London, 14 March 2012 — Moody’s Investors Service has today downgraded the long-term issuer rating of Repsol YPF S.A.(«Repsol») and the senior unsecured debt ratings of Repsol International Finance B.V. to Baa2 from Baa1. Moody’s has also downgraded the preferred stock rating of Repsol International Capital Limited to Ba1 from Baa3. The Prime-2 commercial paper and short-term ratings are affirmed. The rating outlook is stable.
RATINGS RATIONALE
The rating downgrade reflects the marked increase in indebtedness and deterioration in financial metrics reported by Repsol in 2011 as a result of the group’s weaker than expected operating performance in parallel with a significant increase in investments required to finance key growth projects.
While recognising the non-recurring nature of some of the factors, which constrained the group’s operating cash flow generation in 2011, Moody’s believes that in the context of the sizeable capital expenditure programme undertaken by the group to enhance its upstream reserve base and production profile, Repsol will be particularly challenged to cut debt in the next 2-3 years, beyond the reduction expected to result from the divestment and/or the use through a scrip dividend, of the stake in its own shares acquired from Sacyr in December 2011.
In 2011, despite higher oil and gas realization prices benefiting upstream activities and an increased contribution from the LNG business, Repsol’s operating profitability and cash flow generation have been constrained by a number of factors. These included the loss of hydrocarbon production due to civil unrest in Libya but also labour strikes at 57%-owned YPF Sociedad Anónima («YPF», Ba2 review for downgrade), a significant squeeze on refining margins reflecting the very challenging operating environment prevailing in Europe, as well as the effect on YPF’s results of heightened cost inflation in Argentina and the suspension of the Petroleo Plus subsidy.
Combined with a significant increase in investments, which were 24% higher than in the previous year (excluding Gas Natural Fenosa), and the acquisition of a 10% stake in its own shares from Sacyr, this resulted in a marked increase in Repsol’s indebtedness, despite the further reduction of the group’s interest in YPF to 57.4% from 79.8%, which raised EUR1.9 billion (excluding a EUR438 million vendor loan granted to Grupo Petersen) during 2011. Based on the group’s recent earnings announcement, Moody’s estimates that Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) has declined to 18% (pro-forma the placement of a 5% stake in own shares completed in January 2012) v. 33% in 2010.
At the same time, Moody’s acknowledges the progress made by Repsol in recent years in enhancing its hydrocarbon resource base (mainly through exploration discoveries) and developing a pipeline of upstream projects, which should allow the group to meet its medium and long-term production growth targets. Moody’s also notes the improvement in reinvestment risk factors (e.g. reserve replacement rates, finding and development costs) reported by Repsol’s core upstream business as well as, to a lesser extent, by YPF in recent years.
Looking ahead, Moody’s expects that Repsol’s cash flow generation will benefit in the near term from the resumption of production in Libya and start-ups such as Margarita in Bolivia and Kinteroni in Peru. The recent expansion of the group’s conversion capacity in Spain, should also give a fillip to Repsol’s refining margins and help mitigate the pressures weighing on its downstream business in the context of the challenging operating conditions affecting the European refining sector and the weakening Spanish economy. However, free cash flow generation is likely to remain constrained by the high investments required to convert into reserves and bring to market the significant resources added to the group’s portfolio in the past few years. In addition, the increased government interference and pressure faced by YPF to boost production and investment in Argentina may restrain Repsol’s ability to upstream dividends from its 57%-owned subsidiary in the future. Moody’s believes that all these factors will combine to limit Repsol’s capacity to reduce debt in the next 2-3 years and restrain the pace of any recovery in its credit metrics.
The stable outlook reflects Moody’s expectation that Repsol’s future operating cash flow generation will improve against 2011, underpinned by a return to more normalized production levels in Libya, the positive effect of the capacity upgrade on the group’s refining margins and the continuing delivery of its major upstream projects. In turn, this should help Repsol return to positive net cash flow (post divestments) and strengthen its credit metrics relative to the 2011 year-end, including Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) of around 30% on a three-year average basis.
Moody’s would consider downgrading Repsol’s rating further in the event that renewed weakness in financial performance and/or any major delay/setback in the execution of key growth projects (i) result in further negative cash flow and leave the group’s credit metrics weakly positioned for a sustained period of time including Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) below 25% on average through-the-cycle and (ii) prevent Repsol from maintaining operating metrics in line with the Baa2 rating including a reserve replacement ratio consistently in excess of 100%.
Conversely, while unlikely at this juncture, upward pressure may develop on Repsol’s rating should the successful execution of the group’s upstream growth projects lead to some substantial improvement in cash flow generation allowing some meaningful deleveraging and marked strengthening in financial metrics, including Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) consistently above 35%.
The principal methodology used in rating Repsol YPF S.A. was the Global Integrated Oil & Gas Industry Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Madrid, Spain, Repsol YPF, is a major integrated oil and gas company with consolidated total proved hydrocarbon reserves of 2.1 billion barrels of oil equivalent and a strong downstream presence in the Iberian peninsular. In 2011, the group reported consolidated operating revenue of EUR63.7 billion and hydrocarbon production of 290 million barrels of oil equivalent (including YPF’s contribution of 181 million boe).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody’s Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report «Ancillary or other permissible services provided to entities rated by MIS’s EU credit rating agencies» on the ratings disclosure page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Francois Lauras
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Olivier Beroud
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody’s downgrades Repsol to Baa2, outlook stable
RATINGS RATIONALE
The rating downgrade reflects the marked increase in indebtedness and deterioration in financial metrics reported by Repsol in 2011 as a result of the group’s weaker than expected operating performance in parallel with a significant increase in investments required to finance key growth projects.
While recognising the non-recurring nature of some of the factors, which constrained the group’s operating cash flow generation in 2011, Moody’s believes that in the context of the sizeable capital expenditure programme undertaken by the group to enhance its upstream reserve base and production profile, Repsol will be particularly challenged to cut debt in the next 2-3 years, beyond the reduction expected to result from the divestment and/or the use through a scrip dividend, of the stake in its own shares acquired from Sacyr in December 2011.
In 2011, despite higher oil and gas realization prices benefiting upstream activities and an increased contribution from the LNG business, Repsol’s operating profitability and cash flow generation have been constrained by a number of factors. These included the loss of hydrocarbon production due to civil unrest in Libya but also labour strikes at 57%-owned YPF Sociedad Anónima («YPF», Ba2 review for downgrade), a significant squeeze on refining margins reflecting the very challenging operating environment prevailing in Europe, as well as the effect on YPF’s results of heightened cost inflation in Argentina and the suspension of the Petroleo Plus subsidy.
Combined with a significant increase in investments, which were 24% higher than in the previous year (excluding Gas Natural Fenosa), and the acquisition of a 10% stake in its own shares from Sacyr, this resulted in a marked increase in Repsol’s indebtedness, despite the further reduction of the group’s interest in YPF to 57.4% from 79.8%, which raised EUR1.9 billion (excluding a EUR438 million vendor loan granted to Grupo Petersen) during 2011. Based on the group’s recent earnings announcement, Moody’s estimates that Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) has declined to 18% (pro-forma the placement of a 5% stake in own shares completed in January 2012) v. 33% in 2010.
At the same time, Moody’s acknowledges the progress made by Repsol in recent years in enhancing its hydrocarbon resource base (mainly through exploration discoveries) and developing a pipeline of upstream projects, which should allow the group to meet its medium and long-term production growth targets. Moody’s also notes the improvement in reinvestment risk factors (e.g. reserve replacement rates, finding and development costs) reported by Repsol’s core upstream business as well as, to a lesser extent, by YPF in recent years.
Looking ahead, Moody’s expects that Repsol’s cash flow generation will benefit in the near term from the resumption of production in Libya and start-ups such as Margarita in Bolivia and Kinteroni in Peru. The recent expansion of the group’s conversion capacity in Spain, should also give a fillip to Repsol’s refining margins and help mitigate the pressures weighing on its downstream business in the context of the challenging operating conditions affecting the European refining sector and the weakening Spanish economy. However, free cash flow generation is likely to remain constrained by the high investments required to convert into reserves and bring to market the significant resources added to the group’s portfolio in the past few years. In addition, the increased government interference and pressure faced by YPF to boost production and investment in Argentina may restrain Repsol’s ability to upstream dividends from its 57%-owned subsidiary in the future. Moody’s believes that all these factors will combine to limit Repsol’s capacity to reduce debt in the next 2-3 years and restrain the pace of any recovery in its credit metrics.
The stable outlook reflects Moody’s expectation that Repsol’s future operating cash flow generation will improve against 2011, underpinned by a return to more normalized production levels in Libya, the positive effect of the capacity upgrade on the group’s refining margins and the continuing delivery of its major upstream projects. In turn, this should help Repsol return to positive net cash flow (post divestments) and strengthen its credit metrics relative to the 2011 year-end, including Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) of around 30% on a three-year average basis.
Moody’s would consider downgrading Repsol’s rating further in the event that renewed weakness in financial performance and/or any major delay/setback in the execution of key growth projects (i) result in further negative cash flow and leave the group’s credit metrics weakly positioned for a sustained period of time including Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) below 25% on average through-the-cycle and (ii) prevent Repsol from maintaining operating metrics in line with the Baa2 rating including a reserve replacement ratio consistently in excess of 100%.
Conversely, while unlikely at this juncture, upward pressure may develop on Repsol’s rating should the successful execution of the group’s upstream growth projects lead to some substantial improvement in cash flow generation allowing some meaningful deleveraging and marked strengthening in financial metrics, including Retained Cash Flow to Net Debt (based on the equity accounting of Gas Natural) consistently above 35%.
The principal methodology used in rating Repsol YPF S.A. was the Global Integrated Oil & Gas Industry Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Madrid, Spain, Repsol YPF, is a major integrated oil and gas company with consolidated total proved hydrocarbon reserves of 2.1 billion barrels of oil equivalent and a strong downstream presence in the Iberian peninsular. In 2011, the group reported consolidated operating revenue of EUR63.7 billion and hydrocarbon production of 290 million barrels of oil equivalent (including YPF’s contribution of 181 million boe).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody’s Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report «Ancillary or other permissible services provided to entities rated by MIS’s EU credit rating agencies» on the ratings disclosure page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Francois Lauras
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Olivier Beroud
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody’s downgrades Repsol to Baa2, outlook stable
