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This Argentine Giant Wants A Little Respect

Special Report -- Global Investing


Behind the wheel of his Ford Galaxy, Luis Angel Castillo weaves through the maze of the Lujn de Cuyo refinery in the Andean foothills of western Argentina. Just a few years ago, Castillo, manager of the refinery, would have encountered scores of maintenance workers during his rounds. Today, the facility seems all but deserted. The staff has been slashed from 700 in 1990, when it was state-owned, to just 49, now that its operator, YPF, is in private hands. "If everything is going well, the place runs itself from the control room," he boasts. "The fewer people, the better."

Efficiency is the mantra of YPF these days. Attempting to transform itself from elephant to gazelle, YPF, which controls half of Argentina's oil market, has cut its workforce to 6,750 from 51,000. Once aloof and arrogant, it is now the most public-relations-conscious company in the country. Its logo beams down from shiny new outlets selling only environment-friendly unleaded gasoline. And it's making money. Deficit-ridden throughout the 1980s, YPF netted $401 million in the first half of 1995, two years after it went private. Yet it is still looking for respect where it craves it most: on the floor of the New York Stock


Although Americans and other overseas investors now own half of YPF's stock, its shares have languished since its $3 billion initial public offering in 1993. With YPF American depositary receipts now around $18, Merrill Lynch & Co. First Vice-President Constantine D. Fliakos figures the company is trading at half of the value of its net assets. Its oil and gas reserves alone--1 billion barrels of crude and 8.5 trillion cubic feet of gas--may be worth $29 per ADR. "This is one of the cheapest integrated oil companies in the world," says portfolio manager James A. Shore of San Diego-based Brandes Investment Partners Inc., which has snapped up 3.5 million YPF shares.

UNSETTLING. Why so cheap? Start with jitters over Latin markets and the economic squeeze Argentina has been forced to endure since the Mexican market collapse earlier this year. Weighing the stock down even more heavily are YPF's controversial purchase of Maxus Energy Corp., a Texas oil and gas producer burdened with $1.1 billion in debt, and the death in a plane crash last May of YPF's dynamic CEO, Jose A. Estenssoro.

The $800 million Maxus acquisition, initiated a month before before Estenssoro's death, was particularly unsettling to investors. Many had bought YPF as a pure play on Argentina and were unhappy with the oil company going global. Their criticism has stung YPF and illustrated the inexperience many emerging-market corporations have in massaging new foreign stockholders. "We weren't expecting that kind of emotional reaction," admits new CEO Nells Len, 68, who was a close associate of Estenssoro. "They're not used to an emerging-market company buying a U.S. company."

Len insists he's continuing Estenssoro's plans. He's counting on Maxus' offshore technology, honed at its big Indonesian oil-producing operations, to give YPF a leg up on exploring Argentina's coastline. With domestic oil output expected to rise 15% this year, to 394,000 barrels a day, Len also wants to sell 1 billion cubic feet of gas a day to Brazil and more to Chile. And he's stepping up exploration in Bolivia, Ecuador, Chile, Peru, and the Gulf of Mexico. He's not the showman his predecessor was, but Len is just as determined to put YPF on the roster of major oil producers--while finally giving shareholders something to smile about.By Ian Katz in Lujn de Cuyo, with bureau reports

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