(The following statement was released by the rating agency)
Dec 11 -
Summary analysis -- Repsol S.A. ----------------------------------- 11-Dec-2012
CREDIT RATING: BBB-/Stable/A-3 Country: Spain
Primary SIC: Petroleum
Mult. CUSIP6: 76026T
Credit Rating History:
Local currency Foreign currency
19-Apr-2012 BBB-/A-3 BBB-/A-3
20-Jul-2006 BBB/A-2 BBB/A-2
The ratings on Spain-based integrated oil and gas company Repsol S.A. (Repsol) incorporate
Standard & Poor's Ratings Services' view of its "satisfactory" business risk profile and
"intermediate" financial risk profile.
Repsol's business risk profile reflects its position as a sizable integrated oil and gas
company with a solid domestic downstream position, and a profitable exploration and production
(E&P) upstream position that has strong production growth potential over the next five years. We
believe Repsol's refining assets are complex, and note that this division has been profitable
during difficult years, such as 2001 and 2002. Repsol's business weaknesses include its exposure
to volatile oil prices and refining margins. Even after the expropriation of the Argentine unit
YPF S.A. in April 2012, when the Argentine government reduced Repsol's stake to 11.82%
from 57%, we still view Repsol has having material exposure to country risk, notably to various
Latin and North African countries. In contrast with previous years, this exposure is more in
line with the exposure of other international oil companies, however.
Another weakness in our opinion, is the large exposure of Repsol's downstream operations to
the weak Spanish economy, which is a risk factor for the rating. Among others, we note the sharp
drop in demand for refined products in recent quarters. We understand that about 45% of capital
employed by Repsol (excluding its exposure to Spanish gas supplier Gas Natural) relates to the
downstream business in Spain. We therefore classify Repsol's risk exposure to Spain (Kingdom of
Spain, BBB-/Negative/A-3) as "moderate" under our criteria (for further details see "here
" published June 14, 2011, on RatingsDirect on the Global Credit Portal.) In a theoretical
scenario under which we lowered the sovereign rating below that on Repsol, the rating on Repsol
could exceed the sovereign rating by a maximum of two notches, under our criteria, as long as we
still considered Repsol's exposure to sovereign risk as "moderate."
Our view of Repsol's financial risk profile takes into account its prudent financial
policies and management's commitment to reduce its currently high debt, demonstrated by recent
asset sales and other measures like the new scrip dividend program. Relative weaknesses include
the company's currently weak credit ratios, sizable investment requirements, as well as
industry- and country-related risks that affect cash flow.
S&P base-case operating scenario
Following a healthy production increase over the first nine month of 2012, and somewhat
improved refining margins, we have revised up somewhat our expectation for Repsol's operating
performance for full-year 2012. In the first nine months of this year, production stood 8.8%
higher than in the corresponding period in 2011 (most the increase stems from Libya coming back
on stream). Under our $100 per barrel oil price assumption we now anticipate that Repsol will
report EBITDA of EUR5 billion-EUR5.5 billion for 2012 (excluding 30%-owned Gas Natural SDG S.A.
, which we deconsolidate for the purposes of our analysis, and YPF of
which 51% was expropriated in April 2012).
Reported EBITDA in first-nine-months 2012 for the upstream, refining, LNG, and corporate
divisions stood at EUR4.15 billion on a clean cost of supply basis. After 2013 we anticipate
that the negative impact of our lower pricing assumptions will be offset by the likelihood of
increased oil production in view of management's ambitious production target of about 500,000
barrels of oil equivalent per day (boepd) by 2016. Production in the third quarter of 2012 stood
at 339,000 boepd.
S&P base-case cash flow and capital-structure scenario
We forecast adjusted funds from operations (FFO), excluding Gas Natural and YPF, of EUR3.4
billion-EUR3.7 billion in 2012. With expected capital expenditure (capex) of about EUR3.3
billion and dividends we predict negative discretionary cash flow this year, excluding any
divestment. Debt levels and credit ratios at year end remain, however, difficult to predict, as
they ultimately depend on the execution on the divestment plan. We understand that some measures
previously announced by management, like the sale of the 5% treasury shares and the conversion
of the preferred shares into mandatory convertible bonds, are now on hold, however. We therefore
now expect debt to come down to about EUR8.5 billion-EUR9 billion, due to divestment which we
understand will occur in the near term, compared with about EUR7 billion previously. In our
revised assumptions we include a higher price for the LNG operations, which partly mitigates the
shortfall. On this basis, adjusted FFO to debt could recover to about 35%-38% pro-forma the
Our short-term rating on Repsol is 'A-3', reflecting our assessment of the company's
liquidity as adequate" under our criteria. We forecast the company's ratio of liquidity sources
to liquidity uses to be above to 1.4x in 2012, comfortably above our 1.2x threshold.
We consider Repsol's liquidity sources to include:
-- Cash and cash equivalents of EUR3.9 billion (excluding YPF and deconsolidating Gas
Natural) as of Sept. 31, 2012. Of this, we treat EUR0.5 billion as tied to operations. Undrawn
long-term committed bilateral bank lines that we understand exceed EUR3.2 billion (excluding
lines at Gas Natural and non-European subsidiaries). The company also has short-term committed
-- Our forecast of FFO in the EUR3.4 billion-EUR3.7 billion range in 2012 (excluding YPF and
Gas Natural, which we de-consolidate in our analysis).
These sources compare with the following estimate of liquidity needs:
-- EUR2.7 billion of short-term debt on Sept 31, 2012 (excluding YPF and deconsolidating Gas
-- Our estimate of EUR3.3 billion in capex (excluding YPF, and Gas Natural).Cash dividend
payments, which we believe will be reduced in 2013 following the newly introduced scrip
We understand management is actively monitoring banks credit quality in order to allocate
The stable outlook reflects our opinion that management will be able to execute important
debt reduction measures in the coming few months, which will bring down debt and improve
Repsol's credit ratios. Although we now forecast that year-end 2012 debt will be higher than
previously under our base-case scenario, it should trend down to about EUR8.5 billion-EUR9
billion owing to the planned sale divestment plan, despite management's indication that some
previously announced measures, like the sale of the 5% treasury shares, and the conversion of
the preferred shares into mandatory convertible bonds, are now on hold.
We view an adjusted ratio of FFO to debt of 35%, under our oil price assumption of $90 per
barrel in 2013, to be commensurate with the current rating on Repsol.
We could consider lowering the ratings if adjusted FFO to debt didn't recover in line with
our expectations and fell to less than 30% without any near-term prospect of recovery. Other
risk factors include a material decline in profits from Repsol's downstream business, or
increasing country risk in Spain.
We see rating upside as limited until Repsol has successfully reduced debt by about EUR7
billion. In addition, prospective FFO to debt above 40% on a sustainable basis, and at about
45%, could support a one-notch upgrade. Any upside will, however, also depend on our view of any
improvement in the economy and financing conditions in Spain.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept.
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008