* Oil prices 40 pct below worst case scenario in strategic
* Analysts see Repsol's cash generation under high pressure
* Shareholders could resist any cut to dividend
By Jose Elías Rodríguez and Angus Berwick
MADRID, Jan 27 Spain's Repsol has no
choice but to deepen investment cuts, hasten asset sales or
slash its dividend if it wants to weather a fall in oil prices
that far outpaces the worst case scenario it based its strategy
on, sources and analysts say.
Those issues are set to feature high on the agenda of the
board of Europe's fifth-biggest oil company by market value when
it meets later on Wednesday, although any decision will likely
depend on complex boardroom politics as well as a meeting with
credit rating agencies expected to take place soon.
Having lagged the rest of the oil industry in slashing
capital spending following the oil price plummet, Repsol said in
October that over the next four years it would sell assets worth
6.2 billion euros ($6.75 billion) and cut its spending on
exploration and production investments by 40 percent.
That strategy, based on an adverse scenario of $50 a barrel,
would generate 10 billion euros of cash by 2020 that would be
used to almost halve debt, protect its investment grade rating
and return 3.6 billion euros to shareholders.
But with oil hitting a 12-year low of $30 a barrel, analysts
estimate Repsol's cash flow would drop by more than three
quarters to below 2.5 billion euros, inevitably forcing a revamp
of its strategy.
"This would roughly match the dividend cash-out in the
period and therefore, we do not discard further divestments
and/or additional cost cutting measures," BPI analysts said in a
BPI also cut Repsol's target price for the end of 2016 from
14 euros to 10.1 euros. Over the last three months Repsol's
share price has fallen by almost 21 percent to 9 euros, against
a 13.5 percent fall in the STOXX Europe 600 Oil and Gas index
over the same period.
Analysts and investors see more cuts to capital spending and
jobs, and an acceleration of planned asset sales as the most
likely options, as Repsol seeks to ease its 13.2 billion euro
But some even say that if cash flow continues to tighten,
the firm may have to consider cutting its sacred
1-euro-per-share dividend, whose yield of 10.29 percent is the
highest of all oil majors, before Royal Dutch Shell's
A source familiar with Repsol's thinking told Reuters the
company considered the dividend and the investment grade rating,
one of the company's red lines, "unsustainable" under the
current circumstances and if no action was taken.
The company is due to meet credit rating agencies to review
its financial situation shortly after it presents full-year
earnings on Feb. 25.
Big Repsol shareholders Spanish lender Caixabank
and Spanish construction firm Sacyr have tended to
pressure the company to maintain the dividend, given both rely
on it for profit.
Caixabank, which has two people on Repsol's board, earned
308 million euros in dividends from its 11.1 percent stake in
2014, about half the lender's profits.
Sacyr, which also has two people on the board, earns 120
million euros from its 8.7 percent stake, of which half is used
to pay off interest and the other half to repay the loan used to
buy the stake, a source familiar with the situation told
Repsol could also sell part or all of its 5.3 billion euros
of shares in Spanish energy company Gas Natural, in
order to cut the debt it accumulated mainly after its $8.3
billion takeover of Canadian peer Talisman in 2014.
"We believe it is becoming more and more likely that Repsol
may need to consider selling at least part of its stake in Gas
Nat to shore up its balance sheet," Filipe Rosa, an analyst at
Haitong Research, said in a note.
($1 = 0.9200 euros)
(Editing by Julien Toyer and Susan Thomas)