Zacks_Analysts' Blog : Repsol: YPF Unit Finds New Gas - Analyst Blog

YPF SA, an Argentine counterpart of Spain’s largest integrated oil and gas company Repsol YPF, S.A. (REP), has made a major unconventional gas discovery adjacent to the giant Loma da Lata field, as per press reports from Buenos Aires.

Although company officials have not confirmed, the newspaper claimed that YPF hinted as much as 20 trillion cubic feet of natural gas being  present with most of the reserves tied with shale gas and tight gas. While the Argentine government has declared a package of fiscal incentives for exploration and production (E&P) of unconventional gas in the country, the new discovery suggests that Argentina could get a new lease of life from unconventional gas.

YPF’s growth in the E&P space was lagging in the past few years, but it has started investing in upstream space to cope up. The increased investment is possibly paying off as crude oil production rose 1.9% year over year in the first nine months of 2010 despite the continuance of the Government cap on export that was initiated during the 2001 economic crisis.

Early last month, YPF said that the company plans to sell up to $600 million of bonds to fund E&P activities in Argentina and other international markets. Management said the unit will continue to engage in bond sale to the tune of $400 million to $500 million per year.

Going forward, YPF may spend $3 billion to $3.5 billion a year to boost operations in Brazil, Colombia, Mexico and Canada and overseas sales may account for 50% of total revenue as against the current 30%.

The significant discovery of unconventional gas is positive news for YPF at the time when Repsol is planning to sell its 15% stake in YPF. We have a short-term recommendation of 'Neutral' for Repsol with the Zacks #3 Rank (Hold).