COLUMN-The strange case of Pemex and Repsol -Campbell

Mon Sep 12, 2011 11:56am EDT

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-- Robert Campbell is a Reuters market analyst. The views expressed are his own --

By Robert Campbell

NEW YORK, Sept 12 (Reuters) - Mexico's plodding state oil monopoly Pemex rarely catches anyone by surprise but its shock stake-building in Spain's Repsol may well be the exception that proves the rule.

Pemex [PEMX.UL] announced in late August it would nearly double its stake in Repsol (REP.MC) to nearly 10 percent and join with the Spanish group's biggest, and most disgruntled shareholder, Sacyr Vallehermoso SVO.MC.

Officially Pemex says its increased stake is part of an "alliance" that will give it access to Repsol's technology to help it develop deep water oil fields in the Gulf of Mexico. [ID:nN1E77T1FQ]

If so, this is one of the oddest energy alliances ever conceived.

By partnering with Sacyr, a construction group, to exert more control over the Repsol board, Pemex has joined up with a company that has placed itself in opposition to Repsol management over the last two years.

It is hard to see Repsol Chief Executive Antonio Brufau happily letting Pemex access Repsol's deep water technology while the Mexican company is trying to get him fired.

So what on earth is Pemex doing? In short, it is far from clear. Despite attempts to make itself more transparent, Pemex remains among the most opaque arms of the Mexican government and its public explanations fail to convince.

The claim that the share purchase, which was not even discussed by Pemex's own board of directors, will lead to some sort of alliance with Repsol is doubtful at the very least and begs far more questions than it answers.

FINANCIAL PLAY?

Sacyr's motives are more evident.

Since Sacyr announced at the end of 2006 that it had lifted its stake in Repsol to 20 percent, the Spanish oil company's shares have fallen more than 26 percent, handing Sacyr a more than 1.5 billion euro paper loss on its investment.

This loss looks all the worse given Sacyr's heavy borrowing --just under 5.2 billion euros-- to fund the last stage of its share purchases.

Brufau incurred Sacyr's wrath in 2009 by cutting Repsol's dividend, hitting the debt-laden construction book where it hurt as the financial crisis deepened.

In short, Sacyr needs to find a way to get itself out of a big hole and Pemex seems to have taken up the challenge.

Its press release announcing the shareholders' pact with Pemex makes this clear.

According to the release, Sacyr and Pemex want better corporate governance at Repsol, including splitting up the job of chief executive and chairman of the board, and the adoption of measures to boost cut costs and boost synergies among Repsol's subsidiaries in an effort to boost the share price.

So is Pemex simply trying to make money by boosting Repsol's share price?

The Mexican government wants Pemex to generate more value and become more businesslike.

But how buying more shares in Repsol fits into this mandate, particularly as Pemex will add to its already enormous debt pile to fund the transaction, is unclear.

The Repsol shareholding is a tiny fraction of Pemex's assets, so boosting the Spanish company's share price will have at best a modest impact on the balance sheet.

Nor is it clear that the purchase, at a cost of more than 1.5 billion euros, will lead to any meaningful technology transfer.

Pemex has antagonized Repsol's current management, and even if Brufau is replaced it does not follow that the Spanish company will embrace Pemex.

After all, alliances are usually negotiated between companies and rarely thrust upon unwilling managers.

Speculating in shares is not Pemex's core business, unlike crude oil production, which is at risk of decline as Mexico's fields age, or oil refining, where inefficiency and waste in Mexico rack up gigantic losses year after year.

Pemex would do well to pay more attention to fixing its own business than trying to fix Repsol. (Editing by Alden Bentley)

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