Repsol adds lustre by tapping into 'black gold'
Published 13/07/2015 | 02:30
If you were to tell an MBA class that not so long ago, we in Ireland fancied we could play on the same pitch as the oil majors, could hang out and 'kick the tyres' with Statoil, Esso or Shell or with the company we are analysing this morning, the Spanish group, Repsol, at best they would laugh.
But scarcely 30 years ago, lots of people believed that was indeed the case. The Irish newspapers were full of reports about "black Gold" off the Irish coast and the political rhetoric was about getting down and dirty with the oil companies and making them pay top dollar for the rich petroleum resources that were sure to arrive very soon.
So far, alas, that hasn't happened. That is not to say people are still not waiting. However, I have picked Repsol as our target company to show what might have happened in Ireland if the "black gold" was available in the volumes that some in the 1980s thought possible.
Founded in 1987, though it can trace its origins to 1927, Repsol is now one of the world's leading energy companies. It explores and produces oil, natural gas, refines and sells its products in more than 50 countries. It has a business strategy that, if it does nothing else, shows up much of the naive thinking that permeated the hoped-for Irish oil boom.
Repsol has had 40 successful discoveries in the last five years, including eight of the largest finds worldwide. Its reserve-replacement ratio, which indicates how much oil and gas has been discovered compared with what has been extracted, have been positive for the last five years and are now among the highest of major oil companies. At year end, the company had almost 700 oil and gas exploration blocks in 30 different countries which should help future growth.
In a difficult business environment, the company increased its production for the fourth consecutive year. Unfortunately, due to the drop in oil prices and disruption in Libya, profits fell 40pc. In contrast, the company's downstream business increased its profit to €1bn, thanks to the good performance in refining, chemicals and higher sales volumes and margins in the USA.
Repsol's group sales of €46bn were marginally lower than the previous year, but net profit rose to €1.6bn - a significant performance given the negative impact on oil prices. The company's 30pc shareholding in the publicly-quoted Gas Natural "kicked in" €270m to group profits. With a share price of €15.80 and a price-to-earnings multiple of 16, the company is valued at €21bn.
In common with other major oil companies, Repsol is cutting its capital expenditure. Exploration is reduced from €3.7bn to €2.3bn and the number of wells planned for drilling is reduced from 34 to 21.
However, all is not well among Repsol's larger shareholders. Pemex, the Mexican state oil company, sold its 8pc shareholding, ending a difficult and sour relationship.
In addition, the Catalan Caixa group has also indicated that it intends selling its 12pc stake in the company, stating that it is no longer "strategic".
After years of negotiations, investors were pleased when Repsol received €6bn in compensation for the seizure of its assets by the Argentine government. It also offloaded its Liquefied Natural Gas assets for $4.3bn. These sales helped strengthen the company's financial position.
As a result, at year end it purchased the Canadian oil company Talisman Energy for $13bn - regarded by some as a transformational deal. It is the largest acquisition by any Spanish company in a decade.
Thanks to the takeover, one third of its oil comes from politically stable developed countries, which makes a nice change for Repsol and its shareholders. The share is worth having in any portfolio, but with the Greek problems rumbling on, the Chinese market in turmoil and oil prices on the floor, now may not be the time to roll the dice.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.