UPDATE 2-Repsol eyes upstream buys after Argentina settlement

Wed Feb 26, 2014 12:18pm EST

* Chairman hopes to get YPF settlement cash in two years

* Prioritises purchases over shareholder remuneration

* Up to $6.5 bln available for acquisitions in upstream

By Tracy Rucinski and Andrés González

MADRID, Feb 26 (Reuters) - Spanish oil major Repsol said on Wednesday it was on the lookout for acquisitions to boost its exploration and production (E&P) business following the bruising loss of its Argentine energy arm two years ago.

On Tuesday Repsol's board approved a $5 billion settlement from Argentina for the expropriation by Buenos Aires of its majority stake in YPF, drawing a line under a two-year conflict.

Chairman Antonio Brufau said the company hoped to sell bonds from the settlement in the next two years and invest the cash in growing its business rather than returning more to shareholders.

Its strategy contrasts with that of other European oil groups such as Royal Dutch Shell and France's Total , who are sacrificing investments to hand cash back to shareholders.

Repsol already has the second highest dividend yield among peers at 5.3 percent, making it one of the few oil majors that is combining a growth strategy with shareholder returns.

The Madrid-based company's current dividend is worth about 1 euro per share in the form of cash or shares and it has a plan to buy back 500 million euros' worth of capital this year.

Brufau said the share buyback programme would continue beyond 2014 but held back from pledging to increase the amount.

"We shouldn't go crazy," he said, adding that the best way to remunerate shareholders is by adding value to the shares, such as in the form of a bigger, more profitable company.

BIGGER, BETTER

Repsol is in the middle of a four-year plan to gain size to better compete for international exploration projects and to compensate for the loss of YPF, which had accounted for over half its output.

"As Repsol tries to rebuild its strategy post-YPF, Mr. Brufau has been consistent in trying to move it away from Latin America and into OECD," Raymond James analyst Bertrand Hodee said.

Brufau estimates it will have between $6 billion and $6.5 billion to spend on acquisitions after the gradual sale of Argentine bonds and the disposal of its remaining 12 percent stake in YPF.

That treasure chest could grow with the potential sale of its 30 percent stake in Gas Natural Fenosa, worth about 5.5 billion euros.

The company is especially eyeing opportunities in North America, for which one source said it has hired JP Morgan as an advisor.

Repsol's investment grade credit rating came under pressure after the YPF seizure, forcing it to sell liquefied natural gas assets to Royal Dutch Shell to improve its finances. Brufau said he was "totally convinced" that the YPF compensation would be positive for its credit rating.

SHAREHOLDER EXIT?

By signing off on the YPF deal, Brufau is also ending a bitter chapter among key shareholders who had been pushing for a quick end to the bilateral conflict, though doubts remained over how long they would stay with the company.

Mexico's Pemex has been one of Brufau's most outspoken critics, threatening to sell its 9.5 percent stake if the chief doesn't resign. Brufau sought to soothe tensions on Wednesday by opening the door to resurrecting a business alliance between the two firms.

While Repsol's two other main shareholders, lender Caixa , with 12 percent, and indebted builder Sacyr , with 9.5 percent, are also considered potential sellers, analysts said both were likely to wait for Repsol's sale of its YPF and Gas Natural stakes before trying to cash out.

Analysts estimate that the Argentine settlement and the sale of the 12 percent stake in YPF alone could add some 3.5 euros to Repsol's current 18.58 euro share price.

Some market players said Repsol could become a takeover target once it receives cash from stake sales, but Hodee of Raymond James dismissed that theory.

"Repsol is a predator, not a target," he said.

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