Repsol YPF (MCE:REP)

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Isaac Middendorf

Alan Ibrahim

Repsol YPF is an international energy company with operations in over 30 countries. It is primarily involved in oil and liquefied natural gas (LNG) exploration, refinement and distribution. It is one of the ten largest oil companies in the world with almost 37,000 employees. The company has a production capacity of 960,000 barrels of oil equivalent per day. It is also the largest energy company in Latin America in terms of assets.

From 2006 to 2008 the company discovered 840 million barrels of petroleum and during the same time it was a part of three of the five largest oil discoveries in the world and proven reserves totaled 1.06 billion barrels of crude.^[1]

Repsol focuses on new well production and acquisitions to support revenue growth and relies on income primarily from the refinement and sale of natural gas, oil and oil derivatives through its international retail network of 6,514 service stations. The company has also made large investments in oil fields in the Gulf of Mexico, a natural gas project in Peru, and additional purchases of oil fields across the world.

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Business Growth

FY 2009^[2]

• Net income fell 39% to €1.6 billion.

Key Trends and Forces

Volatility of Liquid Fuel Prices Makes Net Revenues Difficult to Predict

Operations in Regions with Changing Political Environments May Lead to Fluctuating Contracts and Business Opportunities

With operations and retail facilities across the world Repsol production and sales are susceptible to changing political environments. International revenues comprised 40% of Repsol's total annual revenue. Repsol extracts 65,000 barrels of oil per day from Ecuador and in 2008 Ecuador moved to terminate its contract with the company because it was no longer satisfied with the share of income it received from Repsol.^[3] To renew the contract Repsol vowed to increase investment in Ecuador to $315 million. The company was also forced to pay $447 million in a back windfall-profits tax and Ecuador will receive 70% of Repsol's future windfall profits.^[4] Additionally one month earlier Repsol was forced to switch to a fee-for-services contract and had to return 936,000 disputed barrels of crude oil worth $100 million.^[5]

Also in 2008, Repsol and Royal Dutch Shell (RDS'A) were warned by the U.S. government to exit a natural gas project worth $10 billion in Iran. The government stated that companies which had investments over $20 million in Iran would be banned from raising capitol in American financial markets under the 1996 Iran Libya Sanctions act. Repsol was forced to pull out of Iran in order to maintain funding from American markets.^[6]

Margins Across Operations Dependent on Changes in Product Demand

With operations in over 30 countries Repsol operating margins can be drastically effected by changes in international markets. On April 16 2009, Repsol became the first company to shutdown a whole European refinery because of weak margins. The company closed its Cartagena refinery, which has a crude-processing capacity of 100,000 barrels per day, and it will stay closed until margins improve. The drop in margins was attributed to a deepening recession in Spain which has decreased demand for oil products, especially gasoline. During the shutdown the refinery will be upgraded to focus on diesel and jet fuel production which are in higher demand.

Due to poor margins several European companies have been forced to cut refinery output. Total S.A. (TOT) (french oil company) cut back 15% to 20% of its French plants, while Petroplus Holdings AG cut production of its oil refinery, Teesside in the U.K., by 35% to 40%. Benchmark refining margins in Europe declined from $8 barrel in the fourth quarter of 2008 to $7 a barrel in the first quarter of 2009 and have declined further to $5.5 per barrel at the beginning of the second quarter in 2009.

Competition

• BP (BP)

BP is the third largest integrated oil company in the world and a direct competitor of Repsol in most business areas. The company's main focus is in oil and natural gas with some activities centered around alternative energies. Its products are marketed in over 100 countries and the company operates more than 24,000 gas stations worldwide.

• Royal Dutch Shell (RDS'A)

Royal Dutch Shell is a global group of petrochemical companies which focus primarily on oil and natural gas exploration, production and refining. Its is a competitor of Repsol in most business areas, yet has formed joint ventures and collaborations with the company as well. It has over 100,000 employees in 110 companies.

• Chevron Corporation (CVX)

Chevron Corporation manages subsidiaries and affiliates involved in petroleum, chemical and mining operations, as well as power generation and energy services. It competes with Repsol mainly in retail liquid petroleum sales with a network of 22,000 service stations, selling under the brands: Chevron, Texaco and Caltex. It has 67,000 employees and conducts business in more than 100 countries.

References

1. ↑ Repsol YPF Nearly Doubles Reserves Replacement, Herald Tribune, May 12, 2009
2. ↑ Repsol 2009 Annual Report pg. 25
3. ↑ Reuters.com Repsol plans talks with Ecuador to save contract November 3, 2008
4. ↑ MercoPress.com, Repsol Accepts Ecuador New Contract Rules for Oil Sharing, March 16, 2009
5. ↑ Oil Week Magazine, Ecuador Terminates Contract With Spanish Oil Company Repsol The Canadian Press October 31, 2008
6. ↑ Energy Current Shell, Repsol May Exit From South Pars Block 14, May 5, 2008