LONDON, April 17 On the day he was appointed head of Spanish oil company Repsol in 2005, Antonio Brufau expressed "fullest confidence" in, and a "firm business commitment" to, Argentina, before almost immediately plotting a retreat from the South American country.
With the announcement of the nationalisation of Repsol's YPF unit on Monday, Brufau's ambition to dramatically scale back the company's position in Argentina has finally come to fruition, albeit not on the terms he would have liked.
The group's shares fell 7 percent to 16.31 euros on Tuesday following Argentine President Cristina Fernandez's plan to expropriate a controlling 51 percent stake in YPF by seizing shares held by Repsol.
YPF accounts for half of Repsol group output and 21 percent of net profit. Analysts at Deutsche Bank said this means the opportunities for dividend growth will be limited in coming years.
Nonetheless, executive chairman Brufau's strategy of reducing Repsol's reliance on Argentina for growth means the loss of YPF will be much less damaging strategically and financially than it would have been a few years ago.
In the past five years, Repsol has participated in some of the hottest oil exploration plays in the industry -- in Brazil, the Gulf of Mexico and West Africa -- turning around its previously meagre record in finding oil.
It has also invested in Alaskan oilfields and U.S. shale gas, as part of Brufau's strategy to have 60 percent of upstream assets in politically stable countries of the Organization for Economic Co-operation and Development (OECD).
Of the 10 key projects highlighted in Repsol's 2008-2012 strategy plan, none are in Argentina.
"Repsol has a solid strategy in place, ex-YPF, with an admirable exploration portfolio and superior upstream growth," Thomas Adolff, analyst at Credit Suisse, said in a research note on Tuesday.
Repsol believes its seized YPF stake is worth more than $9 billion.
Analysts are sceptical it will receive much, if any, compensation. They also expect Repsol will not be repaid a $1.9 billion loan, extended to Grupo Petersen to buy its 25.5 percent stake in YPF.
"This (nationalisation) decision has caused us enormous sadness ... but the foundation of Repsol is enormously solid," Brufau told a press conference on Tuesday.
Much of the bad news is now priced in to Repsol's shares, analysts said. On a sum-of-the parts basis, they value Repsol at 17 euros-21 euros per share, assuming no compensation from the government and no repayment of the Petersen loan.
Yet, the analysts noted shares in the sector often trade at a 20-30 percent discount to such 'break-up' valuations, suggesting investors could see further share falls.
The loss of YPF's Vaca Muerte shale oil and gas find could have been a big blow. Repsol estimated in February that it may hold 23 billion barrels of resources.
But as news of the discovery came amid rising tension with the government, investors attached limited value to the find.
Repsol bought YPF for around $15 billion when it was privatised by the Argentine government in 1999.
The deal was hatched by Brufau's predecessor, Alfonso Cortina, who wanted to turn refining-focused Repsol into a big league integrated oil and gas player.
Investors welcomed the move because oil and gas production has traditionally been more lucrative than refining. Also, the deal came amid a wave of industry mergers and it was felt smaller players could not compete with bigger rivals on costs.
However, Argentina's financial crisis in 2001 and 2002, and the election of populist President Nestor Kirchner in 2003, led to higher taxes and price caps, which meant YPF received well below world prices for the oil and gas it pumped.
By the time Brufau was appointed, the deal was viewed as a failure. In one of his first press conferences after replacing Cortina, Brufau said the company was too reliant on Argentina.
In 2006, Repsol signalled to investors it was considering the flotation of 15-20 percent of YPF on the local stock market.
Analysts urged Brufau to sell it all, but even offloading a small chunk proved challenging. The government insisted on a buyer of its pleasing, and not many international players wanted to buy Argentinean assets.
In 2007, Repsol agreed to sell Argentine businessman Enrique Eskenazi's Grupo Petersen 14.9 percent of YPF for almost $2.24 billion with an option to buy another 10.1 percent, which Eskenazi exercised last year.
Repsol had to agree to lend Grupo Petersen much of the money to buy the shares, to secure a deal. It also raised more than $1.6 billion by selling shares on the Buenos Aires bourse.
"There was a determined effort to wind down the shareholding," a Repsol source said.
While a quicker wind-down might have limited losses further, Brufau's U-turn on another YPF plan saved Repsol billions.
Early in his tenure, he considered injecting Repsol's Brazilian blocks into YPF, but dropped the plan after drilling in the blocks revealed massive oilfields.
In 2010, Repsol injected the assets into a venture with Sinopec Corp, valuing the finds at $11 billion.