Repsol and YPF A A Perfect Marriage

CASE: P-90 (A)
DATE: 04/12/17
REPSOL AND YPF (A):

A PERFECT MARRIAGE?
In the 1990s, Spanish companies made so many large investments in Latin America that some
analysts proclaimed the era of the “Spanish Armada” and the “New Conquistadors.”1 Repsol, an
oil company created by the Spanish government in 1987 and privatized in 1997,2 was one of
these investors. In 1999, Repsol purchased 98 percent of the Argentine oil company YPF’s
shares for more than $15 billion and changed its name to Repsol-YPF.3 At the time, the New
York Times said the deal “appears to be a perfect marriage” and asked, “Repsol-YPF: As Good
as It Gets?”4
BACKGROUND
Oil and Gas in Latin America
The first trans-Atlantic shipment of a barrel of oil reportedly was dispatched from Venezuela to
Spain in 1539, to treat King Charles I’s gout.5 In subsequent centuries, oil and gas came to be
1
Jasper Vandenberghe, “Repsol Meets YPF, Displaying Competence in Cross-Border M&A Press Releases,”
University College Ghent, http://journals.sagepub.com/doi/pdf/10.1177/0021943611414686 (April 4, 2017).
2
Repsol traced its roots back to 1927, when the Spanish government expropriated oil companies and created a state
agency to control them. See https://www.repsol.com/es_en/corporacion/conocer-repsol/perspectiva_historica/ and
http://www.encyclopedia.com/books/politics-and-business-magazines/repsol-sa-0 (March 15, 2017).
3
Pablo Fernandez, “Valuation of an Expropriated Company: the Case of YPF and Repsol in Argentina,” IESE
Business School Working Paper WP-1055-E, University of Navarra, December 2012,
http://www.iese.edu/research/pdfs/WP-1055-E.pdf (April 4, 2017).
4
Judith Rehak, “Oil-Firm Merger Promises Synergy at a Reasonable Price: Repsol-YPF: As Good as It Gets?”
The New York Times, June 5, 1999 http://www.nytimes.com/1999/06/05/your-money/oilfirm-merger-promises-
synergy-at-a-reasonable-price-repsolypfas.html (March 15, 2017).
5
“Repsol SA History,” Funding Universe, http://www.fundinguniverse.com/company-histories/repsol-s-a-history/
(March 15, 2017).
Sheila Melvin and Professors Katherine Casey and Ken Shotts prepared this case as the basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.
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This document is authorized for use only in Prof. Biju Paul Abraham's Country Risk Analysis_2021-22_Term-V_Prof. Biju Paul Abraham at Indian Institute of Management - Calcutta from Sep
2021 to Dec 2021.
Repsol and YPF: A Perfect Marriage? P-90 (A) p. 2
viewed in Latin America as symbols of sovereignty rather than mere commodities.6 Energy
economist Peter Odell noted that foreign companies’ domination of the industry frequently led to
“serious political conflict between these companies and the nationalistic Latin American
environment.”7 Nationalizations and expropriations occurred throughout the region, most
famously in Mexico in 1938, but also in the early 2000s under populist presidents Evo Morales
of Bolivia, Rafael Correa of Ecuador, and Hugo Chávez of Venezuela.
A Swinging Pendulum: Oil and Politics in Argentina
YPF, or Yacimientos Petrolíferos Fiscales (Fiscal Petroleum Fields) was founded in 1922 as the
world’s first state-owned oil company.8 As a Foreign Policy article explained in 2014, the
mixture of oil and politics in Argentina was frequently contentious:
Since the beginning of the Argentine oil industry just over a century ago, the pace
of its development has owed much more to politics than to geology. Economic
distress tends to push governments into oil companies’ hands; populist politics
usually then lash out at concessions made to foreign capital. One executive at an
international oil company with experience in Argentina described the government
as “brilliantly cynical.”
The article noted that YPF was especially affected by this cycle:
Government reforms to strengthen YPF in the 1930s chased away many private
investors and sent production down until after World War II. Faced with a dismal
economy, President Juan Domingo Perón engineered an abrupt 180 to court oil
companies and boost production in the early 1950s. Just a few years later, the
military government undid those reforms. By the end of the decade, another
civilian government again sought to placate foreign energy firms—until those
reforms, in turn, were undone in the 1960s.9
Argentina experienced political and economic instability under a series of leaders, ranging from
elected populists to military dictators; between 1930 and 1983, presidents averaged only two
years in office.10 The nation’s foreign debt skyrocketed in the late 1980s and inflation surpassed
5,000 percent. Carlos Menem became president in 1989, setting Argentina on a course of
6
Felipe Trigos and Roger F. Noriega, “Latin American Energy Monopolies: Boom or Bust?” American Enterprise
Institute, July 31, 2013, http://www.aei.org/publication/latin-american-energy-monopolies-boom-or-bust/
(April 4, 2017)
7
Peter R. Odell, “Oil and State in Latin America,” International Affairs, Vol. 40, No. 4 (October 1964), pp. 659-673
https://www.jstor.org/stable/pdf/2611731.pdf (April 4, 2017).
8
Megan Cassidy, “YPF and Argentina: The Return of National Sovereignty,” The Argentina Independent, April 18,
2012, http://www.argentinaindependent.com/currentaffairs/ypf-and-argentina-the-return-of-national-sovereignty/
(April 4, 2017).
9
Keith Johnson, “Very Unclear Energy Future,” Foreign Policy, October 13, 2014,
http://foreignpolicy.com/2014/10/13/argentinas-brilliant-terrible-very-unclear-energy-future/ (April 4, 2017).
10
This paragraph draws heavily on this article from Reuters: “Chronology: Argentina’s turbulent history of
economic crises,” July 30, 2014, http://www.reuters.com/article/us-argentina-debt-chronology-
idUSKBN0FZ23N20140730 (April 4, 2017).
2021 to Dec 2021.
“radical free market reform” and a period of comparative stability.11 He pledged to increase
foreign investment and privatize state-owned enterprises, including YPF, which was partially
privatized in 1993.12
Repsol’s Goals
Until 1996, Repsol’s holdings were limited to Spain, where it owned five refineries, a chain of
gas stations, and 91 percent of a natural gas distributor. The company began to expand
internationally, buying gas stations in Ecuador, Peru, and Argentina and a majority stake in
PlusPetrol Energy, a company that owned 60 percent of the largest gas field in Argentina. 13 Its
central ambition was to move upstream.
In 1999, Repsol purchased YPF in two transactions: a January purchase of 14.99 percent at $38
per share and a May purchase of 85 percent at a premium price of $44.78 per share.14 The
purchase gave Repsol an important foothold in the upstream part of the industry and moved it to
seventh place worldwide in oil production and refining and eighth place in oil and gas reserves.15
“KIRCHERNISMO”
Soon after Repsol purchased YPF, Argentina experienced a major currency crisis and depression.
Unemployment surpassed 20 percent in 2001 and riots broke out after reports of widespread
hunger. The ensuing political crisis saw five presidents come and go in two weeks and the
government defaulted on more than $100 million in debt, the largest such default in history.
Néstor Kirchner, the governor of Santa Cruz state, was elected president in 2003. He served one
term and was succeeded in 2007 by his wife, Cristina Fernández de Kirchner, a lawyer and
senator who became the first woman to be elected president of Argentina.16 She served two
terms, winning a landslide reelection in 2011 and ruling until 2015. The couple’s presidencies
are known as the era of “Kirchnerismo,” which the Washington Post characterized as “a
contemporary spin on the “Perónismo” of Juan and Eva Perón. And, like the 1950s-era edition,
it is less of an ideology than a ruling style, defined by the concentration of power, populist social
welfare programs, and a steady diet of Argentinian nationalism.”17
Kirchner strengthened the role of the state and began reversing some of his predecessors’ free-
market policies, which many Argentines blamed for the disastrous economic crash of 2001-
11
“Carlos Menem: Profile,” BBC, April 28, 2003, http://news.bbc.co.uk/2/hi/americas/1376100.stm
(March 31, 2017).
12
Gary Marx, “Oil Privatization Brings $3 Billion In Argentina,” The Chicago Tribune, June 29, 1993,
http://articles.chicagotribune.com/1993-06-29/business/9306290314_1_ypf-president-carlos-menem-yacimientos-
petroliferos-fiscales (April 4, 2017).
13
Noel Maurer and Gustavo Herrero, “YPF- The Argentine Oil Nationalization of 2012,” Harvard Business School
Case 9-713-029, June 26, 2013, p. 4.
14
Ibid.
15
Ibid.
16
Juan Perón’s third wife, Isabelita Perón, succeeded him from 1974 to 1976 but not by election.
17
Nick Miroff, “‘Kirchnerismo’ politics set to outlast Argentina’s outgoing president,” The Washington Post,
July 17, 2015, https://www.washingtonpost.com/world/the_americas/kirchner-era-ends-in-argentina-but-maybe-
not-kirchnerismo/2015/07/16/021862ae-29a1-11e5-960f-22c4ba982ed4_story.html?utm_term=.dc2f208bb53c
(April 4, 2017).
2021 to Dec 2021.
2002.18 Upon taking office, Fernández initially benefited from her husband’s perceived success
in overcoming the economic crisis, and many voters expected that she would adopt policies to
help poor and working class Argentines.
A Challenging Economic Environment
Soon after Fernández took office in 2007 the global economy began to slow, causing commodity
prices and tax revenues to decline and inflation to hit double digits. Fernández responded by
nationalizing Argentina’s pension plan in 2008; the stated reason was to protect retirees from
falling stock and bond prices but critics called it an effort to “shore up government coffers to try
to head off a fiscal crisis in 2009.”19 In 2008, Fernández renationalized the airline Aerolíneas
Argentinas. She also broadened access to healthcare and education and—in an extremely
popular move—got television broadcasters to show soccer games for free, rather than on pay-
per-view, with pro-government messaging scrolling at the bottom of the screen.20
Eager to save jobs and bank reserves, the Fernández government implemented new economic
and trade regulations. In March 2011, the government told car importers they had to export
goods equal in value to their imports. BMW Argentina exported upholstery leather and
processed rice, while the local Porsche importer exported olives and Malbec wine.21 Imports
soon fell, but many goods disappeared from store shelves.22 Fernández held “fiery rallies” in
which she called for Argentine ownership of businesses;23 in March 2012, she delivered more
than 50 speeches—which broadcasters were legally obliged to interrupt regular programming
and televise.24
The Impact on Oil and Gas
Argentina had introduced price controls on oil and gas in 2002 in an effort to control inflation.
Energy companies were partially compensated for low prices via a variety of subsidy programs,
including tax credits. An analyst described the impact of price controls:
[T]he demand for energy increased exponentially between 2003 and 2008 (by 38
percent in the case of oil and 25 percent in the case of gas), while the supply
gradually diminished since the business of producing energy became much less
18
Vladimir Hernandez, “YPF nationalisation: Is Argentina playing with fire?” BBC Mundo, April 17, 2012,
http://www.bbc.com/news/world-europe-17740393 (April 4, 2017).
19
Alexei Barrionuevo, “Argentina Nationalizes $30 Billion in Private Pensions,” The New York Times, October 21,
2008, http://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina.html (April 4, 2017).
20
For full article on soccer, see Juan Forero, “Argentina scores points with free broadcasts of soccer games,”
The Washington Post, November 1, 2009, http://www.washingtonpost.com/wp-
dyn/content/article/2009/10/31/AR2009103102092.html (April 4, 2017).
21
“Argentine Protectionism Sees Cars Swapped for Rice, Olives, Wine,” Bloomberg, November 8, 2012.
22
“Argentine Protectionism Sees Cars Swapped for Rice, Olives, Wine,” Bloomberg, November 8, 2012.
23
“Is Argentina’s Cristina Fernandez de Kirchner the next Evita?” The Week, April 19, 2012,
http://theweek.com/articles/476314/argentinas-cristina-Fernández-de-kirchner-next-evita
24
“Kirchner’s Diminishing Returns,” World Finance, March 13, 2013,
https://www.worldfinance.com/featured/kirchners-diminishing-returns (April 4, 2017).
2021 to Dec 2021.
profitable for the several foreign companies involved. Oil production dropped by
about 12 percent.25
The combination of price controls and government pressure led to reduced investment by energy
companies. Some foreign companies, including GDF Suez, chose to leave the country.
At the same time, the government sought to ensure the “Argentinization” of the industry. In
2007, President Kirchner urged Repsol to take on a domestic partner: the Eskenazi family, with
whom he had become friendly while governor of Santa Cruz. The Eskenazis owned the Petersen
Group, which focused on banking and construction, and in 2008 they bought 14.9 percent of
YPF26 in a transaction that valued the company at $15 billion.27 The Petersen Group also
received an option to purchase an additional 10.1 percent of YPF, which it exercised in 2011.
Both purchases were entirely debt-financed and saw the Petersen Group borrow $3.4 billion from
a group of banks and Repsol itself, with the debts to be repaid through dividends.28
In subsequent years, the decline in Argentine oil production continued, and in 2010 Argentina
began importing oil for the first time since the early 1990s.29 President Fernández responded by
pressuring companies to increase output.30 This move made sense politically, because many
energy companies were foreign owned. Repsol-YPF was the largest oil producer, with 34
percent of output. Others included Pan American Energy, which was majority-owned by BP (18
percent of output), Chevron Argentina (7 percent), Brazil’s Petrobras (6 percent) and France’s
Total (3.5 percent). Natural gas companies included Repsol-YPF (31 percent of output), Total
(31 percent), Pan American Energy (15 percent) and Petrobras (11 percent).31
Fernández was especially critical of Repsol-YPF, accusing it of repatriating 90 percent of its

profits and failing to invest in development of new reserves that would enable Argentina to have
adequate supplies of energy.32 She subsequently charged that Repsol pursued business strategies
“of tunneling, of not producing, of not exploring” that would make Argentina “unviable”;
indeed, between 1999 and 2011, YPF had a 42.5 percent drop in oil production and a 31 percent
drop in gas production.33 As of 2012, YPF had a five-year average dividend yield of 8 percent.34
25
Alvaro Vargas Llosa, “Lessons from the Expropriation of YPF-Repsol,” Independent Institute, April 25, 2012,
http://blog.independent.org/2012/04/25/lessons-from-the-expropriation-of-ypf-repsol/ (April 4, 2017).
26
Jude Webber, “YPF move puts Eskenazi clan in debt bind ,” Financial Times, April 19, 2012,
https://www.ft.com/content/f7095caa-8a44-11e1-93c9-00144feab49a (April 4, 2017).
27
“Repsol YPF executes the sale of 14.9% of YPF to the Petersen Group,” Repsol Press Release, February 21, 2008,
https://www.repsol.com/es_en/corporacion/prensa/notas-de-prensa/ultimas-notas/formalizacion_venta_de_ypf.aspx
(April 4, 2017).
28
Webber, op. cit.
29
Hernandez, op. cit.
30
Eliana Raszewski, “Argentina Congress Backs Takeover of YPF From Repsol,” Bloomberg Business,
May 4, 2012.
31
Susan Wacaster, “The Mineral Industry of Argentina,” USGS 2009 Minerals Yearbook Argentina, pp. 2.3-2.4.
https://minerals.usgs.gov/minerals/pubs/country/2009/myb3-2009-ar.pdf (March 17, 2017).
32
Hernandez, op. cit.
33
Noel Maurer and Gustavo Herrero, “YPF- The Argentine Oil Nationalization of 2012,” Harvard Business School
Case 9-713-029, June 26, 2013, pp. 1, 5.
34
Ivan Martchev, “Cry for me, Argentina,” Investor Place, April 20, 2012, http://investorplace.com/2012/04/cry-
for-me-argentina-ypf-repsol/#.WDtlo6IrK8o (April 4, 2017).
2021 to Dec 2021.
The need for investment jumped substantially in November 2011, when Repsol-YPF announced
a major shale oil and gas discovery in the Vaca Muerta, or “Dead Cow,” formations of Neuquén
Basin, an area about the size of Belgium in northern Patagonia. The announcement was seen by
some analysts as a boon to Repsol CEO Antonio Brufau, who had recently survived an effort to
oust him spearheaded by shareholders Sacyr Vallehermoso, a Spanish construction group, and
Pemex, the Mexican state-owned oil company.35 Vaca Muerta contained an estimated 308 trillion
cubic feet of shale gas and 16.2 billion barrels of shale oil,36 giving Argentina the world’s fourth-
largest shale oil reserves, behind the United States, China, and Russia. 37 Industry analysts
viewed the discovery as having the potential to increase Argentina’s hydrocarbon production by
50 percent by 2019, but expected that developing the fields would require investment of up to
$42 billion.38
PROBLEMS IN THE “MARRIAGE”
In January 2012, a government-backed newspaper published a rumor that the Argentine

government would nationalize YPF.39 In March, governors of six provinces began to strip YPF
of concessions.40 Energy Secretary Daniel Cameron endorsed these decisions, saying they would
help Argentina “return to self-sufficiency to sustain growth and continue to give dignity to the
people.”41 Members of Fernández’s party passed out flyers at YPF gas stations that read,
“sovereignty is recovering what belongs to us.”42
YPF’s stock price fell sharply, giving investors what the Wall Street Journal called “whiplash.”
Some observers speculated that the government was trying to reduce YPF’s market capitalization
and the amount of compensation Repsol would receive if YPF was nationalized. Repsol CEO
Antonio Brufau flew to Buneos Aires and tried, unsuccessfully, to meet with Fernández.43 Said
the Wall Street Journal on April 10, “No one knows how the script will end.”44
35
Victor Mallet and Sylvia Pfeifer, “Repsol announces big shale oil find in Argentina,” Financial Times,
https://www.ft.com/content/b77004b0-0969-11e1-a20c-00144feabdc0 (April 4, 2017).
36
“Argentina clinches deal to attract investment in Vaca Muerta shale,” Reuters, January 10, 2017,
http://www.cnbc.com/2017/01/10/reuters-america-update-2-argentina-clinches-deal-to-attract-investment-in-vaca-
muerta-shale.html (April 4, 2017).
37
Michael Smith and Pablo Gonzalez, “Argentina Oil’s Bonanza Helping Too Few Led by Political Friends,”
Bloomberg, March 6, 2014, https://www.bloomberg.com/news/articles/2014-03-06/argentina-oil-s-bonanza-helping-
too-few-led-by-political-friends (April 4, 2017).
38
Mamta Badkar, “Everything You Need To Know About Vaca Muerta, One Of The Biggest Shale Fields Outside
Of North America,” Business Insider, April 27, 2012, http://www.businessinsider.com/everything-you-need-to-
know-about-vaca-muerta-2012-4 (April 4, 2017).
39
Taos Turner and Matt Moffett, “Behind the Battle for Argentina’s Oil,” The Wall Street Journal, April 10, 2012,
http://www.wsj.com/articles/SB10001424052702303302504577325761726929778
40
Ibid., and also see Megan Cassidy, “YPF and Argentina: The Return of National Sovereignty,” April 18, 2012,
http://www.argentinaindependent.com/currentaffairs/ypf-and-argentina-the-return-of-national-sovereignty/
(April 4, 2017).
41
Cassidy, op. cit.
42
Turner and Moffett, op cit.
43
Simon Romero and Raphael Minder, “Argentina to Seize Control of Oil Company,” The New York Times, April
16, 2012, http://www.nytimes.com/2012/04/17/business/global/argentine-president-to-nationalize-oil-company.html
(March 15, 2017).
44
Turner and Moffett, op. cit.
2021 to Dec 2021.
The “Reconquista”45
On Monday April 16, 2012, a major part of the script was revealed when Fernández announced
the expropriation of YPF to a meeting of cheering, clapping, and chanting cabinet members and
a national television audience. The Argentine flag and an image of Eva Perón stood behind her
as she declared energy a “vital resource”46 and held up a glass vial filled with Argentine oil.
“The model chosen for the future of YPF is not nationalization,” said Fernández, “but recovery
of sovereignty and control of hydrocarbons.”47
The government said it would take a 51 percent controlling stake in YPF, all from Repsol; of this
stake, the central government would keep 51 percent and 49 percent would go to the provinces.48
The Petersen Group would retain 25.5 percent and 17 percent would continue to be traded.49
Repsol would thus be left with a 6.4 percent stake in the company.50 At the time, YPF accounted
for two-fifths of Repsol’s crude oil reserves and one-third of its profits.51 YPF Chief Executive
Sebastián Eskenazi was ousted and two of Fernández’s aides, Planning Minister Julio de Vido
and Deputy Economy Minister Axel Kicillof, were asked to run the company temporarily.52
One analyst described the immediate aftermath:
As has so often been the case with Latin American nationalizations, the move was
accompanied by a torrent of nationalistic demagoguery, theatrics and thuggery—
YPF’s headquarters were stormed by government envoys even before the bill sent
by the government was approved in Congress, the Spanish executives were kicked
out ignominiously, and officials immediately began to threaten with not paying
Repsol anything.53
Within Argentina, the reaction was quite different. Legislation to renationalize YPF was passed
on May 3, with 63 senators voting for the expropriation, while only three voted against it (and
four abstained).54 After the results of the vote were announced, fireworks lit up the sky and a
45
Lillo Montalto Monella, “Should Argentina re-take control of YPF?” The Argentina Independent, April 18, 2012,
http://www.argentinaindependent.com/currentaffairs/opinion/should-argentina-re-take-control-of-ypf/ (April 4,
2017).
46
“YPF Repsol: Spain says Argentina shot itself in foot,” BBC, April 17, 2012
http://www.bbc.com/news/world-europe-17739204 (April 4, 2017).
47
Cassidy, op. cit.
48
Romero and Minder, op. cit.
49
Hernandez, op. cit.
50
“Argentina’s ‘expropriation’ of Repsol oil subsidiary: the legal landscape,” Lexology, April 19, 2012,
http://www.lexology.com/library/detail.aspx?g=54653fb6-dac3-4322-92df-6c91ba574afd (March 15, 2017).
51
52
53
Alvaro Vargas Llosa, “Lessons from the Expropriation of YPF-Repsol,” Independent Institute, April 25, 2012,
http://blog.independent.org/2012/04/25/lessons-from-the-expropriation-of-ypf-repsol/ (March 15, 2017).
54
Reuters, “Argentina’s Senate votes for repatriation of Spain’s YPF,” The Telegraph, April 26, 2012,
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/9227745/Argentinas-Senate-votes-for-
repatriation-of-Spains-YPF.html (March 31, 2017).
2021 to Dec 2021.
crowd waved Argentine flags in the streets.55 Over 60 percent of Argentines supported the
takeover, according to a poll published in La Nación.56
Study Questions:
1. Was it a good idea for Repsol to enter Argentina in 1999 or should it have seen this
coming?
2. Was it a good idea for President Fernández to seize Repsol’s stake in YPF economically?
Was this a good move politically?
55
Eliana Raszewski, “Argentina Congress Backs Takeover of YPF From Repsol,” Bloomberg, May 4, 2012.
56
Ibid
2021 to Dec 2021.

Repsol and YPF A A Perfect Marriage

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Repsol and YPF A A Perfect Marriage

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CASE: P-90 (A)

REPSOL AND YPF (A):

Oil and Gas in Latin America

A Swinging Pendulum: Oil and Politics in Argentina

A Challenging Economic Environment

The Impact on Oil and Gas

Fernández was especially critical of Repsol-YPF, accusing it of repatriating 90 percent of its

PROBLEMS IN THE “MARRIAGE”

In January 2012, a government-backed newspaper published a rumor that the Argentine

One analyst described the immediate aftermath:

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