TEXT-Fitch revises Repsol's outlook to stable; affirms at 'BBB-'

Thu Jan 31, 2013 5:34am EST

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(The following statement was released by the rating agency)

Jan 31 - Fitch Ratings has affirmed Repsol SA's Long-term Issuer Default Rating (IDR) at 'BBB-'. The Outlook has been revised to Stable from Negative. A full list of rating actions is provided below.

The affirmation and revision of the Outlook reflect our expectation that Repsol's deconsolidated credit metrics and business profile will not weaken to levels consistent with a lower rating. Fitch believes Repsol should be able to complete fixed asset divestments by the end of 2013 and use these proceeds to reduce debt and stabilise credit metrics. In our opinion, Repsol's credit profile has limited additional downside, even in the absence of fixed asset divestments, which supports the Stable Outlook.

KEY DRIVERS

Fixed Asset Sales:

Fitch views Repsol's asset disposal programme as being very important to strengthening its investment grade rating. Repsol is trying to dispose of certain fixed assets and could use the proceeds to reduce financial indebtedness. Fitch views the completion and closing of assets disposals in 2013 as supportive of the ratings. Repsol's Outlook would likely be revised to Positive upon the completion of any material disposal, and upgraded if proceeds are fully utilised for debt reduction.

New Strategic Plan:

Repsol has announced a new strategic plan that anticipates increasing oil production to 500,000 barrels of oil equivalent per day by 2016 and improving downstream profitability. Repsol plans around EUR19.1bn of total capex during 2012-2016, excluding Gas Natural (GN; 'BBB+'/Stable). Fitch views the company's target upstream production growth rate of consistently greater than 7% a year as ambitious, but the company is currently meeting this target.

Challenging Downstream Environment:

Repsol's downstream core business has significant exposure to the Spanish economy, with 100% of middle distillates sold domestically, accounting for 25% of EBITDA. Macroeconomic volatility could reduce demand for transportation fuels, which would decrease refining margins and internally generated cash flow, affecting the company's 'self-financing' investment plans.

Scrip Dividend:

In January 2013 Repsol announced that a total of 69% of Repsol shareholders opted to be paid the interim dividend from 2012 earnings in shares, up from 64% who chose to receive shares for the final dividend from 2011 earnings. Fitch view this as positive, as it allows the company to conserve cash. However, significant de-levering steps still need to be taken to improve credit ratios to more solid investment grade levels.

GN Debt Non-Recourse:

Fitch considers GN debt to be non-recourse to Repsol. Consequently, Repsol is rated on a deconsolidated basis and the analysis is largely driven by the company's core businesses. However, GN's dividends to the parent company are also reflected in the rating (EUR247m in 2012).

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