Shale Oil Production In Vaca Muerta And Pipeline Expansion Will Transform Operations

Key Takeaways

• YPF's strategic pivot to focus on Vaca Muerta and operational efficiencies could drive higher revenues and improved margins.
  
• Enhanced oil export capacity and optimized capital allocation are expected to boost profitability and financial stability.
  
• YPF faces significant risks, including reliance on Vaca Muerta, high debt levels, and Argentina's economic instability impacting margins and growth projections.

Catalysts

An energy company, engages in the oil and gas upstream and downstream activities in Argentina.

• YPF is reshaping its oil production strategy to focus on increasing its shale oil production from Vaca Muerta, aiming to ramp up production significantly in the coming years. This shift could lead to higher revenues and improved margins due to the high potential of operational and production efficiencies.
  
• The development of VMOS, a new oil export pipeline, is expected to enable YPF to greatly increase its oil export capacity. Increased exports could significantly boost revenue, especially as the pipeline is expected to ramp up YPF's capacity to 120,000 barrels per day by 2027.
  
• YPF's exit from mature fields is aimed at reducing losses and reallocating capital towards more profitable assets like Vaca Muerta. This strategic focus could improve net margins and overall profitability as less capital will be tied to low-return investments.
  
• Operational efficiencies in drilling and completion in unconventional wells are anticipated to improve as YPF utilizes new technologies such as the Real Time Intelligence Center. This improvement is likely to decrease operational costs and increase earnings by reducing well construction cycles by 30% by 2025.
  
• YPF's recent steps in securing financing, such as bond issuances and improving its debt profile, may enhance its financial stability and ability to invest in growth projects, thereby positively impacting earnings through strategic investments and lower interest expenses.

YPF Sociedad Anónima Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming YPF Sociedad Anónima's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 12.3% in 3 years time.
• Analysts expect earnings to reach ARS 2702.9 billion (and earnings per share of ARS 1930.19) by about May 2028, up from ARS 2077.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ARS3717.2 billion in earnings, and the most bearish expecting ARS1712.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 7.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 31.65%, as per the Simply Wall St company report.

YPF Sociedad Anónima Future Earnings Per Share Growth

Risks

• The company's financial performance has been affected by negative factors such as the $300 million negative EBITDA from mature fields and $85 million from adverse weather impacts in Patagonia, which could continue to affect net margins until these issues are fully resolved.
  
• YPF's dependence on Vaca Muerta for its growth presents a risk if the production targets or pipeline developments (like VMOS) face delays, potentially impacting revenue growth projections.
  
• There is a significant reliance on international exports and price parity adjustments in the downstream segment, where market fluctuations and devaluation could adversely affect revenues and profitability.
  
• The company has a high net debt of $7.4 billion, and while it has taken steps to manage this, a negative free cash flow of $760 million indicates financial strain, potentially impacting future earnings if not managed effectively.
  
• Argentina's challenging macroeconomic environment, including high inflation and currency volatility, can affect YPF’s financials by increasing costs and affecting demand, potentially impacting overall earnings and net margins.

Valuation

• The analysts have a consensus price target of ARS57183.333 for YPF Sociedad Anónima based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ARS74250.0, and the most bearish reporting a price target of just ARS37900.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ARS21933.5 billion, earnings will come to ARS2702.9 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 31.6%.
  
• Given the current share price of ARS37025.0, the analyst price target of ARS57183.33 is 35.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.