What future for Repsol, if YPF is sold?

The news that Repsol YPF has been approached by Chinese companies seeking to buy or take interests in the majority of its upstream assets is something of a mixed blessing for the Spanish group.

On the one hand, Repsol has been trying for years to extract itself from the horrible mess of Argentine politics that embroils YPF, and the prospect of a well-funded buyer that is not too concerned about short-term returns coming along to pay a good price for the unwanted business seems like a godsend.

On the other hand, YPF provides about 60 per cent of Repsol’s production. The parallel approach from CNOOC, if consummated, would presumably mean surrendering even more control over oil and gas reserves.

So what would the future for Repsol look like without YPF?

Analysts’ reaction to the prospect of a deal has generally been favourable. At Collins Stewart, Gordon Gray said:

YPF has been a drag on Repsol’s performance over a prolonged period in two senses: 1) the Argentine fiscal regime has severely hampered profitability due to weak gas prices, high oil export duties and difficulties passing through retail price increases; and 2) falling E&P volumes, mainly as a result of the lack of attractiveness of investment…. In our view a significant lowering of Repsol’s stake has made sense for some while – the main issue to us has always been the difficulty of finding a buyer with a reasonable offer.

Neil Beveridge at Sanford Bernstein similarly believes the deal makes good sense for Repsol, and explains why CNPC might be prpeared to pay an attractive price:

The maturity of these onshore oil and gas assets plays to PetroChina’s strength as they have shown they are a competent onshore operator who have acquired considerable expertise in enhanced oil recovery through domestic experience in fields such as Daqing. It is possible that

CNPC/PetroChina could unlock significant value from this acquisition through employing EOR techniques. The key questions are what price PetroChina will pay and whether the Argentinean government will approve any acquisition. We believe Repsol’s 85.1% net share [of YPF] to be worth $11bn to $13bn

That said, there is the vexing question for Repsol of what it would do without YPF, with $10bn or so in the bank but oil and gas production only 40 per cent of what it is today. Output from the non-YPF assets, in countries such as Libya, has been rising at about 5 per cent per year, while production in Argentina has been falling by about 3 per cent. Repsol also has good positions in the deep waters off Brazil, currently the world’s most exciting area for oil exploration. But surrendering all of YPF’s production would still look like a step backwards.

Repsol has an excellent position in the Spanish refining and marketing business, but all western European petrol markets will grow only slowly, if at all. Many international oil companies such as ExxonMobil and Royal Dutch Shell have been getting out of their European downstream activities.

That could be where the CNOOC deal comes in. What better way to cheer up investors troubled by Repsol’s lack of growth prospects than an alliance with one of those aggressive, ambitious Chinese companies that are coming out to take over the world? And what better way could there be to fund huge capital commitments and exploit political contacts with emerging markets? The CNPC deal, if it happens, will surely make the CNOOC deal more likely.

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