Repsol to begin talks with Argentina over YPF settlement

Repsol SA (REP) plans to start negotiating final terms of a compensation deal with Argentina to end a 19-month conflict over the seizure of its YPF unit.

In a meeting yesterday, board members “analyzed and valued positively” a proposal brokered by the governments of Spain and Argentina, the Madrid-based oil company said in a filing. Repsol intends to hire an international investment bank to advise the company on efforts to reach a binding settlement.

President Cristina Fernandez de Kirchner’s government seized 51 percent of YPF in April last year after saying Repsol hadn’t invested enough. Repsol, which removed YPF from its name while not writing down the value on its books, originally sought $10.5 billion compensation and sued in international courts. For Argentina, settling the dispute may help attract investors to develop some of the world’s largest shale fields.

“With the goal of developing the preliminary accord, Repsol will initiate shortly conversations between its teams and those of the Argentine government to seek a fair, effective and swift solution to this controversy,” it said in the filing.

Repsol appointed Deutsche Bank AG to advise it on the settlement, two people with knowledge of the matter said, asking not be identified because a formal announcement hasn’t been made.

The arrangement was negotiated in Buenos Aires this week by ministers from Argentina and Spain, Repsol executives, and representatives from the Spanish company’s two largest shareholders — Mexican oil producer Petroleos Mexicanos and Barcelona-based CaixaBank SA. (CABK).

The proposal is based on $5 billion of 10-year bonds, a person briefed on the matter said this week, asking not to be identified. Repsol’s statement yesterday didn’t disclose terms of the proposal. The bond may carry a coupon of 8.25 percent to 8.75 percent, Expansion reported yesterday.

Based on the current price on Argentina’s government debt, which yields about 11 percent, the bond may have a market value of about $4.2 billion, Bertrand Hodee, an analyst at Raymond James in Paris, said in a note today, raising his target price for the shares to 22.5 euros from 20 euros.

Repsol shares, which jumped the most in a year when the agreement was announced on Nov. 26, rose as much as 0.6 percent to 19.40 euros in Madrid and traded at 19.31 euros at 1:57 p.m. local time. That brings its gain this year to 26 percent, beating the 2.7 percent advance of the 22-member Bloomberg Industries Integrated Oils index.

In June, Repsol rejected an offer that included a 47 percent stake in a project in the Vaca Muerta, or Dead Cow, shale formation valued by Argentina at $3.5 billion, as well as $1.5 billion for development. Repsol was willing to reach a settlement that didn’t involve reinvesting, Chief Executive Officer Antonio Brufau said Nov. 21.

State-owned Pemex, based in Mexico City, has an almost 10 percent stake in Repsol. CEO Emilio Lozoya, who took part in this week’s talks, said Oct. 31 that Repsol should take a more “proactive and prudent approach” to resolve the YPF matter.

In yesterday’s meeting, all Repsol directors except Pemex’s representative endorsed the company’s management. In a separate statement, Pemex said Repsol management “has not offered the desired results for the company and its shareholders.”

Argentina holds the world’s second-largest reserves of shale gas and the fourth-largest of shale oil, according to U.S. Energy Information Administration data. The country is offering tax and export incentives to energy companies that invest at least $1 billion over a five-year period.

Repsol asked a World Bank panel in July to help prevent YPF from developing the company’s seized assets. Repsol also filed a lawsuit demanding fair compensation for the seizure of its YPF stake with the Washington-based International Center for Settlement of Investment Disputes.