Repsol SA (REP)’s $19 billion plan to expand oil and natural-gas production from Alaska to Angola is at risk as it fights to avoid becoming the only major oil company to lose an investment-grade credit rating.
A downgrade would probably increase borrowing costs for Spain’s biggest driller, based on market rates for junk-rated companies. To prevent that, Repsol plans to sell assets and pay dividends in shares to cut the highest debt-to-equity ratio among the 17 largest oil producers, according to recent filings.
Repsol may have to refinance 1 billion euros ($1.3 billion) next July when bonds come due. The company said it will cut debt by as much as 9 billion euros after being lowered to one level above junk following the seizure of its Argentine unit in April. That removed almost half its proved reserves and sparked a sell- off in bonds and a slump of almost 50 percent in its shares.
“Their biggest problem is to convince credit agencies and investors they can deliver on measures to cut debt,” said Francois Nicolas, an analyst at Creditsights Ltd. in London. “At some point they will have to refinance themselves. It would be quite a bad thing to lose the investment-grade rating.”
Moody’s Investors Service, which along with Standard & Poor’s and Fitch Ratings gives Repsol debt its lowest investment grade, cut the outlook to negative from stable on June 29, citing concerns that the sovereign debt crisis will spread. Spain requested a bailout for its banks that are still reeling from a real-estate collapse that’s in its fifth year.
“Maintaining our rating is a priority, and we are confident we have the tools to achieve it,” said Kristian Rix, a spokesman for Madrid-based Repsol.
On July 3, investors demanded yields of 672 basis points, or 6.72 percentage points, more than similar-maturity government debt to hold bonds of European companies in the BB category, the top tier of junk, Bank of America Corp.’s Euro High Yield, BB Rated index shows. That compares with 373 basis points for a gauge of debt graded BBB, the bottom investment-grade division.
Repsol shares have plunged 46 percent this year after it lost the Argentine YPF SA (YPFD) unit, oil prices slipped and concerns rose about the future of the euro currency. The stock fell 3.2 percent to 12.91 euros today in Madrid.
The company had a respite during the past week after European Union leaders agreed on a plan to recapitalize Spanish banks directly, rather than through governments. Investors charged less for five-year credit default swaps that insure Repsol’s bonds against default. The spread fell to 416 basis points on July 3 from 544 basis points on June 28. By contrast, BP Plc (BP/)’s rate is 108.5, and Exxon Mobil Corp. (XOM:US)’s is 28.2.
Repsol said May 29 it will lower its dividend payout to 40 percent to 55 percent of profit this year, which implies a cut of as much as 40 percent. It also said it will sell as much as 4.5 billion euros of assets through 2016 and will reduce debt by as much as 9 billion euros.
This year, the company is considering selling stock held in treasury, offering to pay dividends in shares and converting preferred shares.
“We expect the company to reach its debt reduction targets and keep their rating,” said Manuel Herold, an oil and gas credit analyst at Unicredit Bank AG in Munich. “If they don’t, it will be a new situation in the oil and gas sector to have a high-yield company of that size.”
Repsol plans to bolster production from its remaining assets outside Argentina by 7 percent a year through 2016 and add new reserves covering 120 percent of the oil pumped. The company expects to invest 14.7 billion euros in its upstream division through 2016.
“Investment may need to be higher than planned so cash will be tight,” said Peter Hutton, an analyst at RBC Capital Markets in London. “It would be a serious handicap to lose their rating, it’s important for access to reserves and for trading contracts.”
The company’s prospects for growth in Brazil, the U.S., Angola and Venezuela may still attract investors. The share slump has also raised speculation that China Petroleum & Chemical Corp., known as Sinopec, or another state-backed energy producer may want to invest.
“I’d be delighted about a partnership with Sinopec or someone else taking some of the overhang for the shares,” said Andrea Williams, a fund manager at Royal London Asset Management who holds Repsol, referring to treasury stock it owns.
The loss of YPF leaves Repsol with a greater exposure to the Spanish economy in its refining and marketing business, where it’s seeking to increase margins. Spain slipped back into a recession at the end of last year and has the highest unemployment rate in the European Union.
The country has debated laws to protect companies such as Repsol from hostile takeovers by forcing bidders to file an independent report that establishes a minimum valuation.
“They’re right to be concerned, the company’s vulnerable,” said Stuart Joyner, an analyst at Investec Securities Ltd. in London. “But no one’s going to buy a Spanish company until they know what’s happening to Spain in the euro. You wouldn’t buy a house that’s about to burn down.”
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