Repsol's balance sheet looks stretched. The Spanish oil and gas firm's recent all-cash $13 billion Talisman deal has left it saddled with debt as it headed into the oil downturn. Net debt of $14.7 billion is almost equivalent to its $16.9 billion market value. The good news is that it has already surpassed a $1 billion asset sale target with hefty capital gains. The bad news is that it's not yet enough to convince shareholders its balance sheet is comfortably robust.
The timing on Talisman wasn't great. Repsol agreed to buy the Canadian explorer in December of last year, when expectations on future oil prices were higher. The deal helped boost production and diversify Repsol away from risky areas like Libya. But, paying for Talisman meant net debt to capital employed rose to 30 per cent, the highest in the sector, according to Goldman Sachs estimates. Cashflow from operations will only cover dividends and capital expenditure at oil prices of $80 this year and the next, according to analysts at Santander.
Hence Repsol shares have fallen by nearly 40 per cent since the deal closed in early May, against an average of 15 per cent for France's Total or Italy's Eni. Repsol isn't sitting on its hands, as the assets sales show. A potent downstream division provides a cushion, though that may not last. It has pledged to keep capex flat relative to 2014 even as it incorporates Talisman. Repsol also upped synergy estimates at its second-quarter results in July. Repsol also pays much of the dividend in scrip shares, which conserves cash.
Repsol's bigger challenge is to show it can make ends meet at an oil price of $50-$60. Return on capital employed is a measly 4.1 per cent. Investors will be looking for a coherent game plan on Repsol's strategy day on October 15, including how Repsol will scale down capex and costs. Analysts at Jefferies reckon it will need to sell another $1 billion to get net debt below two times Ebitda by 2017. At a pinch, Repsol may be able to sell its 30 percent stake in Gas Natural, the Spanish utility, worth some $5.9 billion. That insurance will come in handy if oil stays lower for much longer.
The timing on Talisman wasn't great. Repsol agreed to buy the Canadian explorer in December of last year, when expectations on future oil prices were higher. The deal helped boost production and diversify Repsol away from risky areas like Libya. But, paying for Talisman meant net debt to capital employed rose to 30 per cent, the highest in the sector, according to Goldman Sachs estimates. Cashflow from operations will only cover dividends and capital expenditure at oil prices of $80 this year and the next, according to analysts at Santander.
Hence Repsol shares have fallen by nearly 40 per cent since the deal closed in early May, against an average of 15 per cent for France's Total or Italy's Eni. Repsol isn't sitting on its hands, as the assets sales show. A potent downstream division provides a cushion, though that may not last. It has pledged to keep capex flat relative to 2014 even as it incorporates Talisman. Repsol also upped synergy estimates at its second-quarter results in July. Repsol also pays much of the dividend in scrip shares, which conserves cash.
Repsol's bigger challenge is to show it can make ends meet at an oil price of $50-$60. Return on capital employed is a measly 4.1 per cent. Investors will be looking for a coherent game plan on Repsol's strategy day on October 15, including how Repsol will scale down capex and costs. Analysts at Jefferies reckon it will need to sell another $1 billion to get net debt below two times Ebitda by 2017. At a pinch, Repsol may be able to sell its 30 percent stake in Gas Natural, the Spanish utility, worth some $5.9 billion. That insurance will come in handy if oil stays lower for much longer.