DBRS Morningstar Confirms Repsol, S.A. at BBB with a Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the Issuer Rating of Repsol, S.A. (Repsol or the Company) at BBB with a Stable trend. Repsol’s rating is underpinned by its business risk profile, significant size, integrated operations, geographic diversification and high-quality downstream assets. Key constraints include its exposure to political risks and its weaker financial risk profile relative to its business risk profile. The Stable trend underscores DBRS Morningstar’s expectation that under base Brent oil price and Henry Hub natural gas price assumptions of USD 60/barrel (bbl) and USD 2.75/thousand cubic feet (mcf), respectively, for 2019 and 2020, Repsol will maintain its financial risk profile.

Repsol’s operating performance over the last 12 months has been in line with the updated strategic plan laid out in June 2018. Oil and gas (O&G) production was higher due to new short cycle and higher margin projects in service. Compared with 2017, the Company’s reserve replacement ratio was higher, and its reserve replacement costs were lower in 2018. Operating performance at the Company’s downstream segment has also been relatively stable apart from a few temporary plant closures.

DBRS Morningstar expects the Company’s earnings and cash flows to increase over the next two years as the Company benefits from (1) an increase in production from higher margin O&G assets; (2) an increase in earnings from its refining business as its existing refineries are well equipped to benefit from the new International Maritime Organization 2020 regulations restricting the use of sulphur; and (3) earnings from its investment in new low-carbon businesses. Repsol generated adequate cash flow in the first half of 2019 (H1 2019) to fund its capex, dividends and a material portion of its share buybacks despite a reduction in O&G prices and refining margins. The strategic plan forecasts capex (including the low carbon emission business) of ~EUR 11.0 billion and dividends and buybacks of ~EUR 2.50 billion in 2019 and 2020. The Company expects to fund both from operating cash flow and available cash balances in a USD 50/bbl price environment.

Repsol’s financial risk profile has remained relatively stable; however, the lease-adjusted net debt-to-cash flow ratio for the last 12 months ended 30 June 2019 has weakened marginally due lower cash flows in H1 2019. DBRS Morningstar expects the Company’s key credit metrics to improve modestly over the next two years based on an expectation of higher earnings and relatively flat debt levels. Repsol’s liquidity profile is also deemed to be adequate with available liquidity of EUR 7.6 billion as at 30 June 2019.

Repsol’s rating is notched downward for political risks, primarily because of its exposure to Venezuela. However, while Venezuela does account for a significant portion of the Company’s reserves, its contribution to the Company’s overall production and cash flow has also been declining. If the Company successfully delivers on its strategic plan over the next 12 months, the likely improvement in the Company’s business and financial risk profile could soften the impact of the notching on the Company’s rating. In addition, supportive credit metrics and O&G prices could result in a positive rating action. DBRS Morningstar believes that the quality of earnings at the Company’s downstream segment, along with the existing cash balances, provide adequate support to the rating even in the event of a reduction in O&G prices.

Notes:
All figures are in euros or U.S. dollars unless otherwise noted.

The principal applicable methodologies are the Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2019) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers. These can be found can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include the company’s annual account and any public information available. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Giuseppe Fresta, Vice President
Rating Committee Chair: Victor Vallance, Senior Vice President
Initial Rating Date: 16 September 2016
Last Rating Date: 9 October 2018

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