- Repsol has a rock solid balance sheet following the compensation received from YPF expropriation.
- Repsol is looking for acquisitions in OECD countries that offer good long-term oil production growth prospects.
- A full takeover of Talisman or some of its assets seems to be within the company's goals.
A few months ago, I suggested Repsol (OTCQX:REPYY) as a good income investment within the energy sector. The company is an integrated global energy company based in Spain, operating in the Upstream and Downstream sectors throughout the world. Repsol has a market capitalization of about $32 billion, and trades in the U.S. in the over-the-counter market.
Since Repsol was able to reach an agreement with the Argentinean government over YPF's (NYSE:YPF) expropriation for compensation of about $5 billion, the company has been clear about its reinvestment strategy into the OECD countries to offset exposure to emerging markets. Following the cash received from the disposal of Argentinean bonds, Repsol's balance sheet became very solid and the company has about $10 billion to invest in 2-3 upstream oil-producing assets. Repsol prefers oil rich assets with exploration upside that could help the company create value and reach returns on capital employed above its 8% target.
A potential takeover target seems to be Talisman Energy (NYSE:TLM), given that according to Bloomberg Repsol is considering an acquisition of the Canadian company. Repsol released a statement referring that it is studying a number of different transactions, which include possible transactions with Talisman. Repsol has also said that it has taken no decision yet. For its part, Talisman has acknowledged discussions with Repsol. Following this statements, Repsol's share price has dropped while Talisman's rose by 13%, suggesting that investors attribute a strong probability that some sort of deal could go ahead.
A full takeover of Talisman seems to be a risky move for Repsol, given the relatively large size of the company (more than $10 billion in market capitalization) and its quite extensive and diversified portfolio of Exploration & Production [E&P] assets. Talisman has been in the process of selling some assets to lower debt and focus on a smaller number of core assets in the Americas. This means Repsol may give priority to cherry picking some assets like those located in North America, which should provide a good fit to most of the criteria set for a deal. In terms of output mix, more than 50% of Talisman's output is located in OECD and the company is a well-regarded operator in most of its key assets, namely in unconventionals which is an area where Repsol wants to improve its expertise. Additionally, the geographic overlap between the companies is limited so it would give Repsol a different risk profile than it currently has. Even though a full takeover is not impossible, it seems more likely that Repsol will only buy some assets as most of Talisman's output is dominated by gas.
Although Talisman appears to be too much large considering Repsol's acquisition budget, a full takeover is not completely dismissed as Repsol would most likely sell some assets at a later stage. Moreover, Repsol's 30% stake in Gas Natural (OTCPK:GASNY) is worth more than $9 billion and could be sold to finance a potential deal with Talisman. Talisman's shareholders are mainly institutional investors like Franklin Resources or Carl Icahn, therefore the bid price should play a key role in any potential deal launched by Repsol. If Repsol is able to acquire Talisman or some of its assets at a reasonable price, it seems to be a good fit for Repsol as it would enhance its long-term prospects and give it a lower risk profile, probably leading to higher valuation multiples in the long haul. Repsol is currently trading at about 14x its 2014 estimated earnings and offers a dividend yield above 5% considering only its ordinary dividends, being therefore quite attractive for long-term investors.
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