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May 15 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Repsol SA's Long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB-'. The Outlook is Positive. A full list of rating actions is provided below.
The upgrade reflects the successful monetisation of nearly all of the USD5.32bn in nominal value of guaranteed Argentine government bonds Repsol received as compensation for the expropriation of 51% of its former subsidiary YPF (B-/Negative) and YPF Gas and the receipt of USD1.3bn of proceeds from the sale of Repsol's remaining minority stake in YPF. Repsol's total cash proceeds received from the combined transactions are USD6.1bn, exceeding Fitch's rating guideline for an upgrade of monetising at least USD3bn of its guaranteed Argentine government bonds. The sale of those bonds, in addition to the sale of the YPF minority stake, is the main factor supporting today's upgrade.
The Positive Outlook reflects Fitch's expectations that Repsol will improve its upstream business profile with the completion of key projects over the next two years and maintain high operating efficiency. Repsol's 2013 upstream growth rate, excluding equity affiliates, exceeded all European peers rated by Fitch. A further upgrade to 'BBB+', however, will likely depend on the exact use of the Argentine proceeds - whether to fund acquisitions, make capital investments or reduce on-balance sheet debt. The most likely scenario for a return to 'BBB+' is, in our opinion, a use of the Argentinian proceeds to restore the company's upstream profile to a similar level to that before the YPF appropriation, while maintaining conservative financial metrics and a steady performance from downstream.
KEY RATING DRIVERS
Ambitious Upstream Plan
Repsol expects 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. Although the company's target of consistently greater than 7% compound annual growth a year for its upstream production is achievable over the next few years, Fitch nevertheless regards it as ambitious given that most of the integrated oil and gas companies are struggling just 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. Current downstream 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.
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.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- 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 in line with strategy to restore the upstream business profile
- 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:
-Downstream performance not improving
-Failure to maintain upstream organic growth rates near stated targets
LIQUIDITY AND DEBT STRUCTURE
Short-term debt at end-March 2014 amounted to EUR4.8bn, and cash and equivalents totalled EUR4.1bn, while unused credit lines were at EUR3.2bn.
FULL LIST OF RATING ACTIONS
Long-term IDR: upgraded to 'BBB' from 'BBB-'; Outlook Positive
Senior unsecured debt: upgraded to 'BBB' from 'BBB-'
Short-term IDR: affirmed at 'F3'
Repsol International Capital Ltd.
Hybrid capital instruments: upgraded to 'BB' from 'BB-'
Repsol International Finance
Senior unsecured debt: upgraded to 'BBB' from 'BBB-'
Commercial paper: affirmed at 'F3'