Repsol Cut to Step Above Junk as Fitch Questions Plans After YPF

Repsol SA (REP), the Spanish oil producer whose Argentine unit was nationalized in April, was cut to the lowest investment grade by Fitch Ratings, the first downgrade since reducing dividends to shore up its finances.

Fitch reduced Repsol’s credit rating one level to BBB-, the first reduction by any agency since Repsol announced a strategic review on May 29. The outlook for the rating is negative, Fitch said in a statement today.

“The negative outlook is mainly driven by the uncertainty surrounding the execution of the strategic plan at this stage and weakness in the Spanish macroeconomic environment,” Fitch said. “After implementing its financial action plan, Repsol’s ratings could be further downgraded to non-investment grade” if the company doesn’t reduce its debt enough.

Spain’s biggest oil producer last month lowered its dividend payout ratio to 40 percent to 55 percent of this year’s profits on May 29. It also plans to bolster production from its remaining assets outside of Argentina by 7 percent a year through 2016 and add new reserves covering 120 percent of the oil pumped.

Chairman Antonio Brufau met investors last month to explain his plans to reshape the Madrid-based company after Argentine President Cristina Fernandez de Kirchner nationalized its YPF unit, her country’s largest oil company. Analysts’ concerns have focused on how Repsol will finance its expansion after the seizure. Standard & Poor’s reduced the credit rating to BBB- in April, saying it may cut the company’s debt one more step to junk unless borrowings are lowered.

A spokesman for Repsol wasn’t immediately available for comment.

Repsol shares have declined 46 percent this year. YPF contributed 26 percent of 2011 operating profit and had 45 percent of Repsol’s 2.2 billion barrels of proven reserves.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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