Time For Repsol ‘s Plan B

BARCLAYS | Having largely pre-released numbers with its trading statement the focus from Repsol’s 4Q results is on whether or not the group will be able to retain its Investment Grade credit rating, given the prevailing environment. This does appear to be a priority for the group with the announcement of a 40% cut in the final dividend to EUR0.3/sh and although not confirmed in the release Spanish newspaper, Expansion, is reporting that Repsol may monetise part of its Gas Natural stake. These are for us both signals that the management team and board are being pragmatic about responding to the downturn. This combined with reductions in capex and a still strong refining margin environment should enable the group to be cash flow break even post dividends at close to $40/bl, although whether these steps are enough to keep the investment grade credit rating at all agencies is still unknown. With Repsol’s stock trading at just over 0.4x book value we see many of the issues that Repsol faces as priced in and overall we view the update as positive for Repsol. The challenge remains that rebuilding investor confidence is likely to be work in progress for some time, hence our Equal Weight despite significant upside to our EUR16/sh price target.

Key points:

  • Interim dividend of EUR0.3/sh proposed, down 40% y/y with a scrip alternative still being offered. This implies a full year dividend of EUR0.77/sh down 20% y/y.
  • Repsol announces the disposal of its UK offshore wind business to China’s SDIC Power for EUR238m. This takes the company’s finalised disposals to more than EUR2.5bn over the past five months with the latest transaction set to complete during 1H16.
  • Adjusted net income of EUR461m was up 25% y/y and in-line with the EUR450m announced with the trading statement on 28 January.
  • An upstream loss of EUR276m was in-line with the trading statement with Talisman posting an adjusted net loss of EUR115m.
  • Downstream net income of EUR495m was in-line with the trading statement and up 34% y/y given higher volumes and margins.
  • Repsol booked EUR2.4bn of impairments during the quarter principally in the upstream and partially offset by a EUR155m net gain from the tender offer of Talisman bonds.
  • Cash flow from operations of EUR2.1bn was up 100% y/y and outperformed the movement in earnings. There was a EUR1.3bn release of working capital during the quarter and excluding these movements cash flow from operations of EUR836m was broadly flat q/q.
  • Organic cash capex in the quarter of EUR1.2bn was up 61% y/y following the integration of the Talisman assets with cash capex for the full year of EUR4.1bn up 59% y/y.
  • At the end of the year net debt of EUR11.9bn was down EUR1.2bn q/q given positive free cash flow in the quarter and the proceeds from disposals.
  • Net debt to capital of 29.4% at the end of the year was down 0.5pp q/q.