Repsol (OTCQX:REPYY) is a relatively large energy company based in Spain, which has increased its upstream operations significantly with the recent purchase of Talisman Energy. Therefore, it's significantly exposed to oil prices and should benefit from a possible rebound in oil prices over the next few months. Meanwhile, it offers a very attractive dividend yield above 6%, which is sustainable even at current low oil prices.
Repsol is a Spanish energy company with operations in more than 40 countries around the world. Its origins date back to 1927 and the company had ups and downs throughout its history, like the acquisition of YPF in 1999 followed by the Argentine government expropriation in 2012.
Repsol has a market capitalization of about $20 billion and trades in the U.S. on the over-the-counter (OTC) market. Its main shareholders are Caixabank (OTCPK:CAIXY) with a stake of 10% and Sacyr (OTC:SYRVY) with 8.3%.
It has an integrated business model, with operations across the value chain of the energy sector. Its core businesses are upstream and downstream operations, and it has about 2.4 billion barrels of proved oil reserves. Repsol's upstream operations include the exploration of crude and natural gas, and Repsol recently bought Talisman Energy for $8.6 billion. Following the expropriation of YPF, Repsol had a strong balance sheet with a good cash position enabling it to bid for Talisman Energy.
This acquisition was announced in December 2014 and completed in May 2015. It increased Repsol's oil reserves and annual production, especially in North America, and established the company as one of the world's leading energy groups. It has a goal of generating synergies and improved efficiencies across the group, worth a combined $2.3 billion per year by 2018.
Due to the acquisition of Talisman, Repsol's oil production increased by 57% in 2015, reflecting the large size of this acquisition. Its upstream workforce has doubled in size with this acquisition and has increased Repsol's assets in politically stable countries. Repsol's downstream activities involve the supply and trading of crude oil, oil refining, the sale of petroleum products, beyond other activities.
In its downstream operations, Repsol invested over €4 billion ($4.3 billion) to upgrade its refineries over the past few years, which are now some of the most complex and efficient in Europe. Repsol owns five refineries in Spain and one in Peru. Its major maintenance has been completed for all of its refineries and now Repsol is in a position to fully benefit from its refining conversion capacity.
Financial Overview & Dividends
Regarding its financial performance, Repsol has been negatively affected by low oil prices since mid-2014. Like for many of its peers, its revenues and profits have declined considerably over the past couple of years, even though its integrated business model has allowed for some diversification benefit. Its downstream operations have benefited from higher refining margins in Europe, helping to smooth the oil price decline impact in the group's financial results.
Indeed, its downstream activities had a very good year in 2015, boosted by higher refining margins in Europe. Repsol's refining margin in Spain was $8.5 per barrel, more than double compared with the previous year. However, oil prices were about half of the average level in 2014, impacting its revenues negatively.
Its EBITDA increased slightly in 2015, a very good achievement compared to most of its peers. This is justified by the strong increase of EBITDA in its downstream operations, which was more than enough to compensate the decline in upstream. Nevertheless, it reported a net loss of $1.3 billion for the year, compared to a profit of $1.7 billion in 2014. During the first nine months of 2016, Repsol's financial performance has remained resilient, with EBITDA up by 4.8% to $3.8 billion and net income increasing by 34% to $1.2 billion.
Regarding its strategy, Repsol announced in October 2015 a divestment plan of €6.2 billion ($6.6 billion), to be completed during 2016-2020. This plan has rendered almost €5 billion ($5.35 billion) so far, with the reduction of its stake in Gas Natural (OTCPK:GASNY) the biggest divestment to date. Repsol still has a 20% stake in Gas Natural, thus it can beat its divestment goal if it decides to sell more of this stake. Its downstream unit has been the other target for sales so far.
Even though Repsol wants to maintain an attractive shareholder remuneration policy, as part of its balance sheet de-risking plan, the company announced, related to its 2015 results, a cut on its dividend of 20% to improve its cash flow metrics. Its goal was to preserve an investment grade credit rating following the acquisition of Talisman. Its dividend related to 2015 earnings stood at €0.758 ($0.81) per share. At its current share price, Repsol offers an attractive dividend yield of 6.3%. However, investors should take into account that the Spanish dividend withholding tax rate is 19%, reducing a little bit of its dividend appeal.
Additionally, Repsol has a dividend scrip program, meaning that shareholders can choose to receive dividends either in cash or new shares. For shareholders that choose cash dividend, this will result in a dilution of their positions, but for small investors this should not be worrisome. Going forward, Repsol's dividend growth is dependent on higher oil prices that can boost its upstream results and on its balance sheet management, reflecting its goals of deleveraging or returning cash to shareholders. Indeed, Repsol's priority should remain to strengthen its balance sheet given that, according to analysts' estimates, its dividend should remain practically unchanged for the next couple of years.
Repsol has a very good cash flow generation capacity, even in the current challenging operating environment for its upstream operations. In 2015, its cash flow from operating activities was above $5.5 billion. Additionally, Repsol claims that the group is free cash flow positive at a $40 per barrel oil price (about $60 for the upstream unit), one of the lowest in the sector. This means that the company has a good financial flexibility even at a low oil price, providing a good support for its dividend and for debt reduction.
This FCF breakeven at a low oil price is possible, given its sizeable cut on investments, with capital expenditures cut by about half compared to its 2014 levels for 2016 and 2017. In the next couple of years, Repsol's dividend and capex should be completely financed by its FCF generation, providing a good base for growth if oil prices rebound.
Regarding its balance sheet, Repsol's net debt amounted to less than $11 billion at the end of September 2016. Its indebtedness has been reduced significantly over the past year by about 25%, showing its efforts to retain an investment grade credit rating. Its net debt-to-EBITDA ratio stood at 2.1x, compared to 2.5x a year ago. This financial leverage ratio is higher than for some of its peers, but is at an acceptable ratio and further balance sheet deleveraging should not be necessary. This is another supportive factor for its dividend going forward.
Repsol is an interesting play on higher oil prices, offering at the same time a very attractive dividend yield of 6.3%. Its timing of the Talisman acquisition was not perfect, but Repsol adapted its business quite rapidly to lower oil prices and much of its deleveraging efforts appear to be already completed. Therefore, its relatively strong balance sheet and good cash flow generation capacity make Repsol's yield sustainable and a good play for long-term, income-oriented investors.
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