It's Time to Invest in Argentina's Oil and Gas Plays: Bill Newman

Bill Newman Argentina’s nationalist leanings grabbed major headlines earlier this year, but Mackie Research Analyst Bill Newman says the conflict is unlikely to become a repeating trend with the majors and supermajors currently trolling for oil and gas in the country’s Vaca Muerta shales. In fact, Newman expects newer policies to encourage foreign investment in energy exploration. In this exclusive interview with The Energy Report, Newman explains why investors should keep an eye on the region and watch for major catalysts.

The Energy Report: Bill, Argentina’s government decided to pull Yacimientos Petrolíferos Fiscales’ licenses. Are you concerned that the political climate there will drive away potential investors just when you’ve started recommending projects in the country?

Bill Newman: The expropriation of Yacimientos Petrolíferos Fiscales’ shares didn’t drive companies away. Before the expropriation of Repsol S.A.’s (REPYY:OTCPK) 51% ownership in YPF, there was a rush of new companies coming into the Neuquen Basin who saw the huge potential of developing the Vaca Muerta shale oil and gas play. The companies that were acquiring lands were the majors and supermajors, including Exxon Mobil Corp. (XOM:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE), Chevron Corp. (CVX:NYSE) and Total S.A. (TOT:NYSE). All of them are continuing to drill.

“The expropriation of Yacimientos Petrolíferos Fiscales’ shares didn’t drive companies away. All of them are continuing to drill.”

What the expropriation has done is limit the amount of additional capital these companies are willing to commit to Argentina in the short term. Companies continue to talk with the government and are trying to get better certainty over commodity pricing, reduced import restrictions and capital controls. Given the huge amount of foreign capital that’s going to be needed to develop these shale plays, we think there’s a good chance that some changes will be announced, prompting the majors and supermajors to commit more capital again. If that does occur, then this would be a major catalyst for the junior oil and gas companies operating in Argentina, including Americas Petrogas Inc. (BOE:TSX.V) and Madalena Ventures Inc. (MVN:TSX.V).

TER: Was the conflict with Yacimientos’ licenses an isolated incident of nationalization, or is there more to come?

BN: Right now, it looks like the nationalization of these assets is contained just to Repsol’s shares in Yacimientos. It was a very populist move by Argentina’s president, Cristina Fernandez, because most Argentineans view Yacimientos as a national oil company. But we think it’s unlikely that the president will move against any other companies in the region.

TER: What impact has this widely covered story had on oil and gas companies’ stocks that operate in the region?

BN: Both Madalena and Americas Petrogas have been hit hard by increased political uncertainty in Argentina, in addition to general market conditions. Since February, Americas Petrogas is down about 50%. Madalena is down by about 75%. We think this is an opportunity. Both companies are well financed. They both have active drilling programs targeting the Vaca Muerta shale, so there should be a lot of drilling catalysts. Both plan to complete multiple fracture stimulations of the Vaca Muerta in the next six months. We think the political situation has been priced into these stocks, and both companies can fund their operations with cash and cash flow for the next couple of years. We do expect the political situation in Argentina to remain volatile, but we think there’s a good chance the government is going to introduce new incentives to try to attract the capital it needs to develop these shale plays. In the meantime, Americas Petrogas and Madalena will be able to continue drilling and testing the shale play.

TER: So both companies can fund current operations from the cash flow they have right now?

BN: That’s right. Americas Petrogas is actually producing 2,500 barrels oil equivalent per day, so it’s actually generating some cash flow. Madalena is generating some production but limited cash flow. It has enough capital on the books to fund its operations for the next couple of years.

TER: Have test results moved these stocks?

“What makes this Vaca Muerta play stand out is its thickness. You can book a huge amount of reserves if production is economic.”

BN: The production tests of the Vaca Muerta so far have been very encouraging. The vertical Vaca Muerta oil wells are initially flowing between 200 and 800 barrels oil per day (bbl/d). EOG Resources Inc. (EOG:NYSE) recently announced that it completed the first horizontal Vaca Muerta well. It was completed with a multistage frack and the well flowed at 1,500 bbl/d. These are very good results, comparable to what you get in North America. What makes this Vaca Muerta play stand out is its thickness. For example, Americas Petrogas’ Los Toldos Este well encountered a 330-meter (m) section, over 1,000 feet of Vaca Muerta shale. When you have those kinds of thicknesses, you can book a huge amount of reserves if production is proven to be economic.

TER: Is Madalena on track to frack the Lower Agrio, which was slated for July?

BN: Yes. Actually, it is currently working on the well. It’s called the Cur X-1 well. That’s a really exciting play because it’s the first time that the Lower Agrio shale has been fracked in Argentina. It is targeting oil as well. So if it works out, you have a new shale play to go after in Argentina and that’s really important. I’m guessing there should be results at the end of August.

TER: In comparison, Americas Petrogas is waiting on three pending results from current explorations, and within the next two years, it’s also planning on performing about 12 unconventional shale tests. Is having a greater number of test results coming in going to give Americas Petrogas a competitive edge?

BN: Definitely. So far, it has drilled and cased three shale wells. The company is drilling the fourth well right now, which is the second joint venture with ExxonMobil. That’s on the Los Toldos I block. After it has done that well, it plans to immediately drill another well with Exxon, on the Los Toldos II block. So in the next two months, we’re expecting Americas Petrogas and Exxon to complete a fracking stimulation of the Los Toldos wells. We think it’s a good indication that it decided to go ahead and drill additional wells even before testing the first well, which was drilled in the Los Toldos II block. That shows the company is confident in what it has found so far. We are expecting a continued stream of drilling results from Americas Petrogas over the next six months, which could be a good catalyst for the stock.

TER: The Vaca Muerta exploration is significant for Madalena, isn’t it?

BN: Yes, absolutely. Madalena has, to date, nine penetrations of Vaca Muerta on its Coiron Amargo block. Those have shown that the Vaca Muerta is present over the entire block and had good results. Later this year, it will go back and complete fracture stimulations on three more wells on that block. We think that could lead to a very large increase in its reserves by year-end. Madalena and Americas Petrogas have both drilled in the deeper part of the basin, which is more gas prone. Both companies have encountered huge sections of Vaca Muerta. The shale is between 500 and 600m thick—massive, massive thickness. Again, Madalena and Americas Petrogas are both carried by Apache Corp. (APA:NYSE) on these wells, so they don’t pay for any of the costs for those wells.

TER: How big a role does the Vaca Muerta play in Madalena and Americas Petrogas’ stories?

“We’re hoping the government will make Argentina more fiscally attractive for exploration companies. If that occurs, that’s another major catalyst for both stories.”

BN: It’s actually one of the key reasons to be in the stock. Americas Petrogas has access to about 750,000 acres of land that has shale potential. So it’s one of the largest holdings of shale acreage in Argentina. That’s exposing the company to a massive resource. At the current market price, investors are paying very, very little for the potential of the shale play. We think Madalena is more risky, but it has actually drilled more wells targeting the Vaca Muerta than Americas Petrogas. Madalena has more leverage when it comes to stock price appreciation. We’re hoping the government will make Argentina more fiscally attractive for exploration companies. If that occurs, that’s another major catalyst for both stories.

TER: Does Americas Petrogas’ joint venture with Exxon give it an advantage? Does it derisk the project?

BN: The fact that Exxon will be funding up to six wells on the Los Toldos blocks is very important. Exxon could pay up to $75 million worth of exploration on the land, which is fantastic. The fact that Exxon farmed in to Americas Petrogas and let Americas Petrogas operate the blocks, which is pretty much unheard of, shows how interested Exxon is in the Vaca Muerta play in Argentina. Again, it comes down to resource potential. Results to date are encouraging enough for them to see that this could be a multibillion-barrel play.

TER: What other companies in Argentina are you positive about?

BN: There are a couple other junior oil and gas companies that we’re keeping an eye on, but we don’t have coverage on them. One of them is called Crown Point Ventures Ltd. (CWV:TSX.V). It has a growing conventional production base. It also has Vaca Muerta shale potential in the Cerro de Los Leones block.

The other one is Azabache Energy Inc. (AZA:TSX.V). It has actually just drilled a well on its Covunco Norte plot targeting the Vaca Muerta that encountered 360m of shale.

TER: Thank you so much for your time and your insight.

Bill Newman is vice president of international oil and gas with Mackie Research Capital Corp. He has been an energy analyst for 16 years. Bill holds a Bachelor of Commerce from the University of Calgary and has a CFA designation.

3 comments to It’s Time to Invest in Argentina’s Oil and Gas Plays: Bill Newman

  • L

    Stay away fron argentina.

    It is a fraud country.

    Argentina defaulted more than twenty fold, this country live day by day by stoling money from people abroad.

  • kenneh

    stop whining don’t by fooled by current noise – great opportunities abound as nat gas triples this past week !

  • KretinaKK

    2 TERRORIST ORGANIZATIONS SPONSORED BY THE PRESIDENT OF ARGENTINA CRISTINA FERNANDEZ DE KIRCHNER
    LA CAMPORA & VATAYON MILITANTE

    LA CAMPORA – a semi military style terrorist organization that is led by Cristina Fernandez de Kirchner’s son – MaximoKirchner. It is named after former a known Argentine terrorist of the Peronist political party former president Héctor José Cámpora. Although it was established in 2003, it became politically influential after the death and state funeral of Néstor Kirchner. Maximo Kirchner used money that his father Nestor Kirchner left him in his will to further the organization and take part in expropiations of private property, the oil company YPF, which Argentina expropiated (stole) from the government of Spain, and Aerolineas Argentinas also expropiated (stolen) from the government of Spain.
    The airline is going to be renamed “Aerocamporas Argentinas” by the end of the year. They have already begun to repaint the logo on the airplanes at a cost of $400,000 US dollars each. La Campora hopes to imitate the terrorist organization to which Cristina Fernandez de Kirchner belonged to when she was younger, called Montoneros. Montoneros was responsable for kidnappings, murders, armed robberies of business owners and members of the opposition government in Argentina during the 1970s. The group vindicates the actions of the guerilla group Montoneros, and thus was named after Héctor José Cámpora, who had favored them. However, most members are too young to know first-hand about the 1970 conflicts in Argentina, but follow their methodologies of state sponsored terrorism. They go into schools and “indoctrinate” children and make them wear La Campora t-shirts, give them reading material and force them to participate in rallies promoting their demagoguery and any decisions made by Cristina Fernandez de Kirchner. The methodology of the modern group is very similar to the Montoneros, aiming to harass, destroy and silence critics of the Kirchner administration and promote their allies in blogs, Facebook, Twitter and other social networks on the internet and to steadily encroach on key positions in the state. After the death of Néstor Kirchner, Cristina Fernández instructed that the lists of candidates for provincial legislators included at least five members of the Cámpora.

    VATAYON MILITANTE – The Argentine government under Cristina Fernandez de Kircher and The Argentine National penitentiary service, takes inmates out of jail without judicial permission, to attend and participate in political events of Kirchner. The prisoners are paid an “allowance” of $2700 per month for joining this political group. The creation of this Vatayon militante group which are CONVICTED AND INCARCERATED for everything from murderer to armed robbery is becoming the Kirchner government’s militant force of the future. If things get rough for Cristina, these prisoners have nothing to lose for defending the Kirchner movement with violence. They also have access to guns and drugs, and prostitues all courtesy of the Kirchner government. The prisoners who are chosen attend these events, is left up to the to the head of the Argentine National Penitentiary Service, Victor Hortel who is a very close ally of Cristina’s government He is a former prisoner himself and has very close ties with prison gangs, and has been known to release prisoners at night to go out to steal and even kill, in exchange for drugs, sex and money. Rewarding criminals and prisoners for political purposes, violating all sorts of rules and laws, is proof of the form of government that Argentina is living with and will only get worse in the months and years ahead, especially if Cristina moved forward with her proposal to change the Argentine constitution to allow for her re-re-election for an unlimited amount of presidential terms.

    See these documentaries to see the scary truth as to what is going on in Argentina:
    http://www.youtube.com/watch?v=UyPC0SD0PGw
    http://www.youtube.com/watch?v=q7GPAR4rdko
    http://www.youtube.com/watch?v=-7sfYGJobII
    http://www.youtube.com/watch?v=KcmymeZf8jM

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