How To Strike Oil In Argentina

Has the market peaked? Investment manager Tony Hitschler thinks it might still have a way to go, but the risks are mounting. So he has been scouting out sectors left behind in the market run-up--oil companies, for instance. But forget about the usual oil plays, he says. Topping Hitschler's list is a foreign stock: YPF. The company is Argentina's No.1 industrial concern and the world's 11th-largest publicly traded oil company. Its American depositary receipts (ADRs) trade on the Big Board.

With Mexico and other Latin American markets in a funk, YPF has become a bargain, says Hitschler, president and chief investment officer of Brandywine Asset Management, which controls assets of $3 billion.

An integrated oil-and-gas producer, YPF is the most undervalued of the international oil companies, he asserts. And YPF's already attractive fundamentals will be enhanced, Hitschler believes, by its acquisition of Dallas' Maxus Energy, which was announced on Mar. 1.

Most analysts had expressed concern about the deal. But Hitschler argues that owning Maxus will bolster YPF's cash flow and earnings in the long term. He explains that YPF has the money needed to develop Maxus' assets, including extensive reserves of oil and gas in Indonesia. Before the YPF deal was announced, Amoco had offered to buy these Maxus reserves for $585 million.

YPF shares, which closed at 18 on Mar. 28, traded as high as 30 in early 1994. Hitschler likes YPF's depressed price-earnings ratio of 9.5--based on estimated net earnings of $1.90 a share--compared with ratios of 15 to 18 for the U.S. oil biggies. Even at those levels, he notes, multiples of the U.S. stocks are being hurt by weakened earnings. But in the case of YPF, he says, the p-e is hampered by the depressed stock and not by the earnings, which have been on the rebound. He thinks YPF could hit 30 in 12 to 18 months.

Analyst Mary Quinn of S.G. Warburg is also high on YPF. "Despite continued uncertainty [in Latin America], YPF is cheap relative to its U.S. counterparts on an asset-value basis," she says. And in spite of possible "dilutive effects and strategic decisions involved in the Maxus transaction, investors with strong stomachs and a relatively long-term view should be rewarded with substantial capital appreciation."

    Before it's here, it's on the Bloomberg Terminal.