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.