Repsol to Increase Natural Gas Production

| About: Repsol S.A. (REPYY)

Spain’s largest integrated oil and gas company Repsol YPF (REP) entered into an agreement with the Bolivian Government to develop the Caipipendi block. This block is located in the Tarija and Chuquisaca regions, south of Bolivia. The block includes the Margarita and Huacaya fields, the latter being one of the 5 largest gas finds made worldwide in 2008.

The block contains resources of 3.7 trillion cubic feet, which is equivalent to three years of Spanish gas demand. It will be developed and exploited by a consortium made up of Repsol (37.5% – the operator), BG (37.5%) and PAE E&P Bolivia (25%).

Repsol will invest 400 million euros (nearly $600 million) and raise its gas production sevenfold to reach a daily production of 14 million cubic meters in 2013. The reources will be added to the company’s reserves in the coming months.

We believe that this agreement will help the company to increase its proved reserve base, which has had a declining trend in the past few years. Repsol’s year-end 2005 proved reserves were roughly 35% below the year-earlier level. Proved reserves dropped by more than 20% in 2006. In 2007 and 2008, the company’s proved reserves declined by a further 8% during each year.

We are maintaining our Neutral recommendation for the stock, given the company’s weak reserve base, poor reserve replacement track record and higher unit finding and development costs.