Repsol Investors Call for Debt Cuts to Hold On to Dividend

  • CEO to present first strategic plan since taking over in 2014
  • Oil producer has lowest investment-grade rating from S&P

Repsol SA investors are enjoying the second-highest dividend yield among European oil producers. Now the company must show how it’ll shrink its $15 billion debt burden to keep the payouts coming.

Spain’s largest oil producer needs to demonstrate it can reduce borrowings to avoid dividend cuts as crude languishes at $50 a barrel, according to investors including Bankinter SA. With the highest leverage of its peers and the lowest investment-grade rating from Standard & Poor’s, Repsol is expected to outline steps to boost cash when it addresses shareholders on Thursday.

“They have to cut debt,” said Ramon Carrasco, a senior equity analyst at Madrid-based Bankinter who wants to see borrowings lowered by 3 billion to 4 billion euros ($3.4 billion to $4.6 billion). “If they don’t reduce debt, the agencies will downgrade them and then you go into junk.”

While the entire industry has had a rough year, Repsol’s underperformance is particularly acute. Its 24 percent decline makes it the worst-performing integrated oil company in the Stoxx Europe 600 Oil & Gas index in the period. Yet even after the $13 billion takeover of Talisman Energy Inc. swelled its debt pile, Repsol has maintained shareholder payouts, albeit as scrip dividends that pay in stock rather than cash.

Cash Generation

“I expect a clear change in the focus toward an improvement in the financial profile" when Repsol unveils its strategic plan, Gemma Hurtado, lead portfolio manager at Mirabaud Gestion SA, said by phone from Barcelona. “They will try to build a company that generates more cash, so that should bolster the dividend.”

Repsol’s dividend yield -- the annual return divided by the share price -- reached 5.7 percent in 2014, second only to Eni SpA’s among 10 European oil companies, according to Barclays Plc, which forecasts an increase to 6.2 percent this year and next.

Several analysts are calling for divestments to cut the debt burden. Bankinter’s Carrasco said Repsol should sell its butane business, while Jason Kenney at Banco Santander SA suggested other areas where the company could scale back.

“We see a potential for further asset sales with additional divestments potentially including service-fee contracts, downstream Latin America positions and possibly parts of its LPG business,” Kenney said Tuesday in a note. Repsol could also consider divesting “upstream peripheral assets” such as operations in Papua New Guinea, he said.

Strategy Shift

Repsol has already disposed of more than $1 billion of assets, retreating from the growth strategy it pursued since 2012 as it smarted from the loss of its YPF unit to the Argentine government. In 2014, the company used its compensation payment from the South American country to help fund the Talisman purchase, adding reserves in the Americas, Southeast Asia and elsewhere.

“With the important boost in size after buying Talisman, capex and growth will be less important" from now on, Alejandro Vigil, a partner at Cyngus Asset Management SA, said in an interview from Madrid. While Repsol may cut capital spending and reduce costs, “I wouldn’t be surprised if they can maintain the dividend," he said.

Repsol will stick to its dividend policy and keep payouts at about 1 euro a share when it presents its five-year program, Expansion reported Wednesday. It will also hold on to its 30 percent stake in Spanish natural-gas distributor Gas Natural SDG SA, the newspaper said, without saying where it got the information.

Protect Rating

The last time Repsol presented a strategic plan was in 2012, just weeks after the YPF nationalization and when oil was trading above $100 a barrel. Crude has since dropped by half amid a global oversupply. 

S&P, which rates Repsol BBB-, joined Moody’s Investors Service and Fitch Ratings in giving the company the lowest investment grade following the loss of YPF.

Chief Executive Officer Josu Jon Imaz, who took over from Chairman Antonio Brufau last year, has said protecting the company’s credit rating is key. His management team has already announced plans to cut about 1,500 jobs, or about 6 percent of the workforce, by 2018. More job losses may follow in Alaska, where Repsol has sold stakes in acreage to partner Armstrong Oil & Gas Inc. for more than $800 million, according to a statement Tuesday.

The company’s shares, which sank to a record low in September, have jumped 15 percent this month in Madrid, joining a rally in European oil-company stocks as crude nudged past $50 a barrel for the first time since July.

“Repsol is very undervalued," Jorge Abad, a fund manager at Renta 4 Banco SA, said by phone from Madrid. “Investors want to see less debt."

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