YPF cuts capex in response to economic crisis

Argentina's state-controlled YPF will cut capital expenditures by $100mn-$120mn per month to make up for expected losses resulting from a 90-day government freeze on oil prices.

The capex reduction will offset the negative earnings impact of the price freeze, after excluding any cost reductions stemming from this week's currency depreciation, YPF chief executive Daniel Gonzalez said in a call with investors this morning.

The extraordinary call took place on the same day that Argentina's government published an emergency decree prohibiting companies from increasing retail gasoline and diesel prices despite the rout of the peso that accompanied a broad sell-off of assets following the country's 11 August electoral primary.

"Together with the rest of the industry, we have communicated to the government the negative effects that we believe this measure will have on all of us," Gonzalez said, adding that "this is a regulatory measure that we do not share but we will respect."

The freeze is also likely to undermine the value of YPF's reserves and could slow down production growth, but the company has not yet calculated by how much.

YPF is Argentina's largest oil refiner, producer and retailer.

Today's decree states that pump prices must remain at 9 August levels for 90 days.

In addition, crude sales between producers and refiners must be conducted at the same price that had been agreed before that date. The decree sets as a reference a Brent price of $59/bl and a currency exchange rate of 45.19 pesos per US dollar.

The measure, which returns Argentina to artificially low values for its crude in the domestic market, translates into an implied crude price of around $40/bl when taking into account yesterday's exchange rate of 57 pesos per US dollar, according to Gonzalez.

The implied price would vary depending on the quality and local source of the crude, he said.

Downstream, margins on gasoline and diesel will be frozen and the company will be forced to import both products at a loss.

YPF and fellow oil companies in Argentina will try to convince the government to reduce the duration of the price freeze, arguing that its dismantling in three months could prove problematic, particularly if the peso continues depreciating.

Before the 11 August primary, YPF's retail prices were "very close to import parity," Gonzalez said.

The Argentinian peso depreciated 21pc against the US dollar since 12 August after populist presidential candidate Alberto Fernandez scored a 16-point advantage over business-oriented sitting president Mauricio Macri in the nationwide open primary.

The surprising primary result was seen as a harbinger of the outcome of a 27 October presidential election that the Fernandez ticket is now hoping to win outright, avoiding a run-off ballot in November.

Alberto Fernandez is running on a ticket with former president Cristina Fernandez de Kirchner as his vice president. The two are unrelated.

When Cristina Fernandez was president in 2007-15, Argentina's economy was subjected to extensive government controls, particularly in the energy sector. The model scared away most investors, until Macri took office in 2015, promising market-based reforms.