Repsol financial position stabilising on company initiatives and better oil prices
Repsol rarely presents a straight-forward investment case. Since Argentina re-nationalised YPF in 2012,
a combination of large scale transactions and wildly fluctuating macro has presented a complex suite
of moving parts. 1H16 has been no different but with signs of success in delivering the post-Talisman
strategy and oil price recovery seemingly underway, we have taken the opportunity to revisit.
Raising earnings estimates in aftermath of 2Q16 and forecasts re-work
We are raising our 2016 and 2017 EPS estimates by an average of 4.9%. This is largely driven by
higher Downstream resulting from our re-working of Chemicals. The continued robustness of the
Downstream is critical in supporting the integrity of the earnings and cashflows of the business and
has been a standout feature. Our forecasts confirm the free cashflow generation capability of the
Downstream.
Not completely out of the woods yet
Management correctly identifies that credit investment grade is an important input into the equity
investment case. Retaining it is dependent upon an improving oil price and also continued delivery of
the plan. The limited room for manoeuvre clearly creates risk. Strategically, while the tight rein on
capex has had an impressive impact on free casflow resilience, it risks creating some stagnation in
evolving the underlying high-grading element of the post-Talisman investment case as does the weak
Upstream M&A market. Finally, the details of the financial performance continue to be quite difficult to
fully interpret absent a full year of consolidated financials and some significant post-deal and full year
accounting adjustments – especially given the volatile environment.
Valuation: Price target raised to €12.25 from €11.5
Target price is set at 5.5x 2017E EV/DACF in line with European major peers. This is below Repsol's
historic relative rating but reflects the changed nature of the business mix. With the sector carrying
relatively high intrinsic risk around the macro anyway, the additional concerns around gearing and the
settling in of the post-Talisman financial performance don't argue for Repsol being obviously cheap, in
relative terms. As a result we remain Neutral rated on the shares.