Fitch Ratings has assigned a 'CCC' rating with a Recovery Rating of 'RR4' to YPF S.A.'s (YPF) proposed benchmark-size unsecured bonds.

The proceeds of the notes will be used to prepay existing debt and for general corporate purposes. Fitch currently rates YPF's Long-Term Foreign and Local Currency Issuer Default Rating (IDR) 'CCC'.

YPF's ratings are in line with Fitch's 'Government Related Entities Criteria'. The company is majority owned by the government of Argentina and strategically important to the country. YPF's dominant market share in the supply of liquid fuels in Argentina, coupled with its large hydrocarbon production footprint in the country, could expose the company to government intervention through pricing policies or investment strategies.

Key Rating Drivers

Links to Sovereign: YPF linkage to the Argentine Republic reflects ownership structure, government oversight, history of support, and significance of the company in executing government policy role. Argentina controls the company through its 51% stake, and provincial government officials serve on the company's board of director. According to Fitch's assessment of the 'Government Related Entities Criteria', incentives to support and contagion risks are high, leading to the equalization of the ratings.

YPF's Standalone Credit Profile (SCP) is in the 'b' category, reflecting the issuer's production cost profile, which is above average compared with peers in the region, and its inability to diversify its operations outside of Argentina.

Key Producer in Volatile Operating Environment: YPF is the market leader in the country with over 50% of market share for refined products. The company's strong market position and branding give it the ability to adapt to market volatility. YPF's dominating participation along the value chain of fuels, combined with the largest acreage under license for production of crude and gas, position the company to benefit from current efforts to shift Argentina from a net importer to a net exporter of hydrocarbons in a challenging macro-economic environment.

Stable Production and High-Cost Profile: Fitch's rating case assumes production will average 600,000 barrels of oil equivalent per day (boed) over the rating horizon. Fitch estimates YPF's 2023 half-cycle and full-cycle costs at USD36.87 of USD57.34 per boe, which is above-average for players in the region, and could see a decline in the coming years as the company divest its conventional mature fields. The company's high cost was mostly attributed to higher-than-average lifting cost of USD15.40/boe (USD4.0/boe for shale oil production). The company's full-cycle break-even implied prices were below-weighted-average realization prices for oil and gas.

Financial Metrics Strengthen: YPF has maintained a moderate leverage profile. Fitch estimates YPF's total debt/EBITDA will be 1.3x in 2024 compared with 1.8x in 2023 and will average less than 1.0x over the rated horizon. YPF's reported 1,072 mmboe of 1P reserves in 2023, translating into total debt to 1P of reserves of USD7.64/boed. Fitch estimates USD8.22/boe for 2024 based on 1P reserves as reported in 2023. The company's leverage profile has been stable, but is challenged by a limited pool and high cost of capital given the macroeconomic environment in Argentina.

Derivation Summary

YPF's linkage to the sovereign is similar in nature to its Latin American national oil company peers, namely Petroleos Mexicanos (PEMEX; B+/Stable), Petroleo Brasileiro S.A. (Petrobras; BB/Stable) and Ecopetrol S.A. (Ecopetrol; BB+/Stable), and government-owned entities Empresa Nacional del Petroleo (ENAP; A-/Stable) and Petroleos del Peru (Petroperu S.A.; CCC+). These companies have strong linkage to their respective sovereigns, given their strategic importance to each country and the potentially significant negative social and financial implications a default could have at a national level.

The closest peers for YPF's upstream business are PEMEX, Petrobras and Ecopetrol. YPF's total 2023 production averaged 531,000boed, and the reserve life was 5.5 years, most comparable with Ecopetrol, with production of 737,000boed and a reserve life of 7.0 years in 2023, but less than Petrobras' production of 2.8mmboed and reserve life of 10.9 years and PEMEX's production of 2.7mmboed and reserve life of 7.7 years.

YPF has an adequate capital structure, with a gross leverage ratio, defined as total debt/EBITDA, of 1.8x in 2023 (in USD terms) and total debt/1P of USD7.6/boe, compared with Ecopetrol at 1.8x and total debt/1P of USD14.3/boe, Petrobras at 0.6x and USD2.6/boe and PEMEX at 6.7x and USD14.2/boe.

Unlike its peers ENAP, Petrobras, PEMEX and Petroperu, YPF is not the sole provider of refined fuels in its country, Argentina. In 2023, the company had a 50% market share. YPF is an integrated energy company, similar to Petrobras and PEMEX, offering the company more financial flexibility, while ENAP is predominantly a refining company that sells to marketers. Historically, YPF has operated autonomously, with periodic control of fuel prices and crude. YPF has successfully been able to tighten spread and recuperate losses realized during periods of pricing freezes.

Key Assumptions

Average gross production of 600,000boe from 2024-2027;

Realized oil price of USD68/bbl in 2024 and an average of USD55/bbl thereafter;

Natural gas prices rise to USD4.25/MMBTU in 2024 and settle at USD3.75/MMBTU thereafter;

Average annual capex of roughly USD5.5 billion per year from 2023 to 2025;

Downstream sales volume follows Real GDP forecasts and YPF is a net purchaser of crude;

Effective tax rate of 35%;

No dividend payments over the rating horizon;

Rollover of short-term maturities.

Recovery Analysis

Key Recovery Rating Assumptions

The recovery analysis assumes that YPF would be liquidated in bankruptcy rather than reorganized via going-concern;

We have assumed a 10% administrative claim.

Liquidation Approach

The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors;

Inventory advance rate of 50%;

USD10/bbl reflects the typical valuation of recent reorganizations in the oil and gas industry;

YPF has a material joint venture with international oil companies that results in a reported book value of USD1.8 billion.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of Argentina's sovereign rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The Foreign Currency IDR is linked to Argentina's sovereign rating, and an upgrade can only occur with an upgrade of Argentina's sovereign rating.

Liquidity and Debt Structure

YPF reported USD877 million in cash and cash equivalents in 3Q24. The company faces significant refinancing risk, heightened by capital controls, with USD1,682 million in debt maturing in 2025 (as of November 2024), followed by USD1,849 million in 2026 and USD1,281 million in 2027. Fitch expects YPF will continue to roll over short-term bank and trade financing debt over the rated horizon.

Issuer Profile

YPF, S.A is the largest fully integrated energy company in Argentina. YPF participates in three segments: Upstream, Downstream and Gas and Power.

YPF has been controlled by the Argentine government through its majority stake of 51% since 2012.

Date of Relevant Committee

20-Nov-2024

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

YPF S.A. has an ESG Relevance Score of '4' for GHG Emissions & Air Quality due to due to the growing importance of the continued development and execution of the company's energy-transition strategy. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The company has a Governance Structure score of '4', due to its nature as a majority government-owned entity and the inherent governance risk that arises with a dominant state shareholder, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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