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Standard & Poor’s has make good on its promise to reward Repsol with better ratings. S&P and Fitch Ratings had said they would lift the Spanish energy company’s ratings to “investment grade” if it were to divest its liquified natural gas (LNG) assets, including its stake in Point Fortin-based Atlantic. tandard & Poor’s Ratings Services revised its outlook on Repsol SA to “positive” from “stable” and affirmed the ‘BBB-’ long-term corporate credit rating on the company, as well as all of its issue ratings on its debt.
The outlook revision reflects S&P’s view that the company has been able to deleverage and strongly improve its credit metrics. “We consider this could be the basis for an upgrade, depending on the investment or distribution of the cash and the extent to which Repsol reduces net debt on a sustained basis compared with 2013,” S&P said. The sovereign foreign currency rating on Spain is currently also ‘BBB-’ but with a “stable” outlook.
“We believe that Repsol could maintain sufficient liquidity to cover its commitments in the event of extreme stress on the sovereign, and therefore we conclude that it would be possible for us to rate Repsol above the sovereign. However, we would not rate Repsol more than four notches above Spain because we assess Repsol’s country risk as “’moderate’.”
Repsol has carried out its planned debt reduction measures following the sale of its liquefied natural gas (LNG) division. The sale was completed in three different transactions carried out in October and December 2013, and January 2014, for about EUR3.1 billion in cash proceeds after taxes. The LNG sale also included a reduction in lease commitments—which S&P treats as debt under its criteria—of about EUR1.9 billion. As a result, S&P’s-adjusted debt for 2013 stood at EUR9.7 billion, compared with EUR14.1 billion for 2012.
S&P said it continues to assess Repsol’s business risk profile as “satisfactory” due to its view of the group’s very strong refining position in the still-profitable domestic market and a promising reserve and production profile over the coming years. Repsol has been increasing its resource base in countries within the Organisation for Economic Co-Operation and Development (OECD), especially the US and Canada, by acquiring more acreage.
“We consider this to be only a modest future potential mitigant against Repsol’s ‘moderately high’ country risk exposures,” S&P said. S&P views Repsol’s financial risk profile as “intermediate,” reflecting its base-case forecasts for the company, including funds from operations (FFO) to debt of above 45 per cent in 2014 and thereafter, and broadly neutral free operating cash flow in the coming years.
“We note that Repsol has now resumed more shareholder-friendly share buy-back policies; we forecast buy backs of about EUR250 million for 2014 and 2015 each year. However, we still consider financial policy as neutral because we believe that the company has enough cash flow and liquidity to sustain these buy-back policies,” S&P said.
The ratings agency also forecast that Repsol will generate higher operating cash flows going forward based on its assumptions of increased production volumes from several projects that are planned to come on stream by 2016.
The company’s announced guidance indicates an average annual production increase of about 7 per cent compound annual growth (CAG) until 2016. Assuming continued depressed refining margins in the near term, and given current per barrel oil price assumption, S&P expects the proportion of EBITDA from upstream operations to increase with rising production. S&P conducted its analysis assuming a Brent oil price of US$100 per barrel of oil (bbl) in 2014 and US$95/bbl in 2015 and thereafter.