Alexander Green apparently focused his March issue of the Oxford Club’s Communique newsletter on Argentina, and the free excerpt that they shared of that leads to a ‘secret’ stock pick that we can reveal for you.

The back story is the rise of Javier Milei, the new President of Argentina and a man whose leadership could bring a real sea change in the Argentine economy. You’ve no doubt heard of Milei’s election win, and of his fiery speech at the World Economic Forum in Davos back in January, when he gave the free market capitalists of the world a new hero (and better yet, at least for some, one steeped in the work of Friedrich Hayek and the Austrian School of Economics)… but if you missed the actual speech, here it is, with English translation:

We’ll skip past the ideological debate over Argentina’s path, but yes, the key to Green’s interest is that there’s at least a good chance that Argentina will shrink it’s government’s impact on the economy, and maybe make room for loosening price controls and export controls and free up investment and growth and profits for new businesses in Argentina… and for the few publicly traded businesses who have survived Argentina’s long financial decline.

So what’s the stock pick that comes out of his victory?

Here’s a bit from Green’s email…

“Only after Javier Milei won a crushing victory over his Peronist rival Sergio Massa late last year did I start paying closer attention.

“And I really liked what I heard.

“Milei is intent on igniting an economic revolution in Argentina by sharply reducing the size and control of government through deregulation, privatization and dollarization.

“Argentine stocks leapt on news of his victory.

“Yet given the country’s many long-term problems – and the skepticism of many investors and commentators – they are still among the cheapest in the world. Therein lies opportunity…”

And then he drops some hints:

“He has his work cut out for him. There is an array of special interests aligned against him in the legislature. But voters handed him a lopsided victory and are demanding action. Consumer and business confidence is already trending up.

“And there’s one stock in particular that could be a great way to take advantage of it.

“Thriving Under a Milei Presidency

“You see, Argentina is home to one of the world’s leading oil and gas producers. Sales nearly doubled in the most recent quarter. And profits are likely to more than double in the year ahead.

“Yet despite this torrid growth, the stock is a terrific value – trading at less than three times prospective earnings.

“The upside here is considerable. And the stock gives us economic, political and international diversification.”

So hoodat? Well, there’s really only one likely match: YPF (YPF), the state-controlled oil company, is either the largest or second-largest publicly traded company in Argentina, depending on whether you think Mercado Libre (MELI) is still an Argentine company (they’re headquartered in Uruguay, with business spread throughout Latin America).

Their sales did not “nearly double” in the most recent quarter, but there isn’t really a viable second place company in Argentina if you’re talking “the world’s leading oil and gas producers”. Especially if you want something that casual investors who subscribe to a generalist $49 newsletter might be able to buy.  You can see their third quarter presentation here, their revenue  and EBITDA and adjusted earnings have been growing, and in some cases have doubled over the past few years, but there wasn’t any 100% year-over-year growth in that particular quarter.

I should note that it is possible that Green is recommending Pampa Energia (PAM), which is the largest independent (not controlled by the government) publicly traded company in the energy business in Argentina, they have acquired some interesting businesses over the years, often from companies like Petrobras which left Argentina, and have had some moments of 100% growth of late on the earnings front… though it’s awfully hard to say it’s “one of the world’s leading oil and gas producers,” YPF produces about 3X as much oil and gas as PAM, which gets about 2/3 of its income from electricity generation, not from oil& gas production or petrochemicals.

And perhaps more interestingly, Argentina is also second to only the US when it comes to shale oil investment and production, focused on the Vaca Muerta region. Thanks to a dominant presence throughout the country, YPF produces about a third of the oil and gas in Argentina, and most of the big multinationals have gradually given up on the country over the years (Total and Chevron still have meaningful oil and gas production, but that’s about it… the other pretty big current player in oil and gas in Argentina is Pan American Energy, which is by most measures the second-largest producer. Pan American is half owned by BP and half by the private Bridas Corp, which in turn is half-owned by the Chinese oil giant CNOOC).

Shale production is growing fast for YPF, but it’s also still quite new to Argentina — they’re exploring and developing pretty aggressively within Vaca Muerta, and YPF has at least a taste of most of the region, with work funded by private oil companies who have stuck with the country in hopes of getting a piece of this giant field, including other folks like Shell, Petronas, Dow and Equinor. YPF’s net share at this point is 1.2 million acres out of the potential 3 million prospective acres of Vaca Muerta, and their reserves (about 50/50 oil and gas) are still growing faster than they’re being produced. This is not exactly a secret — the eyes of the energy world have mostly been on Guyana of late, as Venezuela threatens the big Hess/Exxon offshore oil fields on the northern coast of South America, but Vaca Muerta has been a big deal for a long time… and even got the attention of the Wall Street Journal recently, here’s a little of what they wrote about it in December “Global Conflicts Stir Sleeping Energy Giant in South America — Argentina’s Vaca Muerta shale field is among the megaprojects ramping up around the region,” Dec. 21, 2023 WSJ):

“South America has long been the world’s sleeping energy giant, with massive oil-and-gas reserves still untapped. Now it is rumbling awake, with huge implications for the global market.

“’What we know is that Europe and the Western world is never going back to depending on Russian gas,’ said Marcelo Mindlin, president of Buenos Aires-based Pampa Energía. ‘This is a big opportunity.’

“His company is among a number that are increasingly active in Argentina’s large oil-and-gas patch called Vaca Muerta—which means dead cow in Spanish.

“Sitting on arid, windswept terrain as big as Belgium near Argentina’s border with Chile, the shale field has potential output comparable to the Permian Basin, long the most prolific region in the U.S., according to Rystad Energy.

“Chronic economic crises and rigid currency controls have long hindered infrastructure development in Argentina, economists say, leaving trucks slowly plying dirt roads around rigs while companies struggle to import drilling equipment amid dollar shortages.

“But thanks to a new political landscape in the country, Vaca Muerta could soon turn into a cash cow, say government officials and oil executives.

“The country’s new libertarian President Javier Milei is promising a sweeping deregulation and privatization of the industry, sending local energy stocks soaring since his victory in November’s elections.”

(Pampa Energia might have caught your eye again there, and it is a potentially meaningful player in Vaca Muerta as well, their concessions cover about 8% of the field.  They have had stronger earnings growth recently, and are also valued at 3-5X earnings, so I’ll remind you that it’s possible that Green stretched to pick them.)

And like most oil majors, YPF also owns a meaningful chunk of the midstream and downstream business — refineries, petrochemical plants, even gas stations.

Their goal is to focus on boosting oil production over the next decade, then to move on to natural gas and LNG expansion, and to eventually, in the 2030s and 2040s, focus on green hydrogen and lithium… but for now, they’re looking to quadruple their shale oil production by 2027 and begin to get more efficient on costs, leading to significant export capacity (that’s more oil than the domestic market needs right now).

So if Argentina frees up the oil sector, and lets YPF either become more privatized or reduces the restrictions on exports or domestic pricing, they could have tremendous growth for a long time. Assuming, of course, that oil demand and prices remain fairly high. Those are some meaningful “ifs”, but this is as hopeful as capitalists have been about Argentina in a long time, so perhaps it will work out. I assume it will take a while.

This is not a new new idea to Gumshoe readers, of course — YPF was one of the very best teaser ideas of 2022, in part because the tease was timed pretty well to profit from rising oil prices (that was a tease from Luke Burgess at the Outsider Club, who called it “Project Petrogonia” in April of 2022). Here’s a little bit of what I wrote at that time:

YPF is a state-controlled oil company, and some investors don’t like to get into such investments. The government of Argentina owns 51%, and about 40% of the shares trade in New York (the rest trades in Buenos Aires). That’s not unique in the energy space, governments often have a strong strategic interest in controlling their energy reserves (Equinor (EQNR, formerly called Statoil), for example, is 2/3 owned by the Norwegian government, and coincidentally has also invested a little bit in Argentina, PetroBras (PBR) is always a political football in Brazil because the government has 50.1% voting rights), and energy companies are always pretty closely regulated even if they are private, but it does mean that state-owned oil companies might be less shareholder-driven than truly independent ones. That’s probably less of an issue for investors than the price controls, capital controls, and relatively slow pace of infrastructure investment in Argentina, which effect all the players in the space, but some people avoid state-controlled companies entirely….

Where the analysts come up with their earnings per share forecasts, I don’t know, YPF doesn’t offer guidance on that bottom line number, but the estimates are very high — $2.11 in adjusted EPS in 2022, on roughly $14.9 billion in revenue… so that would be 12% revenue growth, and a return to the earnings per share range they were in from 2011-2015 or so, which would be a pretty strong bounceback from the money-losing year of 2020.

Investors are not convinced, to put it mildly. That means YPF is trading at a forward PE of about 2.5 — it has usually been relatively inexpensive, probably mostly because investors haven’t consistently trusted the Argentine currency or government over the past 20 years (though there have been moments of enthusiasm), but a PE of 2.5 is very low even for them, that multiple has generally been in the range of 6-12 over the past couple decades.

So yes, YPF is a really cheap oil company, in part because it faces regulatory and currency risks that investors haven’t really been excited about taking, it has some massive shale oil and gas reserves in Argentina that are finally beginning to be produced in meaningful scale, and, well, if that sounds at all appealing to you, it may well be a decent contrarian play (and that’s not necessarily a bad thing, particularly in commodity markets — Rick Rule has thrived for decades as a commodity investor and broker, and he famously likes to say that when it comes to mining and energy stocks, “you’re either a contrarian, or you’re dead.”)

It’s not necessarily at a PE of 2.5 any more… but it’s not that far off. Almost all of the larger oil and gas companies are pretty cheap right now on a PE basis, but YPF is still on the cheaper side — the few analysts who post quarterly forecasts are expecting a huge fourth quarter earnings adjusted earnings number of $4.46 for some reason, which is way off of the trend they’ve been on, so the next four quarters would tally up to about $7, but I can’t say I know where that big number is coming from, which makes me question it. Other sources who survey different analysts have average estimates for 2024 that range from $3-3.65, with the biggest differentiator probably being the estimate of oil and gas pricing. So I’d be more comfortable saying that YPF is probably trading at about 5-6X earnings.

Which is pretty cheap for a growing company that could have the capacity to become a big dividend payer and a meaningful oil exporter over the next few years… particularly if the government lets them… and that is sitting on a good chunk of what is probably the most appealing shale oil field outside of the Permian Basin.

I’ll be curious to see what YPF says next time they report — their last investor presentation was in December, so there could be some changes to the outlook or to the way they talk about the government and about their opportunity… and, as luck would have it, that information is coming soon, YPF will present its fourth quarter results in a webcast tomorrow morning (8:30 Wall Street time). So things could change pretty quick if management surprises investors in any way tomorrow morning.

Lots of uncertainty still, but it’s also still not a crazy idea if you’re willing to ride with Javier Milei as he tries to reform Argentina’s government and free up the economy… with the potential upside rising if Milei is really successful in that attempt, and maybe even moves forward to privatize YPF, giving the government less direct control over the company.

Though as we’ve seen with Petrobras (PBR) in Brazil over the last few years, sometimes an oil company can make enough money even with the government’s heavy hand on their shoulder, and even if the government maintains control of more than 50% of the shares… and one of the ways they can do that is by paying big dividends that the government can use to backstop their budget — the two aren’t directly comparable, with Petrobras reaping the rewards of massive offshore oil fields and YPF more focused on shale, and the Brazilian government was arguably not as restrictive as Argentina when it came to exports or price controls, but the PBR experience offers some US investors a little hope. For some context, here’s the total return for Petrobras (purple) and YPF (blue) shareholders over the past five years, compared to the S&P 500 (orange) and the S&P Oil & Gas Explorers and Producers ETF (XOP, green).

Though this is where I should insert my frequent reminder that being an average oil & gas producer is not a very profitable way to go through life. Here’s that same chart if we go back to the Fall of 2013, when YPF was first getting attention for the discoveries at Vaca Muerta and the potential to become a big shale oil producer… I’ve added another key factor to this chart, the pink line is the price of West Texas Intermediate crude oil, a commodity price which obviously is out of the control of every company operating in this space and yet drives much of their current cash flow and their hopes for future profit:

I’d agree that YPF is interesting, they have a dramatically changing political and regulatory environment and a huge reserve that could lead to big growth in oil production, and there are certainly some future scenarios where that works out spectacularly well for YPF shareholders. Maybe they’re even likely scenarios, I don’t have much of an opinion about how Milei’s revolution will work in Argentina, or what will happen to oil prices in the future. But it’s still an oil producer, and that’s still a tough business that goes through big boom and bust cycles. You can make your call.

And as one final aside, lest we get too convinced about Green’s prognostications about future excitement in the energy space, I’ll just remind you of his “Putin’s Blunder” ad that got so much attention in the Fall of 2022 — that was all about the surging growth of LNG exports following Russia’s invasion of Ukraine, and how you’d get rich from betting on the shippers. I mention this mostly because the link Green asks us to follow after teasing this investment in Argentina is actually a link to that same old “Putin’s Blunder” ad, here’s the update I posted on that today after I checked in on the story:

For those keeping score, another reminder that those outlying Wall Street predictions and forecasts are, well, usually silly. The headline on this ad, which was running starting in October of 2022, was, we’ll remember:

“Wall Street Projects One Stock Will Rise From $30 to $280 in the Next 18 Months
Due to a Major Blunder by Putin… This Energy Stock Is Looking at Sales Growth of 2,400%!”

And how has the actual stock they’re teasing done? Well, the target was “$30 to $280 in 18 months”, and the stock (Flex LNG (FLNG)) was indeed at about $30 when it was teased. And 18 months have passed.

The verdict? It’s still paying the same dividend it was back then, so the yield is still high (it’s about 12% now, assuming they’re able to keep the dividend going).

Was that enough to drive the stock to $280? Of course not, that would be insanity. The stock has fallen by about 15-20% in the past 18 months, much of that coming as the LNG export business in the US got kneecapped by a regulatory “pause” in January, so those shares which were at $30 eighteen months ago are now at $25.

Where does that leave us? Almost exactly where we started — the stock was at $30, they’ve payed a total of almost exactly $5 in dividends since the Oxford Club started teasing it so aggressively, and the stock is now at $25. Total return = $0.

The S&P 500 is up about 40% in that time, just to twist the knife a little, as is the Alerian MLP ETF of mostly oil and gas pipeline companies (AMLP). The average oil and gas producer has suffered, too, but is up about 10%. FLNG has been among the better-performing LNG-related companies, I suppose, the other shippers (like Golar LNG (GLNG)) and firms like Cheniere (LNG or CQP) have done even a little worse, so that’s something.

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So back to you, dear reader — ready to bet on Javier Milei and on the emergence of YPF as Latin America’s next big oil winner? Think Milei’s opponents will slow him down, or that the dream of further privatization and growth in the oil patch will be dashed again? Prefer something else in the energy space… or in Argentina, for that matter? It’s your money, so you know best what to do with it… and we can all learn from each other. Let us know what you’re thinking with a comment below. Thanks for reading!