July 29 (Bloomberg) -- Repsol YPF SA, the Spanish oil company looking to sell part of its business in Argentina, is switching focus to Brazil to reverse four years of declining production.

Output fell 4.9 percent in the first quarter from a year earlier, partly because of natural field depletions in Argentina, and Repsol tomorrow may post another decline of 0.8 percent, according to Irene Himona, an analyst at Exane BNP Paribas who yesterday downgraded Repsol’s stock rating to “underperform.”

Repsol, the biggest oil producer in Spain, is tripling its planned investment in Brazil’s offshore Santos Basin, home to the largest oil find in the Americas in three decades, to at least $1.5 billion in the next three years. The Madrid-based explorer has already been approached by companies interested in its YPF unit in Argentina, which accounts for about two-thirds of Repsol’s overall production.

“Repsol would be able to focus resources on projects with high expected future returns, as well as speed up projects in Brazil, or consider possible acquisitions” following the potential sale of a stake, said Jose Martin-Vivas, an analyst at Madrid-based brokerage Ahorro Corporacion Financiera SV SA.

Excluding inventories and one-time items, Repsol is expected to post a 70 percent plunge in second-quarter earnings to 205 million euros ($292 million), according to the median estimate of five analysts surveyed by Bloomberg News. The company is scheduled to report results before the start of trading tomorrow.

YPF Earnings

Repsol Chief Executive Officer Antonio Brufau plans to sell a stake in YFP or sell shares in the unit as curbs on exports and price caps on crude reduce profitability. Three people familiar with the discussions said at the start of this month that Repsol is in talks with China National Petroleum Corp. and China National Offshore Oil Corp. about a sale of a YPF stake.

Repsol “gains little advantage in its Argentine operations from higher oil prices,” according to Citigroup Inc. analysts Mark Bloomfield and David Thomas. “Second quarter results are expected to once again highlight poor YPF earnings.”

U.S. oil futures averaged $59.79 a barrel in the second quarter, 52 percent lower than a year earlier, while gas futures slumped 67 percent. New York oil futures have rebounded 53 percent since the start of the year and traded at $65.62 at 11:06 a.m. in London.

BP Plc, Europe’s second-biggest oil producer, posted a 53 percent slump in earnings yesterday as the recession dragged down energy prices and cut demand for fuel.

Brazilian Stakes

Royal Dutch Shell Plc, the region’s biggest oil company, may say July 30 that adjusted earnings fell 69 percent to $2.42 billion, a survey of 17 analysts showed. Exxon Mobil Corp., the largest U.S. oil company, releases results the same day and is expected to post adjusted earnings per share of 98 cents, according to the average of 16 estimates.

Repsol has stakes in 22 blocks in Brazil’s offshore Santos, Campos and Espirito Santo basins, and operates 11 of those projects. Since 2007, Repsol and partners BG Group Plc and Petroleo Brasileiro SA have made the offshore Carioca, Guara and Iguacu finds in the Santos Basin’s offshore BM-S-9 block. These are ultra-deep deposits beneath a salt layer under the seabed.

“Repsol is excited about the potential of Brazil,” spokesman Kristian Rix said by telephone from Madrid. “We expect the region to be a large part of our growth in the coming years.”

Petrobras, as Brazil’s state-controlled oil company is known, estimated in November 2007 that the pre-salt Tupi field may have as many as 8 billion barrels of oil, the largest find in the Americas since Mexico’s Cantarell field in 1976. Repsol doesn’t own a stake in Tupi.

Cut Risk

Meanwhile, in Argentina, caps on oil prices introduced in 2007 by former President Nestor Kirchner have eroded earnings, and YPF reported a 59 percent decline in first-quarter net income. Repsol bought the stake in YPF during a privatization by the government of Carlos Menem in 1999. That purchase has weighed on Repsol’s stock since then, analysts say.

A possible sale of a stake in YPF “would reduce the current political risk premium, which has affected the group’s share price since YPF was acquired in 1999,” Martin-Vivas said.

Repsol’s stock has climbed 10 percent so far this year, giving the company a market value of 20.2 billion euros. YPF accounts for 52 percent of Argentina’s refining capacity through three refineries in the provinces of Buenos Aires, Mendoza and Neuquen, according to the company’s Web site. YPF also explores for oil and gas and operates a chain of service stations.

Profit Drop

“We continue to believe that divestment of a stake in YPF could be a strong positive for Repsol,” Nitin Sharma, an analyst at JPMorgan Cazenove Ltd. who has an “in-line” recommendation on the stock, said July 8. “We see potential share price upside of between 7 percent and 30 percent, assuming a mid-point valuation of $13.8 billion for a 75 percent stake in YPF,” Sharma said.

The talks with CNPC and Cnooc have come after another Chinese oil company, China Petrochemical Corp., or Sinopec Group, agreed in June to purchase Addax Petroleum Corp. to gain reserves in Iraq’s Kurdistan and West Africa.

Even after oil prices surged to a record in 2008, the YPF unit reported a 5.6 percent decline in operating profit last year and a 4.7 percent drop in production. Repsol has stakes in three of the 10 biggest discoveries made in 2008, none of which is in Argentina.

Last year, Repsol sold 15 percent of YPF for $2.2 billion to Argentine investor Enrique Eskenazi, who has an option to buy an additional 10 percent. Repsol, which now owns 84 percent of YPF, paid $15.5 billion for more than 80 percent of that unit in 1999.

Brazil Investment

In November, Repsol delayed a public offering of a stake in the YPF unit that it had planned to use for raising cash to expand operations in Libya, Brazil and the Gulf of Mexico. While Repsol has lost some reserves following moves by Venezuela, Bolivia and Ecuador to take resources into state ownership or renegotiate contracts, this year it announced finds in Algeria, the U.S., Morocco, as well as Brazil.

Oil and gas exploration spending will total 575 million euros a year through 2012, Nemesio Fernandez Cuesta, Repsol’s general director of upstream, said Feb. 11.

Investment in Brazilian oil and gas over the next five years will total about $200 billion, including $174 billion in spending by Petrobras and $26 billion from foreign companies, Nelson Narciso Filho, director of Brazil’s National Petroleum Agency, said July 14.

The five-year, $174 billion investment plan by Petrobras is largely focused on exploration of Brazil’s so-called pre-salt oil fields.

Salt Layer

The pre-salt area runs 800 kilometers (500 miles) along Brazil’s coast from Espirito Santo to Santa Catarina states and has oil deposits beneath a layer of salt resting as much as 3,000 meters beneath the ocean surface and another 3,000 to 5,000 meters below the seabed.

Exploring offshore Brazil is not without risk. Brazil’s Petrobras on July 6 said it shut a well in the Tupi field, suspending tests on that discovery, and Exxon Mobil Corp. on July 7 said no oil was found in the Guarani well on the offshore block known as BM-S-22, part of the pre-salt area where Tupi is also located.

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.

Last Updated: July 29, 2009 07:42 EDT