DBRS Upgrades Repsol, S.A. to BBB, Trend Changed to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating of Repsol, S.A. (Repsol or the Company) to BBB and changed the trend from Positive to Stable. DBRS had previously indicated that it may consider a rating upgrade if the improvement in key credit metrics is sustained and the oil and gas (O&G) pricing environment remains supportive. The rating upgrade acknowledges the improvement in the key credit metrics, which have exceeded DBRS’s expectations, and an improved outlook for O&G prices. Repsol’s business risk profile and rating are underpinned by its significant size, integrated operations, geographic diversification and high-quality downstream assets. While relatively weaker, the Company’s financial risk profile has also improved due to higher O&G prices and a reduction in debt. The Stable trend underscores DBRS’s expectation that under base Brent oil price and Henry Hub natural gas price assumptions of USD 65/barrel (bbl) and USD 3/thousand cubic feet (mcf) respectively for 2019 and 2020, Repsol should generate adequate cash flow to largely meet its capital expenditure (capex) and dividend requirements.

While higher O&G prices have helped, the rating upgrade is primarily driven by the material strides made by Repsol in improving its operating and financial risk profile over the last two years. As part of its strategic plan, Repsol has (1) generated sustainable operating and capital efficiencies of EUR 2.4 billion; (2) reduced its capex from EUR 7.0 billion in 2014 to EUR 3.0 billion in 2017, while increasing production and maintaining reserves; and (3) used proceeds from asset dispositions to reduce gross debt by over EUR 3.4 billion from year-end 2016 and improve its liquidity. As a result, the Company achieved free cash flow break-even (operating cash flow after capex and dividends) at USD 40/bbl in 2017. While Repsol’s updated strategic plan forecasts an increase in both capex and dividends over the next three years, the Company expects to fund both from operating cash flow and available cash balances in a USD 50/bbl price environment.

Repsol’s key lease-adjusted credit metrics (net debt-to-cash flow*: 2.34 times (x); debt-to capital: 35.5%; and earnings before interest and taxes interest coverage: 5.84x for the last 12 months ended June 30, 2018) have continued to improve; however, the lease-adjusted net debt-to-cash flow ratio remains outside the range for the current rating. DBRS expects the Company’s key credit metrics to continue to improve and remain supportive of the current rating as Repsol benefits from higher production and O&G prices, combined with lower operating costs.

Repsol’s liquidity profile is also deemed to be adequate, with available liquidity of EUR 9.93 billion as at June 30, 2018, which includes undrawn credit facilities and cash and cash equivalents of EUR 7.25 billion. Given that the Company’s rating is constrained by its financial risk profile, a rating upgrade is unlikely in the medium term until the Company’s lease-adjusted net debt-to-cash flow ratio is strongly in the BBB range on a sustainable basis. DBRS believes that the quality of earnings at the Company’s downstream segment, along with the existing cash balances, provide adequate support to the rating even in the event of a reduction in O&G prices.

Notes:
*Cash balances above EUR 3.0 billion used to reduce gross debt.

All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.