EM LATAM CREDIT: Tecpetrol: New 5NC2-Year Fair Value
(B1/NR/BB-)
IPTs: 8% Area FV: 7.375% Area
• Argentina based oil and gas E&P company Tecpetrol proposed issuance of USD benchmark-sized, 144a/Reg S, senior unsecured 5NC2-year notes. The use of proceeds will be for general corporate purposes including capital expenditures and investment to expand unconventional production.
• TECPET 33s (WAL 6.2Y) were last quoted 7.18%, 16bp tighter since June 30th and 44bp tighter than new issue pricing January 2025. Amid the pessimism in mid-Sept for Argentina (ARGENT; Caa1/CCC/CCC+) bonds, TECPET outperformed with yields only climbing about 20bp to 7.37% and then quickly bounced back to 7.2% a week later.
• The market does not seem to price much Argentina risk into the TECPET valuation, though maybe it should as ratings are tied to the sovereign and in a prolonged downside scenario TECPET valuations would be more severely impacted. For that reason, we look to recently issued Brazil independent oil and gas E&P company Prio (PRIOBZ; Ba3pos/NR/BB*+) with 5NC2-year notes quoted at 7.18%. TECPET should trade a bit wider due to its Argentina risk but that is offset somewhat by PRIO’s smaller production scale.
• Another good comp would be Pan American Energy (PANAME; B1/NR/BB-) with 2032s (5.5Y WAL) last quoted 7.14%. PANAME is a bit larger in terms of production scale at 222k/boed vs 190k for Tecpetrol and has a longer 19 years of reserve life vs 14 years for Tecpetrol. PANAME also is vertically integrated with substantial refining operations, so we think TECPET bonds need to trade wider.
• We observe a relatively flat yield curve when looking at other Argentina energy companies such as YPF (YPFDAR; B2/B-/CCC+) and Vista (VISTAA; B2/NR/BB-) so the shorter dated new issue 5NC2 relative to the outstanding TECPET 2033s doesn’t influence the FV much.
• TECPET leverage is relatively low at about 1.5x but is expected to rise to 4.5x next year, according to Fitch, because of borrowing to fund investment in Argentina’s Vaca Muerta region but then is expected to fall back to 2x with EBITDA doubling by 2027. Tecpetrol is owned by conglomerate Techint so that is added implicit support that has some value.
• Fitch’s EBITDA expectation is based on a Brent oil price assumption of USD70 per barrel for 2025, USD65/bbl for 2026 and USD60/bbl for the long term. YPF has said that $45 is the breakeven price for Argentina shale production and Brent is now quoted $64.
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