Repsol Seen Cutting Dividend to Defend Rating After YPF: Energy

Repsol YPF SA (REP) is expected to cut the highest dividend payments among major oil producers to defend its credit rating after Argentina’s seizure of YPF SA. (YPFD)

Repsol will probably opt to lower its annual payout from 1.155 euros ($1.44) a share, or about 1.4 billion euros in total, to conserve cash after Standard & Poor’s said its debt risks a downgrade to junk, said Lydia Rainforth at Barclays Plc and Brendan Warn at Jefferies International Ltd. They didn’t say how much Repsol will reduce dividends, which yield 8.3 percent.

“They have to keep the ratings agencies happy and one way to do that is cutting the dividend,” said Rainforth, an oil analyst at Barclays’s investment-banking unit in London. “My sense is that they will take the opportunity to rebase it.”

Repsol Chairman Antonio Brufau will present a new strategy tomorrow to investors asking how he plans to fund investments in oil production after Argentine President Cristina Fernandez de Kirchner nationalized the YPF unit, her country’s largest oil company. YPF contributed 26 percent of 2011 operating profit and 45 percent of Repsol’s 2.2 billion barrels of proven reserves.

Kristian Rix, a spokesman for Repsol in Madrid, declined to comment on the plans ahead of the presentation.

S&P last month reduced Repsol’s credit rating to BBB- following the expropriation and said it may cut the company’s debt one more step to junk unless borrowings are lowered.

Pay for Wells

Without the revenue from Argentina, Repsol’s upstream division needs average crude prices of $120 a barrel to pay for the wells it plans to bring into production, Mark Bloomfield, an analyst at Deutsche Bank AG, said in a note. The company intends to begin pumping oil and gas from deposits in Spain, Peru, Bolivia and Venezuela over the next three years. Benchmark Brent crude has averaged about $118 a barrel in London this year.

“Delivery of growth, maintenance of dividend and defense of an investment-grade rating are incompatible,” Bloomfield said. “Repsol must cut the dividend.”

Bloomberg’s dividend forecast model predicts the company will pay a dividend of 1 euro a share from 2012 earnings, down from 1.155 euros for 2011, which was split into an interim payout of 0.5775 euros and a final dividend at the same level. Repsol is likely to increase the payout to 1.08 euros for 2013, the projection shows.

The shares fell 0.4 percent to close at 13.82 euros in Madrid.

Payout Ratio

Repsol’s payout ratio of 64 percent of profit over the past 12 months is the highest among the 23 members of the Bloomberg Industries Integrated Oil Producers Index. Eni SpA (ENI) ranks second with 53 percent while Exxon Mobil Corp. (XOM), the world’s biggest oil producer, paid out 23 percent.

Repsol is likely to announce higher production goals tomorrow. The company aimed for output growth of 4 percent to 6 percent through 2014 under its previous strategic plan drawn up two years ago. First-quarter production excluding YPF increased by 8 percent from a year earlier.

Output may climb by 9 percent a year through 2016, reaching about 500,000 barrels a day, compared with about 300,000 barrels a day last year, according to forecasts from Deutsche Bank’s Bloomfield. Production may reach 581,000 barrels a day by 2020, he said.

Bloomfield and Jefferies’s Warn also urged Brufau to sell Repsol’s 30 percent stake in Gas Natural SDG SA (GAS), which is valued at about 2.8 billion euros at market prices.

Gas Natural Debt

Repsol is obliged to account for 30 percent of Gas Natural’s debt, amounting to about 4.8 billion euros, on its balance sheet, straining the financial ratios that rating companies focus on, Warn said. Repsol’s debt excluding Gas Natural and YPF is 4.2 billion euros.

“Repsol should divest its stake in Gas Natural in order to better concentrate its resources in the high-growth upstream operations,” Warn said in a research report. “This amount could provide Repsol with enough firepower to compete with large global E&P players in the scramble for high-growth, high-return resources globally.”

Repsol controls Barcelona-based Gas Natural with Caixa Holding SA, the investment arm of La Caixa Group, which has a 35 percent stake, according to data compiled by Bloomberg. Brufau worked at La Caixa from 1988 and was chairman of Gas Natural from 1997 to 2004 before joining Repsol.

La Caixa’s banking unit, Caixabank, is also Repsol’s biggest shareholder, with a 13 percent stake.

Share Swap

Repsol executives have emphasized that the company is determined to hang on to its investment-grade rating since the YPF seizure.

They will allow holders of about 3 billion euros of preferred shares to swap them for mandatory convertible bonds as well as offering investors stock instead of cash for last year’s dividend. About 35 percent of holders opted to be paid in stock, Chief Financial Officer Miguel Martinez said on a May 13 conference call with analysts.

The company can also sell treasury stock if it needs to raise more capital. Repsol holds 5 percent of its own shares that it acquired from Sacyr Vallehermoso SA (SYV) last year to help the construction company, then its biggest holder, refinance.

“We are totally committed to keeping our investment grade,” Martinez said.

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

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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