Fitch: Argentina Hydrocarbon Prices Pared Back For 2016; Prices to Remain Above Int'l 2016 Averages
Until October 2015, Argentine light crude oil (Medanito) prices have averaged approximately USD77/BBL in 2015, which is 50%+ higher than average West Texas Intermediate (WTI) prices of USD50/BBL. This pricing dislocation has remained in place in Argentina despite the global sell-off of crude oil prices as the government has attempted to spur crude oil production to close the country's energy gap that has resulted from diminished crude oil production during the past decade.
If current global oil price trends continue, Fitch would expect the government and producers to agree to a similar cutback in 2016 to close the gap with global prices. A similar price cut would bring light crude oil prices to the USD70/BBL level, which would still maintain Argentine crude oil prices at levels upwards of 40% above WTI prices. This would occur despite the final results of the runoff round in the Presidential elections scheduled for November 22nd.
Price Recently Adjusted Due to Indexation to Brent
In December 2014, the government and producers announced an approximately 8% decrease in Medanito prices to USD77/BBL from USD84/BBL, which has held most of the year. Recent reports on Bloomberg have noted that YPF S.A.'s (Foreign Currency IDR 'CCC') refineries recently cut-back the price they paid for light crude oil from producers to USD75/BBL, though this is not the first time the price of crude oil has been pared back during the year.
Local Argentine oil prices are indexed on a monthly basis to Brent per a 2014 agreement between upstream/downstream players and the government. For every USD8/BBL decrease in Brent local prices would be adjusted down by USD1/BBL. This accounts for the USD2/BBL decline which is evident in the last quarter of 2015. This agreement is in place with the current administration; however, a new administration taking office in 2016 is still a wild card. Given the sell-off in world oil prices, Fitch believes there is a high probability that the new administration will adjust crude oil downwards once again in 2016.
YPF and Pan American Energy Most Impacted
Of Fitch-rated entities, the most directly impacted by the decline in domestic crude prices would be YPF and Pan American Energy LLC (Foreign Currency IDR 'B-'/Negative Outlook). One other important factor is that both presidential candidates are expected to float the currency, which could lead to 35% plus depreciation of the Argentine Peso versus the U.S. Dollar. Given YPF is an integrated energy company with the largest downstream share in the country, an overall negative impact could be mitigated by price adjustments at the pump. However, these price adjustments would also have to account for the expected decrease in the value of the Argentine Peso versus the U.S. Dollar. In Pan American's case, any negative impact could also be mitigated by export stimulus and/or production stimulus payouts along with the continued decline of export tariffs from the Argentine government. In 2015, companies that managed to increase production are eligible to receive USD3/bbl in stimulus payments, and exporters are also eligible to receive an additional payment equivalent to USD2-USD3/bbl. Exporters also benefit from the decreased export tariff rate of 1% when the price of exported crude oil is less than USD71/bbl.
Shift to Increased Gas Production Expected
Furthermore, in a lower oil price environment, Fitch would expect both companies to shift towards increased gas production. Via Resolution No. 1/2013, the Argentine government created an incentive program for generating incremental natural gas production, whereby YPF and Pan American are entitled to receive attractive compensation between USD7.50 per million BTU (MMBTU) and their invoiced average gas price if they manage to increase gas production. Given the country's reliance on thermal energy for electricity generation, Fitch would expect this program to remain in place during 2016. There are still too many unknown variables regarding the overall negative impact from the probable decline of upstream energy prices, though both companies' credit profiles should remain strong for their rating categories given they are constrained by Argentina's sovereign rating (Foreign Currency IDR Restricted Default; Country Ceiling 'CCC').