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April 14 (The following statement was released by the rating agency)
Fitch Ratings has revised Repsol SA's Outlook to Positive from Stable and affirmed its Long-term Issuer Default Rating (IDR) at 'BBB-'. A full list of rating actions is provided below.
The Outlook change reflects Fitch's expectations that the company will soon receive up to USD6bn in nominal value of guaranteed Argentine government bonds as compensation for the expropriation of 51% of former subsidiary YPF (B-/Negative) and YPF Gas. This follows an agreement reached with the government of Argentina in February 2014.
We also expect Repsol will monetise these bonds within the next two years. The ratings will be upgraded after bonds equal to USD3bn are sold because of the material improvement to the company's liquidity and net leverage metrics. Further upgrades to 'BBB+' will depend on use of proceeds to fund acquisitions, capital investments or reduce debt.
KEY RATING DRIVERS
Tangible YPF Compensation
Fitch will upgrade Repsol's Long-term IDR to 'BBB' once the company monetises at least USD3bn of its guaranteed Argentine government bonds. Repsol's agreement with Argentina removes much of the cash flow uncertainty we had indicated in our December 2013 rating affirmation.
Repsol took additional steps to strengthen its financial profile after being downgraded twice in 2012. Measures included the sale of treasury shares to Temasek Holdings for EUR1bn and the implementation of a dividend reduction and scrip dividend programme that generated cash savings of EUR2.5bn. The company has also made pre-tax divestments of EUR4bn over the last two years.
Ambitious Upstream Plan
Repsol anticipates increasing oil production to 500 thousand barrels of oil equivalent per day (mboepd) by 2016. In 2013 Repsol achieved average annual net production growth of 4.2%. This was due to the start-up of five of its 10 key projects, partly offset by production volatility in Libya. Fitch views the company's target of consistently greater than 7% compound annual growth rate a year for its upstream production as ambitious, as most of the integrated oil and gas companies are struggling to maintain flat production growth rates.
Challenging Downstream Environment
Repsol's downstream core business has significant exposure to the Spanish economy, which accounts for 20% of EBITDA. Downstream current cost of supply- adjusted operating income declined 46.6% year-on-year in 2013 due to a weak refining environment. Repsol's refining margin averaged USD3.3 per barrel in 2013, down 37.7% from 2012. At the same time, oil product sales rose just 1% in 2013 compared with 13% in 2012. Fitch expects the downstream market environment in Europe will remain challenging in 2014.
Above-Average Operating Efficiency
Repsol's production profile is "small" according to Fitch's oil and gas sector credit factors. However, the company has the highest profitability in terms of EBITDAX per barrel, the lowest replacement costs and is one of two companies with an organic replacement ratio of above 100%. Nevertheless, Fitch expects this position could deteriorate if Repsol moves more production to OECD countries with more complex geological formations and higher production cost inflation.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Monetisation of the guaranteed Argentine government bonds equal to USD3bn
- Deconsolidated FFO adjusted net leverage around 2.5x (end-2013: 2.6x)
- Deconsolidated FFO fixed charge cover around 8x (end-2013: 3.9x)
- Upstream production size at around 500,000 barrel per day
- Stable deconsolidated FFO margin greater than 10% (end-2013: 6%)
- Capex spending of no more than 100% operating cash flow
- Improvement to downstream performance
Negative: The current Outlook is Positive. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade. However, the Outlook could be revised to Stable due to:
-Unforeseen difficulties monetising at least USD3bn of Argentine government bonds
-Downstream performance not improving
-Problems maintaining upstream organic growth rates near stated targets
LIQUIDITY AND DEBT STRUCTURE
Repsol had EUR9.3bn of total liquidity at end 2013, with EUR6.2bn of cash and EUR3.1bn of available committed unused credit lines, excluding GN. This comfortably covers Repsol's maturities to 2018. Additionally, Fitch considers subsidiary Gas Natural SDG, S.A.'s (GN; BBB+/Stable) debt to be non-recourse to Repsol.
FULL LIST OF RATING ACTIONS
Long-term IDR: affirmed at 'BBB-'; Outlook Revised to Positive from Stable
Senior unsecured debt: affirmed at 'BBB-'
Short-term IDR: affirmed at 'F3'
Repsol International Capital Ltd.
Hybrid capital instruments: affirmed at 'BB-'
Repsol International Finance
Senior unsecured debt: affirmed at 'BBB-'
Commercial paper: affirmed at 'F3'