YPF - YPF Sociedad Anónima: A Speculative Trend Play With Record Profits Low Multiples And Deleveraging

2023-08-04 17:29:37 ET

Summary

• YPF's net margin is at a record high since 2014, while net debt has fallen 36% to $6.31b.
• The company's P/S, P/B, and EV/EBITDA multiples are all near their lowest levels since 2014.
• YPF's refinery processing levels recently reached a 13-year high, and shale oil and gas production grew 31% and 9% YoY.
• Despite risks such as Argentina’s history of economic instability and the potential for import/export restrictions, YPF’s strong financials and upward price momentum present an opportunity for investors.

Key Points

• Net margin (LTM) is at a record high since 2014, while net debt (quarterly) peaked in Q4-2018 and has fallen 36% to a level of $6.31b.

• The firm’s P/S, P/B, and EV/EBITDA multiples are all close to record lows since 2014.

• In the recent quarter, YPF’s refinery processing levels reached a 13-year record high and its shale oil and gas production grew 31% and 9% YoY.

• Despite risks such as Argentina’s history of economic instability and the potential for import/export restrictions, YPF’s strong financials and upward price momentum present an opportunity for investors.

About

YPF Sociedad Anónima (NYSE: YPF ) is an energy company that mostly operates in Argentina, deriving the bulk of its revenues (66% in FY2022) from sales of fuels and natural gas. As its 20-F filing explains:

We are Argentina’s leading refiner with operations conducted at three wholly-owned refineries with a combined annual refining capacity of 119.7 mmbbl (328.1 mbbl/d). We also own a 50% equity interest in Refinería del Norte S.A. (“Refinor”)... which has a refining capacity of 26.1 mbbl/d. … As of December 31, 2022, we held interests in 116 oil and gas fields in Argentina. … We are the largest producer of natural gas in Argentina with total natural gas sales of 13,713 mmcm in 2022, accounting for 29.0% of the market (market share calculated through December 2022, as provided by Ente Nacional Regulador del Gas (“ENARGAS”).

In addition to its operations in Argentina, YPF also sells lubricants and oil derivatives in Chile and Brazil.

Strong Financials

Revenue (LTM) has been in an uptrend since Q1-2021 and has more than doubled since, now at a post-2014 record of $9.23b, according to StockRow . The firm’s EBIT (LTM) is close to a record level, a significant recovery from its Q4-2019 - Q1-2021 rough patch. Net income (LTM) is at a record high.

YPF’s net margin (LTM) is at a record high, now at 11.9%. Operating margin (LTM) is approaching record levels. Its operating cash flow margin (LTM) is fairly healthy, hovering around 30% since Q3-2020, however that margin has been slightly downtrending since its earlier peak in Q3-2019.

YPF has been deleveraging. Its net debt (quarterly) peaked in Q4-2018 and has fallen 36% to a level of $6.31b. Its debt/equity and debt/asset leverage ratios have been in downtrends since Q2-2020 and now sit at 0.7 and 29%, respectively.

The company’s number of book-entry shares of common stock in Q1-2023 was 393,312,793, the same as it was in Q1-2022 and Q1-2021.

Historically Cheap Multiples

YPF’s P/S, P/B, and EV/EBITDA multiples are all close to record lows since 2014. For the past several quarters, P/S and P/B have been expanding, meaning that investor sentiment appears to have recently rebounded; investors are repricing their estimate of firm value upwards.

Potential Catalysts

In the recent quarter, YPF’s refinery processing levels reached a 13-year record high, growing 9% YoY, per the Q1-2023 release . Management attributes this to its recent update of a topping unit at the firm’s refinery in La Plata. The firm saw substantial growth in its shale oil and gas production, climbing 31% and 9% YoY, respectively. Also, the recent quarter saw domestic fuel demand rise 4% YoY.

Risks

Since 51% of YPF’s shares are owned by the Argentine Republic ((AR)), that AR determines the outcome of all decisions that are put to a shareholder vote and require a majority approval.

The firm notes in its 20-F that the COVID-19 pandemic significantly affected YPF’s performance in the past. If the pandemic’s trajectory worsens or a new health threat emerges, YPF’s financial results could suffer.

A large part of YPF’s success depends on favorable economic conditions in Argentina, a country with a history of substantial economic volatility and debt crises such as those in 2001, 2005, 2015, and 2020. If inflation intensifies or another factor impairs the country’s ability to refinance, economic growth could suffer and pull down company revenues. If Argentina has trouble meeting its future debt obligations from foreign borrowers, it may lead to retaliatory measures that could impede YPF’s ability to do business in those countries.

About 7% (as of FY2022) of the firm’s total debt is sensitive to fluctuations in bond yields. Adverse rate movements could increase the firm’s debt servicing costs and lead to a drop in margins.

Import and export restrictions that apply to YPF could change and become less favorable. At one time, the AR forced the firm to redirect some of its natural gas to domestic customers as opposed to export clients, resulting in customer disputes. Luckily, YPF is not currently facing restrictions on its natural gas exports (permitted under “Plan GasAr”), but future restrictions are possible and could hurt its results.

YPF is exposed to currency fluctuations. The recent devaluation of the Argentine peso has hurt Argentina’s economy and accelerated inflation. All else equal, those factors tend to increase key costs like wages and materials and pull down customer demand.

Finally, the AR government has outstanding claims which are before the International Centre for Settlement of Investment Disputes (“ICSID”). The outcome of those claims may be unfavorable to the AR and impede economic growth.

Execution

Buying a stock is a bet on where its price goes, not necessarily the fundamentals of the business. Since there is statistical evidence of trends in equity markets, investors who apply a scientific mindset may benefit from focusing on companies with trending share prices.

YPF’s stock price broke above its 200-day trend in August 2022 and has been in an uptrend since, rising more than 200% since that time, per finviz .

Zooming out, the stock is 46% below its peak in 2017 and 62% its peak in 2014, indicating significant potential upside if mean reversion takes effect.

Note that YPF’s website states it reports Q2-2023 earnings on August 11. Investors could consider holding the share into earnings and betting on a favorable quarter and market reaction, or they could consider waiting to see what price action looks like afterwards. The latter approach might be more suitable for investors who want to avoid gap risk.

Bottom Line

YPF’s record margins, depressed valuation multiples, recent deleveraging, and trending share price make it an interesting opportunity for investors. While its share price continues to trend, the stock could be a reasonable bet for investors with a momentum-inspired strategy to consider.

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