimes have remained in power for a very long time.

The lesson is twofold: 1) invest in large, multinational integrated oil stocks that have such a diverse level of interest that any one political upheaval does not kill the company; or 2) thoroughly research the oil stocks you are interested in to be sure that political climate is stable. The advantage of junior oil stocks is that they have a higher potential for capital appreciation, especially with high oil prices. However, with high potential of returns also comes with a higher level of risk. For my money, I’m going to avoid several of the South American nations for now until they can prove that investors’ money is safe.