UPDATE 3-Steeper costs hit net profit at Argentina's YPF

Wed Nov 7, 2012 10:12am EST

* Net profit falls 51 percent year on year

* State-run company says production costs jump

* Market expected net earnings of 902.5 million pesos

By Alejandro Lifschitz

BUENOS AIRES, Nov 7 (Reuters) - Net profit at Argentina's state-controlled energy company YPF fell 51 percent in the third quarter from a year earlier as domestic crude prices failed to keep pace with rising production costs, the company said on Wednesday.

Argentine President Cristina Fernandez seized control of YPF from Repsol in April, accusing the Spanish oil company of investing too little and making Argentina increasingly reliant on pricey fuel imports.

YPF reported a third-quarter net profit of 756 million pesos($161 million), a 51 percent drop from a year earlier and trailing market expectations.

"We're not satisfied with the profitability of this quarter. That's not the level of profitability we plan for the long term," Chief Financial Officer Daniel Gonzalez told a conference call. "We should definitely improve on the cost side and the revenue side."

Four analysts polled by Reuters had forecast the net profit at a median of 902.5 million pesos, with estimates ranging from 877.7 million to 932 million pesos.

YPF, which is Argentina's biggest energy company, said the weaker net earnings were caused by increased operating costs and a poorer performance by companies in which YPF has a stake. It also cited a deferred tax payment.

Annual inflation in Latin America's No. 3 economy is estimated privately at about 25 percent and that is driving up company costs.

"The increase in operating costs was mainly caused by higher labor outlays, repair and maintenance services, increased royalty payments to provinces and bigger (asset) depreciations," YPF said in a note to market analysts.

Argentina's domestic crude prices rose 15.8 percent year-on- year in the third quarter to an average of $70.40 per barrel.

YPF aims to boost oil and natural gas production 32 percent by the end of 2017, reversing years of declining output, by stepping up investment in the energy-hungry South American nation.

The company's new chief executive has said that will require some $37.2 billion, most of which will come from cash flow.

YPF has sold debt on the local market since the company was nationalized, and Gonzalez ruled out a potential foray into global credit markets "anytime in the short term."

Argentina sits on huge resources of shale natural gas and oil, but large amounts of capital would be needed to bring them into production and the country remains virtually shut out of international debt markets a decade after staging the biggest sovereign default in history.

Wednesday's statement said investments in the first nine months of 2012 totaled 9.67 billion pesos, up 18.7 percent from a year earlier, when the company was still controlled by Repsol.

"This increase is mainly due to the increase in upstream activity and advances and conclusions in downstream projects," YPF said.

"The third-quarter results show that YPF has started to reverse the downward trend of the last decade in terms of oil output," it added.

Crude production rose 0.6 percent in the third quarter to 228,000 barrels of oil equivalent (BOE) per day, accumulating an increase of 4.7 percent in the first nine months of 2012.

However, total production slipped 1.3 percent in the third quarter to 485,000 BOE, pressured by smaller volumes of natural gas and liquefied natural gas.

YPF shares in Buenos Aires were down more than 1 percent in morning trade at 74 pesos per share, underperforming the MerVal blue-chip index.

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