The price of shares in Repsol, Spain’s flagship integrated oil major, has more than halved this year. That’s due to Spain’s sovereign debt crisis and bad news from Argentina, where the populist government expropriated Repsol’s $10.5bn stake in Argentine national oil firm YPF, robbing Repsol of more than a fifth of its earnings.
Yet there’s still plenty of upside here. Repsol’s upstream operations (the business of getting oil out of the ground) are the envy of the industry. Production is set to rise by 7% a year and surpass 500,000 barrels per day by 2016, with the reserve replacement rate (which measures the firm’s success at finding new reserves to replace the ones it is extracting) exceeding 120%.
Most of these fields are located overseas, in places such as Venezuela and the Gulf of Mexico. Big development assets are also situated in Brazil. By contrast, the downstream unit (the business of selling oil-derived products) is focused mainly on Spain. Repsol also owns a 30.8% stake in Gas Natural (worth about €2.5bn), along with a highly-profitable liquefied natural gas (LNG) division.
Repsol (Spain: REP), rated OUTPERFORM by Sanford Berstein.
The biggest headache (since the loss of YPF) has been net debt (debt minus cash), which is now too high. At €13.5bn (as at June), it equates to a gearing ratio of about 50%. The board is doing everything possible to maintain the firm’s investment-grade credit rating. It plans to sell non-core assets and treasury stock worth up to €4.5bn.
After the $540m disposal of its Chilean liquefied petroleum gas (LPG) distribution unit a fortnight ago, €1.85bn has already been realised. Another option is to sell the LNG unit, which would slash debts related to financing LNG tankers.
On a sum-of-the-parts basis, I value the whole group at about €32bn. Deducting the debt gives a value of €16 a share. The City is pricing in a dividend cut from the current €1.16 per share to €0.90. This would still give an 8% yield, which is underpinned by robust cash flows from Bolivia and Peru, as well as restarted production in Libya.
Repsol is, of course, exposed to volatile commodity prices (oil in particular) and variable oil refining margins. It also has significant assets in various geopolitically volatile regions. Yet all in all it seems far too cheap on a forward earnings multiple of seven – especially as around three-quarters of the group’s worth is situated outside of Spain and should not therefore be directly affected by the nation’s debt crisis.
Rating: BUY at €13.00
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634.