Repsol wants to raise 6.2 billion euros selling assets. The Spanish oil major is also slashing costs and spending. The measures will ease balance-sheet strains at $50 oil and reflect welcome realism. But the targets are ambitious and assume half the dividend is paid in shares.
Can it deliver? Repsol’s $8.3 billion purchase of Talisman of Canada in 2014 left it saddled with debt and with additional exposure to the weakened oil price. Hoping to restore its financial strength, Repsol will cut capex by as much as 38 percent. It also aims to save 2.1 billion euros in costs by 2018. That should enable the company to cover investments and dividends at $60 oil for 2016 to 2017, before taking the divestments into account. That $60 oil estimate is similar to a target set by France’s Total, but Repsol sees it coming in at $45 from 2018 to 2020, or an average of $50 for the period.
Thanks to Repsol’s potent refining and marketing division, it can break even at a lower crude oil price than many rivals. Repsol also argues that it hasn’t committed to big exploration projects and that it can easily turn off exploration spending on shale oil and gas projects.
The debt reduction plan gives Repsol a good chance to maintain an investment-grade credit rating. Even at $50 oil, Repsol expects to make some 10 billion euros of extra cashflow between 2016 and 2020. Debt would fall into line with peers by 2017/2018, according to estimates by analysts at Jefferies. But Repsol’s hopes are also pinned on being able to raise 6.2 billion euros in asset sales. True, it has given itself five years and includes assets not linked to the oil price. But Repsol’s peers are flooding the market with asset sales, so it may still be a big ask.
This will hurt growth. The planned disposals will remove around 15 percent of Repsol’s asset base. Taken with the other cuts to capex, production is likely to stay flat at around 700,000 to 750,000 barrels a day until 2020.
At least return on capital should improve. But Repsol’s guidance also assumes half of the dividend is paid in shares, against just over 60 percent currently. This is dilutive. A further dose of realism might have seen Repsol paying a smaller dividend in cash.