Repsol seeks rewarding end to Mexican stand-off

Fri Nov 23, 2012 10:20am EST

* Repsol and Pemex in talks over increased partnership

* Repsol wants access to Mexico's deepwater oil reserves

* Mexican energy reform a possible stumbling block

By Tracy Rucinski and David Alire Garcia

MADRID/MEXICO CITY, Nov 23 (Reuters) - Spanish oil major Repsol, badly bruised by the nationalisation of its Argentine business, is in talks to patch up frayed ties with state-owned Mexican oil monopoly Pemex.

Repsol's loss of YPF in April - and its access to the world's third-largest shale gas reserves - left it hungry for new exploration projects. Pemex, meanwhile, wants greater international exposure to offset its falling oil production.

A deeper alliance, however, also depends on Mexico's new government. Incoming president Enrique Pena Nieto has pledged to open Pemex to private investors, but the company remains a powerful symbol of national self-sufficiency and similar initiatives have failed to be voted through in the past.

Pemex is Repsol's third-largest shareholder, with a 9.5 percent stake, but the companies' four-decade relationship ran into trouble last year when Pemex teamed up with another Repsol shareholder to try to topple the chairman.

Now Repsol Chairman Antonio Brufau, having survived the attempted coup, is trying to make peace, with an eye on a share of the potential deepwater reserves in the Gulf of Mexico and a partner to develop other wells across the globe.

"There have been formal contacts in recent months on several areas between Repsol and Pemex ... I'm optimistic for a more solid partnership between the two," said Pemex board member Fluvio Ruiz.

IDEAL PARTNER

Repsol's earnings outside of Argentina have proved resilient. Not counting what it lost from YPF, the company has targeted a 7 percent-plus annual rise in global production until 2016, driven by projects in Bolivia, Peru and Brazil.

But Mexico, the world's No.7 oil producer, could make an ideal partner for the Spanish company, which can offer Pemex its expertise in offshore drilling.

"Repsol doesn't need Mexico for reserves or growth, but it's sensible for the two to look at more synergies. Strategically, it's a move in the right direction," RBC Capital Markets analyst Peter Hutton said. "Pemex has an appetite for access to international technology and Repsol may be able to bring that."

Pemex, which has suffered falling oil production since reaching a 3.4 million barrel peak in 2004, signed a strategic alliance with Repsol in February to collaborate in exploration projects.

The agreement, which also replaced Mexico's representative on the Repsol board, was meant to end rivalries after Pemex and indebted Repsol shareholder Sacyr Vallehermoso launched their boardroom coup with the aim of securing attractive dividend flows.

The plot failed and Sacyr was forced to sell half its 20 percent stake in Repsol to avoid bankruptcy.

February's alliance also limited Pemex's stake to 5-10 percent and analysts have expressed concern that the Mexican company could sell 3.5 percent of Repsol to obtain funds without losing a board member and a say in its strategy.

FALLING SHARE PRICE

The risk of such a sale by Pemex, along with debt and cash concerns at Repsol's other main shareholders CaixaBank (13 percent) and Sacyr (9.7 percent), has contributed to a 27 percent fall in Repsol's shares price this year.

So steps towards stability between Repsol and Pemex, in addition to the exploration potential, will be welcomed by the market, analysts said.

"We believe Repsol's growing cooperation with Pemex could see them getting access to the Mexican portion of the Gulf of Mexico, which holds an estimated 4-10 billion barrels of recoverable oil reserves," Bank of America Merrill Lynch said.

But to fully benefit from a deeper partnership, Mexico must open its hydrocarbon and petroleum and gas reserves to private ownership, sources and analysts said.

Pemex believes that there are up to 29 billion barrels of crude equivalent in the Gulf of Mexico - more than half of Mexico's potential resources - but investors have been scared off by the constitutional ban on foreign ownership.

Repsol will move with caution in Mexico as it continues to fight to recover more than $10 billion from Argentina for the loss of YPF.

The YPF fiasco has generated speculation that shareholders are again taking steps to force out the chairman. But signs that negotiations between Spain and Argentina could resolve the conflict may work in Brufau's favour as he pushes ahead with a new strategic plan.

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