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Repsol at war with itself amid shareholder disputes

Shareholder wrangling and a dip in profits and production mark a difficult year for Spain’s Repsol

Repsol is at war with itself – and in these days of volatile markets, resource nationalism, soaring project costs and global instability, that’s a severe handicap for an oil company.

The dispute pits Repsol’s two largest shareholders, Mexican national oil company Pemex and Spanish construction group Sacyr Vallehermoso, against the management, led by chairman and chief executive Antonio Brufau.

On 2 September, Pemex said that, in accordance with a shareholder agreement reached with Sacyr on 29 August, it had doubled its stake in Repsol to 9.4%. The two together now hold 29.8%, just below the 30% threshold that under Spanish law necessitates a formal take-over offer.

Dividend pressure

Sacyr’s motives are clear – it needs the dividend payouts that Brufau has been busy cutting and diverting into exploration technology (PE 6/10 p40). Sacyr acquired its Repsol stake in 2006 in a highly leveraged buyout, which involved a €5 billion ($7 billion) loan, and relies on the shares to bolster its weak profits, which have slumped 61% in the last year.

By co-ordinating its voting with Pemex, Sacyr hopes to put pressure on Brufau into paying out more dividends and perhaps selling Repsol’s 31% stake in Spanish gas firm Gas Natural. This, in turn, would lift Repsol’s share price, which trades at a discount to its peers.

Analysts say Pemex’s reasons are less clear cut, especially given Mexico’s tight finances and heavy oil-sector investment requirements to reverse falling output. Pemex has stabilised oil production at 2.6 million barrels a day (b/d), but is aiming to boost that to 3 million b/d by 2015 by moving into deep water. A Pemex spokesman said the firm regards the alliance with Sacyr as a way to "leverage the technology Repsol has ... to shore up projects such as Chicontepec and in deep waters" (PE 5/11 p30).

Keep Repsol Spanish

Such benign motives and reassuring comments about the commitment of Pemex and Sacyr to keep Repsol Spanish will go some way to mollifying the government, but they probably won’t be enough to head off inquiries. Repsol has asked the Spanish energy regulator, the CNE, to look into the alliance because of the influence Pemex will have over Gas Natural, which is part of a regulated sector. And on 6 September, a minority shareholders’ group, AEMEC, said it has asked Spain’s securities watchdog, the CNMV, to investigate the pact.

While the Socialist government has so far stayed largely neutral on the shareholder scrap, the CNE has until early December to decide whether or not to study the pact – just weeks after a November general election that the opposition Popular Party, which has already indicated it doesn’t like Sacyr’s deal with Pemex, is expected to win.

"A defeat of the Socialists will make it very difficult for the CNE to turn a blind eye to the shareholder pact," said Bruno Silva of Iberian investment bank Banco BPI. He reckons Repsol could be seeking a white knight to save it from the clutches of Sacyr/Pemex, with the two most likely candidates mentioned in the press being Sinopec of China and Russia’s Lukoil.

Whatever the ultimate fate of the alliance, with Brufau enjoying strong support from other shareholders, "a confrontation seems imminent", predicts IHS Global Insight.

A difficult time

All this comes at a difficult time for Repsol, which has some serious issues to address. On 28 July, it announced a set of financial figures that were generally depicted by analysts as weak, but at least a bit better than expected.

Its second-quarter earnings fell by 7.3%, to €485 million, compared with the year-earlier period as production took a hit from strikes in Argentina and civil war in Libya. Although the 12.9% fall in production, to 296,000 barrels of oil equivalent a day, was offset by increased downstream activity, refining margins were lower during the period.

The group’s portfolio is essentially exposed to Spain and Peru in the downstream, and to Central/South America and Africa upstream. Consequently, 2011 promises to be a difficult year. Strikes are continuing at its YPF subsidiary in Argentina (in which it now holds 57.4% after selling 26% over the past year for about €3 billion), which are expected to reduce output there by 3%; while Libyan operations have been shut in since March and there’s no sign yet of production resuming (although in September, Repsol sent a delegation to Tripoli to discuss resuming operations as soon as possible).

Signs are more hopeful over the longer term, however. In its strategic plan for 2010-14, the company is aiming for production outside Argentina to increase at a compound average growth rate of 6.8% a year boosted by Bolivia, Peru and, in particular, Brazil.

A boost from Brazil

In Brazil, last October Repsol agreed an alliance with Sinopec to create one of Latin America’s largest privately owned energy groups, valued at $17.8 billion (PE 11/10 p36). Under the terms of the deal, Repsol Brasil will carry out a capital increase worth more than $7.1 billion, which Sinopec will subscribe in its entirety, giving Repsol 60% and Sinopec 40%.

For Repsol, the deal will provide massive funds to fully develop reserves in Brazil, one of the world’s exploration hot-spots since the discovery of massive offshore pre-salt resources. "We’re delighted to share Brazilian development projects with a partner with recognised prestige in the sector like Sinopec," Brufau said of the deal.

Repsol, in partnership with state-run Petrobras, has a stake in some of the larger deep-water pre-salt blocks, including 25% in BM-S-9, which holds the Guara and Carioca fields. Estimates of recoverable oil at Guara are between 1.1 billion and 2 billion barrels, and 765 million barrels at Carioca. Repsol expects equity production of more than 136,000 b/d by 2018-20 from its existing Brazilian holdings.

The unconventional option

Then, like every self-respecting oil company these days, Repsol is entering the unconventional scene. According to the US Energy Information Administration, Argentina has 774 trillion cubic feet (cf) of technically recoverable shale gas, putting it just behind China and the US. In December, YPF discovered an estimated 4.5 trillion cf of tight gas in the south of Loma La Lata, in the Neuquen basin, in a 100% owned field.

Then in May, YPF found 150 billion barrels of shale oil in the Vaca Muerta formation in northern Loma La Lata, whose flow rates compare favourably with the Bakken and Eagle Ford shales in the US. With at least another nine exploration wells to be drilled this year in the Neuquen, at a cost of about $270 million, YPF will be at the "forefront of the deployment of oil from unconventional sources outside North America", says Banco BPI’s Silva.

Less sexy, but no less important to Repsol’s bottom line, is the downstream segment, where refinery upgrades are expected to add $2-3 a barrel to squeezed margins. The company is adding 125,000 b/d to its Cartagena refinery at a cost of €3.25 billion, and a new coker facility at its Bilbao refinery at a cost of €850,000. Both Spanish investments should be completed by the fourth quarter, providing an extra €600 million a year of earnings from 2012.

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