DBRS Assigns Rating of BBB (low) with a Stable Trend to Repsol, S.A.

DBRS Limited (DBRS) has today assigned an Issuer Rating of BBB (low) with a Stable trend to Repsol, S.A. (Repsol or the Company). The rating is supported by the Company’s significant size, integrated operations, geographic diversification and high-quality downstream assets with a dominant presence in the Spanish downstream market. The key challenges include a relatively higher operating cost base at its upstream business, exposure to political risks and realizing envisaged synergies from its acquisition of Talisman Energy Inc. (Talisman). The rating is also constrained by the weakened credit metrics resulting from the additional debt raised for the acquisition of Talisman. In May 2015, Repsol completed the acquisition of Talisman, a Canadian oil and gas producer with assets primarily in Canada, the United States, Southeast Asia and the North Sea, for a cash consideration of EUR 8,005 million for the Talisman shares plus the assumption of associated debt of EUR 3,994 million. Although the acquisition has almost doubled the Company’s production and increased its exposure to geographical areas with greater political stability, the timing of the acquisition has coincided with a weakening price environment, leading to a weakened financial profile. DBRS notes that Repsol’s strong presence in the downstream segment has partially offset the impact of deteriorating cash flow from the upstream segment. However, it is still not sufficient to substantially lift the Company’s weak key credit metrics.

Repsol has undertaken several measures to improve its balance sheet subsequent to the acquisition of Talisman, including the reduction of operating and capital costs, the sale of non-core assets and a reduction in dividends. These measures, along with the strong performance from its downstream segment, have led to improvements in its lease-adjusted debt-to-capital and lease-adjusted debt-to-cash flow ratios for the last 12 months ended June 30, 2016. However, overall, the ratios (including inter-company debt) continue to remain weak, with lease-adjusted debt-to-capital at 41%, lease-adjusted debt-to-cash flow at 6.02 times (x) and lease-adjusted EBIT interest coverage at 0.06x. Repsol expects to raise an additional EUR 700 million in the second half of 2016 by concluding the ongoing asset sale transactions. In addition, DBRS notes that on September 12, 2016, Repsol announced that it had reached an agreement to sell 10% of Gas Natural SDG, S.A. (of which Repsol currently holds 30%) for a cash consideration of EUR 1,901 million; the transaction is expected to close in 2016. Repsol’s liquidity profile is deemed to be adequate with available liquidity of EUR 6,659 million as at June 30, 2016, and includes undrawn credit facilities and cash and cash equivalents of EUR 2,225 million. The Stable trend reflects DBRS’s view that the proceeds from dispositions coupled with cash flow from operations (after adjusting for cash flow from the disposed assets) should be sufficient to fund Repsol’s capital and dividend commitments through 2017 and possibly result in a reduction in Repsol’s indebtedness. However, in the absence of a sustained improvement in oil and gas prices, the Company’s key credit metrics are expected to remain weak. Should oil and gas prices weaken even more, the Company’s credit metrics are likely to come under further pressure, which could trigger a negative rating action by DBRS. Conversely, if the Company is able to materially improve its key credit metrics, a rating upgrade is possible.

Notes:
All figures are in euros unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2016) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.