Inflation of more than 100 percent in Argentina is erasing the advantage the country’s top companies used to have by booking revenue in US dollars.
Investor darlings in the energy sector — natural gas and power producer Pampa Energía SA, pipeline operator TGS SA, and state-run oil driller and refiner YPF SA – are struggling with costs that are coming under pressure from rising prices, which surpassed 100 percent on an annual basis last month.
In the past, Argentine energy companies could compensate for inflation on their balance sheets through revenues linked to the US dollar. But with the national peso currency strongly controlled by the government, these days depreciation of the exchange rate is no match for the pace of price increases affecting everything from machinery to wages.
“We do see dollar inflation in our costs and there’s not much that we can do against these movements of the macro environment,” Pampa CEO Gustavo Mariani said on a March 13 earnings call. The company’s adjusted earnings in the fourth quarter were US$183 million, down 26 percent from the previous quarter, in part because of the inflation trend.
Investor relations officer Lida Wang said on the call that the company was especially grappling with the need to increase wages to retain talent.
TGS’s biggest business line — selling natural gas liquids whose prices are tied to dollars — is suffering.
Earnings from its liquids segment were negatively impacted in the fourth quarter as inflation last year outstripped peso depreciation by 23 percentage points, CFO Alejandro Basso told analysts.
YPF, which is leading development of Argentina’s shale riches, has been combating a similar problem exacerbated by global inflation in oil services.
The company’s operating expenses throughout 2022 in dollar terms grew by nearly a third, “mainly explained by the continued overall accelerated inflationary environment and a slower-than-expected pace of the currency depreciation,” according to an earnings report. Adjusted earnings fell 38 percent in the fourth quarter from the prior three-month period.
While new power contracts and natural gas sales have an automatic correlation with the exchange rate, it’s an uphill battle for state-run YPF to ensure gasoline and diesel prices do likewise, especially in an election year. That can hurt its shale-drilling investments.
“That’s the million-dollar question,” CFO Alejandro Lew said at a March 10 earnings event at the New York Stock Exchange. “How we are going to tackle price adjustments.”
Outside of the energy industry, food producer Arcor SAIC is struggling to make revenue match inflation because of concerns about stifling demand and the risk of government regulation, according to a March 16 note by Esteban Arrieta and Ezequiel Fernández of Balanz Capital Valores. Arcor’s price increases lagged 2022’s inflation by about 28 percentage points, Arrieta and Fernández estimated.
Argentine media conglomerate Grupo Clarín blamed the mismatch between inflation and the exchange rate for a 27 percent decline in adjusted earnings in the fourth quarter from a year prior.
“Argentina enters 2023 with no tailwind,” Samantha Lee Olivieri, investor relations officer at Grupo Clarín, said on a March 15 earnings call. Inflation “acceleration took place with no correlation to the official exchange rate parity.”
by Jonathan Gilbert, Bloomberg