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Repsol sows seeds for organic growth

From small things, good things grow, says Antonio Brufau. Repsol’s chief talks to Anthea Pitt, about the strengths of not-so-big oil

Antonio Brufau adds a third shot of coffee to his double espresso, and takes a sip. Less than an hour earlier, at the World Petroleum Congress (WPC) in Doha, Repsol’s chairman and chief executive called on the industry to craft a new future; one with both frugality and sustainability at its core. His WPC address marked the end of a hectic year for Brufau; this cafecito is well-earned.

For Repsol – and for the firm’s head – while 2011 has been eventful, the second half of the year has been especially sweet. Less than two months after Muammar Qadhafi’s ouster, Repsol’s Libyan fields are producing at an average of 170,000 barrels a day, about 60% of their pre-war levels (PE 11/11 p18).

The firm recently won significant new acreage in Alaska, beefing up its position in the North Slope. It has reaffirmed its commitment to Bolivia’s gas play and is pushing ahead with the Margarita development. Soon, it hopes to spud an exploration well in the Cuban sector of the Gulf of Mexico (GOM); and it is set to enter Russia’s onshore through a joint venture with Stockholm-based Alliance Oil.

Dead cow delivers

It has seen off Pemex and Sacyr Vallehermoso’s attempted boardroom coup over dividends and earnings (PE 10/11 p10). At the beginning of December, the Spanish firm raised €850 million ($1.14 billion) on the German bond market. On top of this, Repsol, through its YPF unit, made one of 2011’s biggest discoveries, identifying recoverable reserves of 927 million barrels of oil equivalent from just 4% of its holding in Argentina’s Vaca Muerta (dead cow) shale formation.

Sweet indeed. Vindication perhaps of Brufau’s stewardship of Repsol. He says: "This business is very, very competitive. Besides that, the elements are different. You are managing four or five different businesses. The downstream business has nothing to do with trading, which has nothing to do with the upstream. You need the best person at the top of each [unit] – I think I’ve done a good job of that." Once you have the right people you have to trust them, he says.

Brufau points to Repsol’s 2006 decision to buy BP’s 28% stake in the Shenzi field (PE 7/09 p8) as an example. "This was my most difficult decision," he says. "Our people in Houston were promising Shenzi had more reserves than the seller claimed. BP said the field had 600 million barrels [in total resources], but our technical people were saying 900 million barrels. It made no sense – normally, the seller is the one talking an asset up. But, if I did not follow the suggestion of my people in Houston, then all I could do was close the office. So, I said yes and put everyone to work.

The Houston office proved themselves, he says. "Now we have a real office and a real asset base in North America, thanks to them." It brought a change in the firm’s culture. With its acquisition of Argentina’s YPF in 1999, it seemed that Repsol was aiming for a place with the supermajors. No longer.

"That mentality, that we had to compete with the big guys, was a big mistake," Brufau says. "It was a waste of money and time. It was a crazy thing, being big for the sake of it. I don’t like this, it means just chasing reserves replacement barrels [rather than focusing on value]."

He may be right. When compared with ExxonMobil, the difference is clear. Repsol has a market capitalisation of €27.4 billion ($36.4 billion), compared with ExxonMobil’s $360 billion; its reserves base (excluding Vaca Muerta) is 1.1 billion boe, compared with ExxonMobil’s 24.8 billion boe. In the first nine months of 2011, Repsol pumped 491,000 boe/d, while ExxonMobil produced 4.282 million boe/d.

Scaling back started shortly after Brufau joined the firm. In 2006, Repsol began floating a portion of its YPF holding, eventually reducing its stake to 57.4%. This also saw the Argentine business separate itself from the rest of the firm’s operations. "My best decision … was dividing the business and changing the company’s mentality so we thought smaller," he says. "Now, Argentina thinks just of Argentina. It is a mature province, so we talk of how fields are working there. The discovery at Vaca Muerta wouldn’t have been possible if we had been thinking globally. And in the rest of the world? We are a small company.

"You see," he adds, "the industry thinks size is important – but size does not matter. When you think smaller, you are more intelligent, more flexible. I am not criticising the sector, but it has difficulties thinking of the future." Ensuring Repsol’s future has been one of the former banker’s priorities. While he sees difficult years ahead for Spain, for Europe and for the US, Brufau says Repsol will weather the storm. The market seems to agree. Repsol’s shares have outperformed those of peers such as Total and Eni.

There are some worries. The Argentine state’s golden share in YPF leaves Repsol vulnerable to the country’s shifting politics, say some analysts. But Brufau sees this differently, saying the country’s stake grounds Repsol in Argentina, making it a local company, not a Spanish one.

Building up a large cash reserve isn’t to the taste of all investors, either. But Brufau says liquidity it critical. "Everyone was talking production when I joined Repsol. This surprised me. What about margins? Maybe it is because I come from a background in accounting and banking, but you see the value of money. Some people become crazy when you put €6 million in the bank every year. They lose sight of longevity, they lose the idea of value."

Brufau stresses that maintaining organic growth is crucial not just when the economic outlook is tough, but to ensure the long-term future of a company. Recessions make take-over targets cheaper, giving firms a chance to expand through acquisitions. But Brufau believes internal growth and financial prudence – having access to enough cash to fund two to three years of both capital expenditure and dividend payouts – is vital. As is finding niches – deep-water, unconventional or mature plays, for example – and flourishing within them.

This means the oil industry’s highest-profile prizes – contracts in Iraq – aren’t on Repsol’s agenda. "There are plenty of places that are better for us to put our money than Iraq – there you have one field producing 1 million b/d and that’s it. There is Africa, Asia, Latin America," Brufau says, adding: "Being small is very important. There is still a place for us. And from small things? Good things grow."

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