DBRS Morningstar Confirms Issuer Rating of Repsol S.A. at BBB and Assigns a Negative Trend; Removes Under Review with Negative Implications Status

DBRS Ratings GmbH (DBRS Morningstar) confirmed Repsol S.A.’s (Repsol or the Company) Issuer Rating at BBB and assigned a Negative Trend. At the same time, DBRS Morningstar removed the Under Review with Negative Implications status from Repsol’s rating. Prior to the Under Review with Negative Implications status, the Trend was Stable.

On 27 March 2020, DBRS Morningstar placed the Issuer Rating of Repsol Under Review with Negative Implications. This was in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between the Organization of the Petroleum Exporting Countries (OPEC, led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions to factor in (1) the impact of the coronavirus on crude oil demand as lockdowns ease, (2) the significant build-up in global oil inventories, and (3) the impact of production cuts recently implemented by OPEC+. Today’s rating actions follow DBRS Morningstar’s review of the Company’s business risk profile and financial forecast under the revised commodity price assumptions.

The rating confirmation accounts for Repsol’s (1) large size and highly integrated operations, with production of 710,000 barrels of oil equivalent/day in Q1 2020; (2) geographical and product diversification; (3) significant downstream presence in Spain; and (4) ability to reduce operating costs and adjust capital spending to changing market conditions. The key business factors tempering the ratings include the Company’s (1) presence in countries with higher political risk; (2) relatively higher operating cost base for its upstream business; (3) exposure to natural gas in North America; and (4) weaker financial metrics. In addition, the rating confirmation also takes into account Repsol’s reduced exposure to certain emerging markets, in particular Venezuela.

In March 2020, Repsol adopted a “Resilience Plan”, based on the assumptions that – for the period April-December 2020 – the prices of Brent crude oil and the Henry Hub natural gas would average USD 35 per barrel and USD 1.80 per million British Thermal Units, respectively. The key objectives of the “Resilience Plan” are: (1) to ensure the robustness of the Company’s balance sheet; (2) to maintain the Company’s investment grade status; and (3) to reiterate the Company’s energy transition goal of achieving net zero carbon emissions in 2050.

Repsol’s cash flow is sensitive to changes in the price of Brent crude oil and, as a result of the recent severe decline in crude oil prices, the Company’s key credit metrics have been under significant pressure and are currently well below the BBB range. The Resilience Plan contemplates the implementation in 2020 of a number of initiatives to reduce operating expenses by EUR 350 million and capital expenses by more than EUR 1.0 billion as well as optimising working capital for approximately EUR 800 million. By implementing these measures, Repsol aims to maintain its net debt at the end of 2020 in line with its level at the end of 2019 (EUR 8.1 billion).

As of 31 March 2020, Repsol had sufficient liquidity of EUR 8.1 billion, including cash & cash equivalents of EUR 5.3 billion and undrawn committed credit lines of approximately EUR 2.7 billion, representing 1.6x short-term gross debt maturities. Since the start of 2020, the Group also reinforced its financial position through the issuance of two Eurobonds for an aggregate amount of EUR 1.5 billion in April and securing an additional EUR 1.3 billion of structural committed credit lines (of which around EUR 0.9 billion were already in place at the end of March).

DBRS Morningstar expects Repsol’s key credit metrics under its base-case commodity price assumptions (see DBRS Morningstar’s 15 May 2020, commentary “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”) to be very weak in 2020, before slightly recovering in 2021 and strengthening further in 2022. DBRS Morningstar assumes a more normalised operating environment by 2022 and anticipates the price of Brent crude oil reaching the USD 55.00 per barrel level, the lower end of DBRS Morningstar’s deemed midcycle pricing scenario. DBRS Morningstar projects manageable free cash flow (FCF) deficits in 2020 and 2021, with a projected FCF surplus in 2022. At the end of March 2020, total debt – including capitalised operating leases – was EUR 17.9 billion.

In assessing the Company’s credit risk profile, DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when DBRS Morningstar anticipates a return to a more normalised operating and pricing environment. On this basis and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports an overall BBB rating. The risk, in DBRS Morningstar’s view, is that a recovery in crude oil prices will fall short of DBRS Morningstar’s base-case price assumptions and that Repsol’s overall financial risk profile will not support the current ratings. The Negative trends reflect this risk, which DBRS Morningstar currently deems to be elevated.

DBRS Morningstar will likely change the trends to Stable if the demand/supply fundamentals in crude oil markets continue to improve, leading to greater confidence that prices and, consequently, the Company’s key credit metrics will recover in line with DBRS Morningstar’s base-case assumptions. Conversely, should oil prices and the Company’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar could take a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal applicable methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (23 August 2019), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (1 November 2019), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (25 November 2019). These can be found can be found at: http://www.dbrsmorningstar.com/about/methodologies.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include the Company’s annual accounts, interim accounts, and other public information available. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/363338/repsol-sa-sensitivity-analysis

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Giuseppe Fresta, Vice President – Global Corporates
Rating Committee Chair: Victor Vallance, Senior Vice President – Global Corporates
Initial Rating Date: 16 September 2016
Last Rating Date: 27 March 2020

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

--Rating Companies in the Oil and Gas and Oilfield Services Industries (23 August 2019)
https://www.dbrsmorningstar.com/research/349594/rating-companies-in-the-oil-and-gas-and-oilfield-services-industries.
--DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (1 November 2019) https://www.dbrsmorningstar.com/research/352346/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers.
--DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (25 November 2019),
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.