Is Beaten Down Repsol A Bargain?

| About: Repsol S.A. (REPYY)

Madrid based Repsol YPF SA (OTCQX:REPYY) may now be a buy. Beset by the perfect storm of the euro-crisis, loss of Libyan production, and rumors of nationalization of its Argentine subsidiary YPF (NYSE:YPF), the stock is flirting with 52-week lows.

Yet, this is a company in a swirl of change as it completes asset sales, partners with China offshore Brazil, beefs up exploration and production, and grows its already formidable LNG business.

Company Overview

With a market cap of $24 billion, Repsol is a large integrated international oil company with an historically strong presence in Spain, and Latin America. It holds a 54% stake in YPF - Argentina's largest oil company. Repsol is active in over 30 countries around the world.

Upstream the company is actively looking, worldwide, for new oil and gas reserves. Midstream, Repsol engages in refining, petrochemicals and transportation. Downstream it operates over 6,400 service stations in Spain, Portugal, Italy, Peru and Argentina.

Attractive Financials

Repsol's trailing P/E is 10.6, price/sales ratio 0.34, and it has a price/book ratio of 0.88. Comparable numbers for Exxon show trailing P/E at 10.2, price/sales ratio 0.94, and price/book ratio of 2.64 (Source: Yahoo Finance).

Several Large Oil Discoveries

Repsol has achieved exploration and production success recently in Brazil, Argentina, and Africa. In Brazil, the company, with its new partner Sinopec (NYSE:SHI) - Sinopec bought in for $7.1 billion in 2010 - has made a huge offshore oil discovery. Just recently Repsol found a nearly billion barrel shale oil field in Argentina. In offshore West Africa the company recently discovered large oil bearing strata in Sierra Leon. Offshore Brazil and Africa are regarded as two of the world's few remaining oil frontiers.

In the U.S. Repsol has bought into the Mississippian Formation in Oklahoma, and Kansas, in a joint venture with SandRidge Energy (NYSE:SD). See Investing In The Mississippi Lime - Is It The 'New Bakken'?.

Venezuelan and Cuban Ventures

Venezuela has some the world's largest heavy oil deposits along with super-giant natural gas fields and Repsol (which seems to get along with Hugo Chavez) is there to partner with it in both oil and gas.

Cuba thinks it has billions of barrels of oil offshore. Apparently Repsol's geologists agree; the company has just begun drilling in deep water 50 kilometers north of Havana - the first of at least three planned wells. The drilling is controversial for environmental and political reasons in the U.S.

Reserve Replacement Ratio Now Over 100%

In 2008 Repsol's replacement ratio of proven reserves was only 65%. By 2010 it was 131% (see here - end of article). YPF, Repsol's Argentine subsidiary, has been a major factor, increasing reserves over 160%. And, as 2012 discovery announcements show, Repsol appears to be able to more than replace production with new discoveries in the future.

Liquefied Natural ((NYSEMKT:LNG)) gas Growth

Almost overnight LNG shipping has become one of the hottest energy markets in the world. Soaring day rates now have LNG tankers fully booked. Japan, Korea, and China, are all big importers of LNG. Don't let the low U.S. price for natural gas fool you. While U.S. prices are at record lows - just a little over $2/MMBtu - in Europe natural gas sells for 10/MMBtu and in Asia for $15/MMBtu (see here).

Repsol, the world's fourth largest LNG shipper, saw LNG income surge 367% in 2011 - boosted by exports from its newly operational facility in Peru. The company has exclusive rights to market output of and owns a 20% stake in the Peruvian facility. The Peruvian gas is now going to high-priced Asian markets.

Not everything is rosy on the LNG front for Repsol. In 2009 the company completed an LNG import facility - Canaport - in St. John, New Brunswick. Canaport is rumored to be operating at only 30% capacity. Piping gas from the nearby Marcellus shale makes a lot more sense than importing it from Qatar via tankers.


Repsol's dividends have been erratic. Bloomberg figures the yield to be around 6%. The company says it plans to raise dividends in 2012.

Don't let Repsol's subsidiary YPF SA's dividend yield of over 12% tempt you, it may be on its way out. Argentina has asked the company to scrap its dividend in order to boost exploration and production.


Repsol has a lot going for it. The Brazilian asset sale to Sinopec added $7.1 billion to the coffers - money that funds new exploration and production. This has born fruit with enormous discoveries in offshore Brazil, and Argentina. Libyan production is recovering and the massive shale oil discovery in Argentina, is promising. And remember: Repsol seems to be one of the few companies that has a good relationship with Venezuela, with its huge oil and gas reserves.

The company's reserve replacement ration has gone positive and the LNG business is turning profitable.

Issues remain of course: YPF must deal with an unpredictable Argentine government and Canaport is only marginally profitable - at best. Yet, with its stock close to 52-week lows, Repsol YPF SA may be worth considering.

Disclosure: I am long SD.

Disclaimer: This article is informative only - not buy or sell advice. Do your own research and due diligence before investing.