Fitch: Argentina Hydrocarbon Prices Pared Back For 2016; Prices to Remain Above Int'l 2016 Averages
Fitch Ratings expects hydrocarbon prices in Argentina to remain above
depressed international hydrocarbon prices in 2016, though a price cut
similar to last December could happen again.
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').
Additional information is available at 'www.fitchratings.com'.
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