DBRS Confirms Repsol, S.A. at BBB (low), Changes Trend to Positive

DBRS Limited (DBRS) confirmed the Issuer Rating of Repsol, S.A. (Repsol or the Company) at BBB (low) and changed the trend to Positive. The rating confirmation reflects the Company’s significant size, integrated operations, geographic diversification and high-quality downstream assets with a dominant presence in the Spanish downstream market. The Positive trend acknowledges (1) a successful reduction of operating and capital costs; (2) a reduction in debt and increase in cash balances; (3) improving credit metrics; and (4) an improving price outlook for Brent oil benchmark. Key challenges include a relatively higher operating cost base at its upstream business and exposure to geopolitical risks, especially in Venezuela.

Over the last 18 months, Repsol has successfully integrated the operations of Talisman Energy Inc. (Talisman) which has almost doubled the Company’s production and increased its exposure to geographical areas with greater political stability. Over the same period, the Company has reduced operating and capital costs and expects to generate EUR 2.1 billion in savings in 2017, relative to 2015. Repsol has reduced its average annual capital expenditure (capex) to ~EUR 3.6 billion and has also reduced its dividend payments. These measures, along with the strong performance from its downstream segment, have allowed the Company to reduce its free cash flow break-even price (including capex and dividends) to USD 42/barrel (bbl) in 2016.

Repsol has disposed non-core assets of EUR 5.1 billion since 2015, and has used part of the proceeds to reduce debt. This, coupled with stronger earnings caused by higher oil and gas (O&G) prices and lower operating costs, have led to a material improvement in the Company’s key credit metrics. For the last twelve months (LTM) ended June 30, 2017, Repsol’s lease-adjusted debt-to-cash flow ratio was 4.83 times (x) (2015: 7.05x) , lease-adjusted debt-to-capital ratio was 39.7% (2015: 43.4%) and lease-adjusted EBIT interest coverage ratio was 3.12x (2015: 0.90x). Although the lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios are outside the BBB rating category, the Company’s strong business risk profile is expected to continue to offset the impact of weaker credit metrics on the overall rating.

Based on Brent oil price, Henry Hub natural gas price and refining margins assumptions of USD 55/bbl, USD 3/thousand cubic feet and USD 6.40/bbl, respectively, for 2018 and 2019, DBRS expects the Company’s key credit metrics to improve through the period as Repsol operates within cash flow. The Company’s liquidity profile is also deemed to be adequate with available liquidity of EUR 7.53 billion as at June 30, 2017, which includes undrawn credit facilities and cash and cash equivalents of EUR 4.71 billion.

Overall DBRS believes the credit profile of Repsol has improved over the last year as it has integrated the operations of Talisman, made material progress in reducing operating and capital costs, especially at its upstream segment and reduced debt. The Company has displayed the willingness to prioritize balance sheet strength and has publically stated its commitment to maintain an investment-grade rating. DBRS also believes the that quality of earnings at the Company’s downstream segment along with the existing cash balances provides Repsol with adequate financial flexibility to operate without material increase in debt levels even in the event of a reduction in O&G prices. DBRS might consider a rating upgrade over the next 12 months if the improvement in the Company’s key credit metrics is sustained and the O&G pricing environment remains supportive.

Notes:
All figures are in euros unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.

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