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Repsol to sell $7.1 Billion of noncore assets in cost-cutting drive

October 16, 2015
Chemical Value Chain

Repsol SA said Thursday it will sell €6.2 billion ($7.1 billion) of noncore assets through 2020 as part of a cost-cutting drive, which also includes a significant cut in oil-exploration spending.

The Spanish oil major said it would reduce capital expenditure by 38% from last year’s levels as part of a strategic plan for the next five years. The plan also seeks to cut Repsol’s current €14 billion debt pile by half, even under its worst-case scenario—that the price of Brent remains around $50 per barrel.

The plan aims to keep shareholder returns stable in a scenario of contained oil prices and represents a shift in focus from growth toward increased profitability. The company has expanded aggressively in recent years, a process completed with the $8.3 billion takeover of Canadian rival Talisman Energy Inc. in May.

“We don’t need growth now. We’re not going to grow,” Chief Executive Josu Jon Imaz told analysts and reporters. “Cutting debt is our top priority now.”

Repsol said Wednesday net profit this year will fall to between €1.25 billion and €1.5 billion from €1.61 billion last year, reflecting lower oil prices and tighter refining margins.

Net profit will also be hit by €450 million of provisions after tax this year to account for the lower value of North American gas, power and oil assets. Earnings before interest, taxes, depreciation and amortization will be between €5.2 billion and €5.45 billion this year, and they should double from that level by 2020, Repsol said.

The strategic plan was made public after weeks of cutbacks by the company in reaction to declining profit. Like its rivals, Repsol has been hurt by a 50% slump in oil prices over the last 12 months. The company has lost a quarter of its market value during that stretch.

Repsol’s shares fell again Thursday after the plan was unveiled. Analysts said the company’s expectation that Brent oil prices will rise to an average of $65 next year and $90 by 2019, from the current $49, is too optimistic in a market that remains oversupplied.

“We expect oil prices materially lower than the company’s base scenario,” Goldman Sachs analysts said in a research note. They reiterated their sell rating on Repsol’s stock.

Refining margins, which are typically compressed when oil prices rise, are another source of concern. The company said it sees an average of $6.4 per barrel through 2020, an estimate called “too bullish” by Goldman Sachs in light of a $3.8 average since 2010.

Mr. Imaz, the CEO, defended the margin guidance, saying Repsol will benefit from a weaker euro and specific competitive advantages through 2020. He said the company has plenty of non-core assets it can sell, especially as oil prices bounce from current levels.

As an example of asset sales to come, Mr. Imaz cited a deal announced Wednesday with Armstrong Oil & Gas. Under the terms disclosed, the privately held U.S. company will raise its interest in several Alaskan drilling areas where it works with Repsol, in exchange for cash, assets and various other commitments.

Barclays analysts estimate the deal, combined with an agreement to delay planned drilling in coming months, might lower Repsol’s capital expenditure by close to €1.5 billion.

Repsol said this month it plans to cut 1,500 positions, 6%, of its staff, over the next three years. In September it sold part of its piped gas business to Gas Natural Distribution and Redexis Gas for €651.5 million and its 10% stake in oil pipeline operator Compania Logistica de Hidrocarburos for €325 million.

Mr. Imaz said Thursday that Repsol might fully divest itself from the piped gas business. But he ruled out a possible sale of Repsol’s 30% stake in gas firm Gas Natural SDG SA, a possibility discussed for years. He said he is “comfortable” with the stake and that, given that Repsol’s production is now 70% gas, such a stake provides the company with a variety of future options.

By David Román

Source: Wall Street Journal

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