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Isaac Middendorf

REP AT A GLANCE

P/E ► 7.27 AVG EV/EBITDA ► 2.90 AVG ROA ► 12.1% AVG ROE ► 28.2% AVG Interest Coverage Ratio ► 18.6 AVG

 

 

 

 

 

 

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. In 2008 the company had a production capacity of 960,000 barrels of oil equivalent per day and almost doubled its reserve replacement ratio to 64%, up from 35% in 2007. It is also the largest energy company in Latin America in terms of assets, with assets worth €49.43 billion in 2008.^[1][2][3] From 2006 to 2008 the company discovered 840 million barrels of petroleum, which was close to seven times its output in 2008. During the same year 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.^[4]

In 2008 Repsol took advantage of record high oil prices, which reached $109 per barrel in the third quarter, bringing total revenue for the company to €61 billion, an increase of 8.2% as compared to 2007. However, growth in revenue was slowed by a 5% drop in hydrocarbon production and a decrease in demand for petrochemicals.^[5] Between 2006 and 2008 Repsol revenue grew by 9.7% with only minimal growth between 2006 and 2007 of 1.5%.^[5][6]

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. In 2007 Repsol initiated projects on fourteen new discoveries in Libya, Algeria, Argentina, Bolivia and Brazil.^[7] The company 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.^[8]

Company Overview

Repsol YPF is an international energy company headquartered in Madrid, Spain. It is an integrated oil and natural gas company with operations in over 30 countries. It sells gas under the brands Campsa, Petronor and Repsol.^[9]

The company's core business is divided into three segments: upstream, downstream and Liquefied Natural Gas (LNG). Also reported are YPF (which is considered an operative shareholding) and Gas Natural SDG (a non-operative shareholding). These segments are comprised of gas and oil exploration and productions, refining, marketing, chemical production, LNG, and external holdings and investments.

Business and Financial Metrics

Net Revenue and Operating Income for Respol YPF 2006-2008^[10][11]

2007 Total Revenue by Geography^[12]

Total Revenue for 2008 was €61 billion, an increase of 8.2% from 2007.Growth in revenue was supported by record high oil prices of $109 per barrel in the third quarter.^[10] The rise in revenue was also supported by the sale of 14.9% of YPF for $2.24 billion.^[13]

Hydrocarbon production (crude, liquids and natural gas) decreased by 5% from 1,039 thousand barrels of oil equivalent per day (K Boed) in 2007 to 952 K Boed in 2008. The drop in production was mainly due to contractual variations in Dubai, Venezuela, Bolivia and the largest drop was in Argentina. The drop in Argentina was mainly due to the breakage of the company's Magallan polyduct.^[14] The reserve replacement ratio in 2008 was 64%, up from 35% in 2007. Between 2006 and 2008 the company discovered 840 million barrels of petroleum. In 2008 it was a part of three of the five largest oil discoveries in the world and had proven reserves of 1.06 billion barrels of crude.^[2][3] Sales of petrochemicals fell from 4.9 million tons (Mt) in 2007 to 4.11 Mt in 2008, a decrease of 16.1%. The fall was mainly due to lower sales, shrinking demand worldwide and decreases in the retail price of derivative products.^[15]

Adjusted operating income fell by 14.26%, as compared to 2007, to €5.1 billion. This was mainly attributed to the accounting impact of inventory losses of €1.05 billion as compared to inventory gains of €66 million in 2007.^[16]

Liquefied Natural Gas (LNG) sales increased by 4.2% from 180.1 trillion British thermal units (TBtu) in 2007 to 187.7 TBtu in 2008. The rise in sales was mainly due to increases in natural gas prices, rising demand in new markets, and higher pool prices in the Spanish power market.^[17]

Sales of Oil and Petrochemical Products for Respol YPF 2006-2008^[18]

Revenue for 2007 was €56 billion up 1.6% from 2006.^[11] The rise in revenue was fueled by strong euro against the dollar and by high international gas prices. The price of crude oil moved from $60 per barrel at the beginning of the year to an annual maximum of $99 per barrel. Increases in prices were attributed to greater control of supply by OPEC due to low production by non-OPEC countries in addition to growth in demand from emerging countries.^[19] Proved oil reserves were 951.6 million barrels of oil and 8.2 trillion cubic feet in 2007.^[9] Operating income was €5.81 billion down 4.75% from 2006.^[11]

Total revenue for 2006 was €55.1 billion up 7.5% from 2005.^[11] This was due mainly to an increase in crude oil and natural gas prices as compared to 2005.^[20] Crude oil prices were pushed to a record high of $78 per barrel in August due mainly to worries of a similarly destructive hurricane season as in 2005. Average prices for the year were about $66 per barrel.^[21] Income from chemicals increased by 14.6% to €353 million due to an increase in international margins and improved sales, which increased by 2.9% to 4,778 thousand tonnes.^[20] Revenue was also driven by increases in income from Gas Natural SDG due to power activity and commercialization of natural gas in Spain.^[20]

Investments and Divestitures

In February of 2008 Repsol sold a 14.9% stake in YPF to the Peterson Group for $2.24 billion dollars.^[13] Investments in exploration totalled €326 million with 56% of that being spent on development in the Gulf of Mexico, Trinidad and Tobago.^[23] €242 million was invested in liquified natural gas activities, mainly in the development of a Canaport ragasification plant and a Peru LNG project.^[24] €1.5 million was invested in marketing and refining activities with the majority spent on ongoing refining projects, upgrading operations and installations, safety and the environment, fuel quality and conversion.^[25] Gas Natural SDG investments were €894 million due to the purchase of Unión Fenosa in July and gas distribution and power activities.^[26]

In 2007 Repsol investments totaled €5.1 billion. The majority was due to the purchase of a 28% stake in an oil field in the Gulf of Mexico, construction of the regasification plant in Canaport, Canada, development of the LNG project in Peru, and other refining projects.^[8] Divestment for the year totaled €1.3 billion with the selling of non-strategic assets. Notably, the sale of 10% of its capitol holdings in Compañía Logística de Hidrocarburos (CLH) to Deutsche Bank for €353 million, the sale of fuel commercialization activities in Chile to the Colombian company Organización Trepel for $210 million and additional purchases of oil fields in OECD (Organization for Economic Cooperation and Development) countries.^[27]

Business Segments

2008 Net Income By Segment^[18]

Upstream Activities (8% of 2008 Revenue)^[10]

Upstream activities involve exploration for new sources of oil and natural gas, and production of these resources. Exploration projects are underway in the Gulf of Mexico, northern Latin America, North Africa, Trinidad, and Tobago.^[28] Total revenue in 2008 for upstream projects was €4.9 billion.^[10] Hydrocarbon production (crude, liquids and natural gas) was 952 K Boed for 2008.^[29]

Downstream Activities (70% of 2008 Revenue)^[10]

Downstream activities involve refining and marketing of gas, oil and petrochemical products. In 2008 these activities generated €42.5 billion.^[10] As of 2007 Repsol operated nine refineries: five in Spain, three in Argentina and one in Peru with a total capacity of 1,162 thousand barrels per day.^[30] Sales of oil products was 42,862 thousand tons (kt) through an international network of 6,514 service stations, while the amount of crude that was processed was 39 Mtoe. Sales of petrochemical products was 2,602kt.^[31]

YPF Activities (16.5 % of 2008 Revenue)^[10]

YPF activities involve gas and liquid production; primarily oil products, such as gas, gasoline and diesel products. For 2008 revenue from YPF operations totaled €10.1 billion.^[10]

Liquified Natural Gas (LNG) (2.5% of 2008 Revenue)^[10]

LNG activities account for natural gas sales as well as power generation. In 2008 LNG activities generated €1.54 billion through the production of 315 million standard cubic feet per day (scfd) of natural gas.^[10]

Gas Natural (6.9% of 2008 Revenue)^[10]

Gas Natural is a company in which Repsol holds a 30.85% stake and has joint ventures for numerous gas projects. The Gas Natural group is involved with the supply, transport, distribution and commercialization of gas and electricity. The company is located in Spain and distributes gas in Argentina, Brazil, Colombia, Mexico, Puerto Rico and Italy. In 2005 the group entered into an agreement with Repsol to jointly develop liquefied natural gas businesses.^[32] In 2008 activities involving Gas Natural generated €4.2 billion.^[10]

Key Trends and Forces

Volatility of Liquid Fuel Prices Makes Net Revenues Difficult to Predict

The company's income is highly dependent upon commodity prices of oil, gas and other derived products. Large fluctuations can affect margins and overall income dramatically. Though the average price per barrel in 2008 was up by 37% as compared to 2007, income due to fluctuations in prices over that time decreased by €325 M. In the third quarter of 2008 oil prices for Repsol were at $109 per barrel, but plummeted in the fourth quarter to $48 per barrel, which was also a drop of 43.5% as compared to the fourth quarter of 2007.^[34]

As an example of volatility, in 2008 the United States, one of the largest consumers of fuel in the world (23%), had fuel consumption decline by almost 1.3 million barrels per day, a drop of 6.1% as compared to 2007. This drop was influenced by the rapid rise in retail prices to record levels and the slowing economy. This is a notable decrease since the United States represents roughly twenty-five percent of the total liquid fuel consumption in the world. During 2008 U.S. crude oil prices were extremely volatile and difficult to predict, reaching near $124 per barrel and by the end of the year moving below $58 per barrel.^[33]

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. In 2007 international revenues comprised 40% of Repsol's total annual revenue.^[12]

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.^[35] 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.^[36] 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.^[37]

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.^[38]

Severe Hurricanes Can Damage Refineries and Decrease Production

In addition to political changes Repsol is susceptible to hurricanes and inclement weather. In 2008 the Gulf of Mexico had 16 named storms, eight were hurricanes and five of them were category 3 or higher.^[39] Hurricanes Gustav and Ike were estimated to have exposed more than 2,000 oil and gas platforms in the Gulf of Mexico to hurricane conditions with winds over 74 miles per hour. 60 platforms were completely destroyed and were responsible for producing over 13,000 barrels of oil and 96.5 cubic feet of natural gas per day. 31 platforms had extensive damage requiring 3-6 months to repair while another 93 sustained moderate damage that required 1-3 months to repair.^[40] This is especially notable with Repsol increasing its presence in the Gulf of Mexico with an investment of over €1.7 billion in a single oil field there.^[14]

Margins Across Operations Dependent on Changes in Product Demand

Repsol YPF Distribution of Proved Reserves 2007^[41]

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. Before this news at the end of 2008 the company's refining margins were at $8.6 per barrel up from $6 per barrel in 2007.^[42]

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.^[42]

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.^[43] Total revenue for 2008 was $367.1 billion.^[44]

• 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 and had total revenue of $458.4 billion in 2008.^[45]

• 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.^[46] It has 67,000 employees and conducts business in more than 100 countries. Total revenue for 2008 was $273 billion.^[47]

References

1. ↑ Respol Company Website, accessed on March 15, 2009
2. ↑ ^{2.0 2.1} 2008 Fourth Quarter Report Pg. 22
3. ↑ ^{3.0 3.1} Repsol Says 2008 Reserve Replacement Ratio 64 pct, Reuters.com, February 11, 2009
4. ↑ Repsol YPF Nearly Doubles Reserves Replacement in 2008 Latin America, Herald Tribune, May 12, 2009
5. ↑ ^{5.0 5.1 5.2} Repsol 2008 Fourth Quarter Report
6. ↑ Repsol 2007 Consolidated Management Report
7. ↑ Repsol 2007 Annual Report Pg. 32
8. ↑ ^{8.0 8.1} Repsol 2007 Consolidated Management Report Pg. 24
9. ↑ ^{9.0 9.1} Yahoo Finance Company Profile-Repsol YPF Accessed on April 7, 2009
10. ↑ ^{10.00 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.08 10.09 10.10 10.11} Repsol 2008 Fourth Quarter Report Pg. 18
11. ↑ ^{11.0 11.1 11.2 11.3} Hoover's Financials- Repsol YPF, accessed on March 15, 2009
12. ↑ ^{12.0 12.1} Repsol 2007 Consolidated Management Report Pg. 23
13. ↑ ^{13.0 13.1} 2008 Repsol Fourth Quarter Report Pg. 1
14. ↑ ^{14.0 14.1} Repsol 2007 Consolidated Management Report Pg. 37
15. ↑ Repsol 2008 Fourth Quarter Report Pg. 6
16. ↑ 2008 Fourth Quarter Report Pg. 1
17. ↑ Repsol 2008 Fourth Quarter Report Pg. 5
18. ↑ ^{18.0 18.1} Repsol 2008 Fourth Quarter Report Pgs. 6-8
19. ↑ Repsol 2007 Consolidate Management Report Pg. 22
20. ↑ ^{20.0 20.1 20.2} Repsol 2006 Consolidated Management Report Pg. 21
21. ↑ Repsol 2006 Consolidate Management Report Pg. 20
22. ↑ Repsol 2007 Annual Report
23. ↑ 2008 Fourth Quarter Report Pg. 4
24. ↑ 2008 Fourth Quarter Report Pg. 5
25. ↑ 2008 Fourth Quarter Report Pg. 7
26. ↑ 2008 Fourth Quarter Report Pg. 10
27. ↑ Repsol 2007 Consolidated Management Report Pg. 39-40
28. ↑ Repsol 2007 Consolidated Management Report Pg. 77
29. ↑ Repsol 2008 Fourth Quarter Report Pg. 25
30. ↑ Repsol 2007 Consolidated Management Report Pg. 38
31. ↑ Repsol 2008 Fourth Quarter Report Pg. 26
32. ↑ Wright Investor Services, Company Profile Reports- Gas Natural SDG, accessed on March 15, 2009
33. ↑ ^{33.0 33.1} Global Crude Oil and Liquid Fuels Energy Information Administration, Short-Term Energy and Summer Fuels Outlook April 14, 2009
34. ↑ Repsol 2008 Fourth Quarter Report Pg. 3
35. ↑ Reuters.com Repsol plans talks with Ecuador to save contract November 3, 2008
36. ↑ MercoPress.com, Repsol Accepts Ecuador New Contract Rules for Oil Sharing, March 16, 2009
37. ↑ Oil Week Magazine, Ecuador Terminates Contract With Spanish Oil Company Repsol The Canadian Press October 31, 2008
38. ↑ Energy Current Shell, Repsol May Exit From South Pars Block 14, May 5, 2008
39. ↑ Azadeh Ansari and Reynolds Wolf, An Unusually Destructive Hurricane Season, CNN.com, December 1, 2008
40. ↑ Minerals Management Service Report MMS, Completes Assessment of Destroyed and Damaged Facilities from Hurricane Gustav and Ike, November 26, 2008
41. ↑ Repsol 2007 Consolidated Management Report 2007 Pg. 31
42. ↑ ^{42.0 42.1} Radowitz Bernd, Repsol: Mothballing Refinery Aims to Defend Margins Wall Street Journal, April 16, 2009
43. ↑ Hoovers.com BP Company Information, accessed on March 25, 2009
44. ↑ Google Report on BP Plc, accessed on March 25, 2009
45. ↑ Google Report on Royal Dutch Shell, accessed on March 25, 2009
46. ↑ Chevron Company Website, accessed on April 7 2009
47. ↑ Google Report on Chevron Corporation, accessed on March 25, 2009