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Repsol YPF: turning the corner

Its first-quarter financial results suggest Spain's Repsol YPF might have finally turned the corner, writes NJ Watson

WHEN Repsol YPF revealed in February that 2007 profits were down by 16% on the year, despite record oil prices, but then described how business was about to improve, the collective groan from the analyst community was almost audible: Repsol YPF has made upbeat strategy presentations before – and all too often failed to deliver.

But on 13 May, the Spanish energy group announced a confusing, yet surprisingly healthy, set of first-quarter figures – confusing because the firm provided several pro forma profit figures to reflect changes in its business and healthy because the figure that most analysts identified as the important one showed net profit of €0.811bn ($1.25bn). While virtually flat from the year-earlier period, it was above the consensus forecast.

The headline figure the company gave was even better, showing a rise in net profit of 36.5% from the year-earlier period, to €1.2bn. That figure included €236m in non-recurring items, particularly accounting and tax gains linked to the sale of a 15% stake in its Argentine subsidiary, YPF, and a €165m revaluation of its inventory.

What's changed?

So what has changed in Repsol YPF's business and will the improvement continue?

One of the most important changes is a decision to reduce its exposure to Latin America, the source of many of its problems – production declines at ageing fields, contract changes by governments seeking higher rents for the state and the heightened regulatory uncertainty that characterises resource nationalism. The company now wants 55% of its assets to be located in OECD countries by 2012, 31% in Latin America, and 14% in Trinidad & Tobago and elsewhere. That compares with 54%, 38% and 8%, respectively, in 2007.

The company has made particular headway in reducing its exposure to Argentina, where it bought former state-owned oil company YPF in 1999. During the first quarter, Repsol YPF completed the divestment of a 14.9% stake in YPF, raising $2.2bn for the company to invest in acreage outside the region. On 15 May, chief executive Antonio Brufau said the firm would press on with its plan to float another 20% of the subsidiary on the Buenos Aires stock exchange in the second half of the year. That might raise another $3bn. "The company has turned a corner in its efforts to diversify away from troublesome Argentina," says David Stedman, an analyst at Daiwa Institute of Research.

By excluding Argentina from its upstream division, Repsol YPF's overall production was about 4% lower in underlying terms in the first quarter, which is an improvement from the 8% overall decline recorded over the whole of 2007. However, it still compares unfavourably with that of other oil majors.

To address this problem, at its February strategy presentation for 2008-12, Brufau outlined plans to invest €32.8bn – €11.7bn more than the budget set in its previous strategic plan, from 2005. The Spanish firm will focus on 10 projects that will be responsible for 75% of the group's projected growth over the next few years. These include five large upstream projects: Brazil's Carioca oilfield; the Shenzi and Genghis Khan fields in the Gulf of Mexico; the Libya I/R field; Algeria's Reggane gasfield; and Block 39 in Peru. The list also includes three large downstream projects in the Iberian Peninsula.

With 70% of investment to be focused on three core exploration areas – North Africa, northern Latin America and deep-water areas in the Gulf of Mexico and Brazil – Repsol YPF aims to add 400m barrels of oil equivalent (boe) by 2012 at the same time as reducing the "geological risk profile of its exploration portfolio".

The Carioca oilfield, in which Repsol YPF holds 25%, is a notable recent success. In April, Haroldo Lima, head of ANP, Brazil's upstream regulator, blurted out that the field's reserves might amount to 33bn boe, which would make Carioca the world's third-largest field. Operator Petrobras, which holds 45% (the UK's BG Group holds the remaining 30%), swiftly qualified that statement by saying it would take until July at least to drill deep enough to make an accurate estimate. But even if just 10% of Lima's reserves figure is proved, then Repsol YPF would be adding 0.825bn boe. That would increase the company's reserves by a third.

"With this find, Repsol YPF solves a large part of its reserves-replacement problem for the next few years and could increase the life of its reserves to nine years and approach the level of other integrated oil companies, which have a life of 10-12 years," says Alvaro Navarro, an analyst at the Spanish investment bank Ahorro Corporacion Financiera.

Repsol YPF's first-quarter figures also show an improving trend in the refining and marketing segment. Operating profit from the refining division was up by 2% as a strong performance in petrochemicals offset a contraction in the company's Spanish refining margins, which fell by 19% compared with first-quarter 2007.

Set for a strong second quarter

Higher prices for products sold in Argentina since August were the main reason behind the strong performance of YPF in the period and prices there are set to continue rising. In addition, with the group expected to benefit from higher prices downstream in Brazil from June, Repsol YPF looks set for a strong second quarter and, says Stedman, "the long period of dull operational and financial performance may finally be coming to an end."


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