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LNG sale brightens Repsol outlook and boosts Shell

Repsol has agreed to sell LNG assets in Latin America to Shell

Spain’s Repsol has struck a $6.7 billion agreement to sell its liquefied natural gas (LNG) export assets in Latin America and a gas-fired power plant in Spain to Anglo-Dutch supermajor Shell. The deal marks a breakthrough in Repsol’s recovery after its Argentine business was nationalised last year and adds to Shell’s growing global gas portfolio.

Repsol’s will sell stakes in Trinidad and Tobago’s flagship Atlantic LNG export plant, the Peru LNG export facility, as well as the projects’ associated marketing and shipping operations, and an 800 megawatt gas-fired power plant in Spain. Shell has also agreed to supply gas to the Canaport LNG import terminal in Canada. Repsol had sought to sell the plant, but struggled to find a buyer amid low North American gas prices.

Shell will pay $4.4bn in cash for the assets and take on liabilities of around $2.3bn, covering $1.8bn in leases for LNG carriers and $500 million in debt.

Repsol says that after taxes and a write-down on the value of the Canaport terminal, the deal will generate $1.4bn. Crucially, the deal will cut Repsol’s net debt in half from around €4.4bn ($5.9bn) to €2.2bn.

After Repsol’s majority stake in YPF was nationalised by the Argentine government last year, credit rating agencies put the company on notice that, unless it dramatically cut its debt, it could see its investment grade credit rating cut to “junk”.

The threat of a downgrade forced Repsol to put its LNG business up for sale. The assets drew more than a dozen bids, including advances from Russia’s Gazprom and French player GDF Suez, before Shell emerged as the winner. The companies expect the deal to be completed in the second half of this year or early 2014. Repsol has now divested more than €5bn in assets, passing its target of €4bn to €4.5bn. This will likely take the threat of a credit downgrade off the table.

“Our outlook on Repsol is likely to be revised to positive upon the completion of any significant disposal, and upgraded to 'BBB' if proceeds are fully utilised for debt reduction,” agency Fitch Ratings said. The other rating agencies are expected to follow suit.

Analysts welcomed the deal. “Almost a year after the expropriation of YPF, Repsol appears to have finally placed the business on a footing that will allow the market to assess its merits without the existential threat posed by the ratings agencies,” Deutsche Bank analyst Mark Bloomfield wrote in a note to investors. “The focus now shifts back to the underlying business where superior volume growth and exploration leverage are clear differentiating factors.”

Repsol plans to spend an average of €2.95bn a year between 2012 and 2016 on its upstream business and aims to increase production from around 340,000 barrels of oil equivalent a day (boe/d) to 500,000 boe/d in that time frame. The company plans to drill as many as 40 wells this year targeting 6 billion barrels of potential resources, with investment focused on North America, Brazil, Norway and Peru.  

Shell has invested heavily in its global gas business over the past few  years, but Latin America remained a glaring gap in its portfolio. This deal fills in that gap and significantly expands its global LNG production capacity.

Shell acquires the right to export around 3.3m tonnes per year (t/y) from Atlantic LNG and 900,000 t/y from Peru LNG, adding nearly 4.2m t/y, or 20%, to its existing global LNG production capacity of 22m t/y. The company expects to add a further 7 million t/y of capacity through its projects under construction in Australia. That will push total capacity to around 33m t/y by the end of the decade.

Exports from Atlantic LNG will initially target the Atlantic basin market, including the growing Brazil and Argentine markets, though the expansion of the Panama Canal, scheduled to be completed in 2015, will open opportunities to ship gas to Asian markets as well. Shell said it plans to market Peru LNG gas to Asian markets.

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