(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 divestment plan.
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 bank lines.
-- 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 Natural).
-- 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 dividend.
We understand management is actively monitoring banks credit quality in order to allocate bank deposits.
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. 28, 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008