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Repsol tuning up

The Spanish major has tightened its belt, lifted its profitability and positioned itself to capitalise on an evolving market

In the headlong race to cut companies back to a size that sits comfortably with a world of $50 a barrel, Repsol chief executive Josu Jon Imaz is doing as well as anybody and possibly better than most.

He's been at the helm for three and a half years and the latest six-month numbers show that, if anything, he's speeding up the process of reconfiguration. Under Imaz, the group has taken a more pessimistic view of the long-term outlook than many other companies and is being redesigned for a future of $40/b.

The numbers tell the story. First-half net income was €1.056bn ($1.25bn), up 65% over the comparable period in 2016. Adjusted net income rose by 23% and ebitda by 29%. The once struggling upstream business made a substantial contribution, posting €339m in net profit while sitting on rich discoveries in Alaska's North Slope and in Trinidad and Tobago.

As for the downstream business—Repsol's flagship sectorit achieved a net profit of €0.93bn, roughly equal to the first half of 2016. This was achieved despite major maintenance shutdowns at refineries in Cartagena, Bilbao and A Coruña. Downstream is the group's major generator of cash and should remain so for the foreseeable future. And it's where the company is investing most of its capital expenditure. In Peru, a launch of a new low-sulphur diesel unit at the La Pampilla refinery in Lima boosted production.

The group is particularly proud of the efficiency of its refineries. The Cartagena plant, for example, produces the same level of emissions as it did before a top-to-bottom upgrade when it was processing half the current volume of barrels. Meantime, the all-important refining margin was $6.60/b, compared to $6.30 in 2016 and, in better times, $8.50/b in 2015.

Investor darling

During the six months when Brent averaged $51.70/b and Henry Hub $3.30 per million British thermal units, these are the kind of numbers that shareholders love. And it explains why Repsol has become the darling of the Madrid stock exchange. In early August, the share price stood at €14.40, up more than 36% in the past 12 months. The group's current market capitalisation stands at €22.29bn.

One of the main attractions to institutional investors is the "efficiency and synergies programme", which continues to hit its straps. At the start of 2017, Repsol set a full-year target of booking an annual €2.1bn in "sustainable savings" from the sale of assets deemed non-strategic, but the group got there nearly half a year ahead of schedule. This follows another impressive year when the Imaz regime achieved savings from the divestment programme of €1.6bn, a whopping 150% ahead of the original goal.

There's nothing investors like more than a chief executive who exceed his targets.

One happy consequence is that group debt is in freefall. In the 12 months to the end of June, net debt plummeted by 36% to €7.48bn, from €11.71bn at the end of last year. In one astute debt-slashing move, Repsol bought back $2bn in bonds with a sticker of 6% and saved itself millions in repayments.

36% - Rise in Repsol's stock price in past 12 months

And as the market in the financing of cleaner energy infrastructure continues to develop rapidly, it looks as though Repsol's successful—but initially criticised—issue in mid-May of $0.56bn in green bonds, the first floated by an oil and gas major, was ahead of the times. While the bond market generally is in the doldrums, the global market for green issues has grown by over 100% in each of the past two years and is heading for more than $206bn by the end of 2017.

As Canadian law firm Aird & Berlis explained in a study in July: "The aggregate trend is clear: corporate and government issuers are using green bonds to finance the transition to a decarbonised economy." Royal Bank of Canada says the boom in green bonds is mainly driven by heavyweight institutional investors seeking to divest from fossil fuels amid a dearth of credible green investment options.

Creative rationalisation is Imaz's hallmark. He joined the group in 2008 as chairman of Basque-based subsidiary Petronor under an efficiency-oriented mandate and was so successful that in short order he was appointed director of the new energies division, taking over the management of the industrial complexes among other functions, and was handed the top job in early 2014, just before the slump in the markets. Since then he's been shuffling around the group's portfolio of companies and offloading assets in such a way, as a spokesman explained, "that the group is monetising assets that aren't linked to the price of oil and therefore aren't being sold in a depressed market". These include pipelines and other utilities.

Latin American boost

Repsol's long-standing Latin American connections have helped the upstream business get back on track. By lifting output in Peru and starting up production in Brazil's Lapa reservoir as well as from new wells in Sapinhoá in the Santos Basin about 310km off the coast of Rio de Janeiro, the group met its average production target in the first half of the year at 0.685m barrels of oil equivalent per day.

Repsol continues to have an inside track in Bolivia where it is a supporter of president Evo Morales's ambitions to develop a full-scale regional energy hub supplying neighbouring countries. A long-standing operator of the prolific Margarita-Huacaya field that last year produced 2.39bn cubic metres of gas, the group has just signed to explore a new block in the south where the biggest producing fields are located. With mineral rights for 31 blocks already in hand, six in exploration and 25 in development or production, the group enjoys a highly favourable position in the central South American nation.

And Repsol has plenty of barrels in the ground. In March 2017, Repsol and Denver-based Armstrong Oil and Gas announced a major hydrocarbon discovery on Alaska's North Slope. Estimated at 1.2bn barrels of recoverable light crude, it's the largest in 30 years on American soil. Although the group says the find is not necessarily transformative for the business, it's close enough to existing infrastructure to reduce the capital costs required to develop it and, as a spokesman says, "it validates six years of hard work in exploration". Armstrong will operate the field.

There's nothing investors like more than a chief executive who exceeds his targets

In Russia, after sitting on its pockets for a few years, Repsol struck an arrangement in June with Gazprom Neft that may yet turn out well—though the tightening of US sanctions on Russia is a headwind for some investors. Their jointly owned Eurotek Yugra has agreed to explore seven blocks in a relatively underdone region of West Siberia that is said to have significant potential. Three years ago, Repsol made two hydrocarbon discoveries in the Karabashsky 1 and 2 blocks with recoverable resources estimated at 240m boe.

The group has long experience in Russia and remains hopeful for the future. "We have the expertise and we know what the land is like," says the spokesman.

Gas is also proving a boon. In early June, Repsol and its 70% partner BP followed up the Alaska discovery with the former's biggest gas find in the past five years, an estimated 2 trillion cubic feet in Trinidad and Tobago lying in two wells, Savannah and Macadamia, about 80km offshore. The find is the equivalent of two years of Spain's gas demand. Drilling is expected to start in the second half of 2018 and production the following year.

Imaz is also looking to the future in retail. In July, the group signed a deal with Spanish retail giant El Corte Ingles, the biggest department store chain in Europe, to develop what the partners intend to be the largest network of convenience stores in its home country. Under the brand Supercor Stop&Go the stores will be rolled out in Repsol-branded service stations. With 58 Stop&Go stores installed already, Repsol has already made a start. But the potential is great—the company has almost 3,500 retail outlets dotted across the country.

The longer term might not rely so much on oil and its fuels. Whether fortuitously or not, Repsol now finds itself in a good position to embrace a low-carbon future. Adding in the Trinidad and Tobago discovery, approximately 65% of the group's total production and 75% of its reserves are in gas, which Imaz has identified as the fuel of tomorrow.

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