Repsol Oil Hunt Risked as Pemex Ally Sacyr Demands More Cash

Antonio Brufau’s search for oil in Brazil and West Africa that boosted Repsol YPF SA (REP)’s reserves by 25 percent since 2005 is in jeopardy after two of its biggest shareholders allied to loosen his grip on the company.

Brufau should give up either his role as chairman or chief executive officer, Petroleos Mexicanos and Sacyr Vallehermoso SA (SYV) said on Aug. 29 when they announced an agreement to vote as a bloc on improving management and on strategies to boost earnings, share price and dividend payments.

Sacyr, which counts on dividends from its 20 percent stake in Repsol to bolster earnings, skipped a board meeting last year when directors endorsed Brufau’s strategy after he cut payouts for shareholders to sustain investment in exploration. Sacyr, a construction company whose profit slumped 61 percent in 2010, must refinance a 4.9 billion-euro ($7.1 billion) loan that funded its Repsol holding and is due in December.

“One of the key moves by Sacyr could be to ask Repsol to raise its dividend,” Dominique Patry, an analyst in Paris at Cheuvreux, said in a research note. “Sacyr was in dispute with Repsol in 2009 over the oil major’s decision to cut its dividend,” and “the agreement has apparently been signed without knowledge of Repsol’s management.”

Repsol’s current dividend yield is about 5.3 percent, the fourth-highest among the 33-member Stoxx 600 Oil & Gas index, whose average is 2.7 percent.

A spokeswoman for Sacyr who asked not to be named in line with company policy declined to comment. Pemex officials were unavailable because they were traveling back from Madrid.

Cutting Debt

Brufau, 63, turned around Repsol’s fortunes since becoming chairman in 2004 by cutting its debt and using new technology to uncover reserves in areas such as in deep water in the Atlantic Ocean off Brazil.

Discoveries in Brazil, Sierra Leone and Morocco helped the company to prosper during the financial crisis which dragged down most Spanish stocks. The stock has returned about 14 percent in the past 12 months, including dividends, outperforming Spain’s benchmark Ibex 35 by 27 percentage points.

Repsol last year sold a 40 percent stake in the Brazilian business to China Petrochemical Corp. for $7.1 billion in a deal that valued the Spanish company’s remaining stake at about $10.7 billion. It invested $2 billion in exploring the site.

Sacyr suffered even as its Repsol investment prospered because Spain’s construction-led economic boom turned to bust in 2008 as the supply of credit ran dry. Relations between Sacyr Chairman Luis Del Rivero and Brufau deteriorated after Repsol opted to invest its cash in developing new oil fields instead of maintaining dividend payments.

Higher Payout

Cheuvreux’s Patry forecast Repsol will pay out 4.2 billion euros in dividends through 2013 and disapproves of a higher payout. Longer-term investor returns will likely be reduced should the company divert cash from its upstream operations to increase dividends, according to Lucy Haskins, an analyst at Barclays Capital in London.

Repsol will watch out for the interests of all investors as it responds to the pact, according to a spokesman who asked not to be named in line with company policy. The agreement excludes the majority of the company’s shareholders, he said.

The announcement helped boost Repsol’s stock 6.2 percent in two days, as investors anticipated Pemex’s share purchases. The company may also benefit from a closer relationship with Latin America’s biggest oil company as it looks to develop its businesses in Mexico and Brazil, said Stuart Joyner, London- based analyst at Investec Securities.

‘Deepen Relationship’

“Pemex have been looking to deepen their relationship with Repsol for a while,” Joyner said in a telephone interview yesterday. “With Mexico licensing rounds coming up, the partnership is good for the company.”

Repsol is one of the world’s cheapest major oil companies by several measures. It’s trading at about 9 times estimated annual profit, compared with the 15 times average for the Stoxx 600 Oil & Gas index. Repsol’s share price is about 2.1 times its earnings before interest, tax, depreciation and amortization, cheaper than the gauge’s average multiple of 5.9 times Ebitda.

A higher share price will help Sacyr refinance its syndicated loan used to fund its Repsol investment because the shares are pledged as collateral to the lenders. Sacyr was forced to post more collateral for the loan in 2008 to avoid breaching of loan covenants after Repsol’s share price declined. The revised terms were not made public.

‘Agitated for Cash’

Sacyr “has repeatedly agitated for more cash payouts,” said UBS AG analyst Jon Rigby in a research note yesterday. “Repsol management has pursued an aggressive and successful investment strategy at odds with Sacyr’s cash wants but one that is well-regarded among institutional investors.”

Sacyr and Pemex want Repsol to sell its stake in Gas Natural SDG SA, which has a market value of about 3.7 billion euros, in order to fund an extraordinary dividend, El Confidencial reported today, citing people close to the two companies without naming them.

Repsol owns 30 percent of Gas Natural, Spain’s biggest gas supplier, as part of a circle of cross-holdings that tie it to La Caixa, the Barcelona-based savings bank. Repsol controls Gas Natural along with La Caixa, which owns 37 percent of the stock. CaixaBank, La Caixa’s commercial lending arm, is Repsol’s second-biggest shareholder with 13 percent.

Takeover Bid Discounted

Sacyr and Pemex said they aren’t interested in mounting a takeover bid for Repsol and their combined holding will fall just below the 30 percent threshold that requires a takeover bid under Spanish securities law.

The companies said in their Aug. 29 statement the move is because Repsol shares are undervalued and they want to help boost that valuation. They said they will seek to increase the number of seats they control on the company’s board and pool their voting rights on issues including the amount of dividend the company pays.

“If it goes from an investment strategy to running the company for cash and cutting down on capex that would be detrimental,” said Anish Kapadia, an analyst at Tudor Pickering Holt & Co. in London. “Pemex and Sacyr don’t necessarily have the same interests as current management.”

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net

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