Repsol Remains Neutral

REPSOL YPF S.A. (REP - Analyst Report) reported third-quarter earnings of 30 euro-cents per share (45 cents per ADR), compared to the Zacks Consensus Estimate of 43 cents and year-earlier earnings of 58 euro-cents (82 cents per ADR).
 
While earnings was down year over year due to the steep decline in oil and natural gas prices, a sequential increase in net income (€859 million vs. €647 million or $1.23 billion vs. $975 million) shows the signs of recovery in the macro backdrop.
 
Adjusted income from operations during the quarter totaled €859 million ($1.23 billion), down approximately 45% year over year, primarily reflecting the impact of lower oil prices and weak refining margins.
 
Adjusted upstream operating income during the quarter was €302 million ($432 million), down approximately 51% from the year-earlier level due to poor realizations, partially offset by lower exploration costs and a favorable euro–dollar exchange rate.
 
Repsol’s liquids price realizations averaged $62.9 per barrel versus $104.9 per barrel in the year-ago period. The average natural gas price realization during the quarter was $2.1 per Mcf, down more than 54% year over year.
 
Total production averaged 327 MBOE/d (43% liquids), down 1.2% from the year-ago level. After excluding the impact of contractual and regulatory changes and the OPEC quota reduction, volumes were 2.5% higher than in the third quarter of 2008. Investments in the Upstream business segment were €290 million ($414 million), down approximately 23% from the year-ago level. Exploration expenses were down 22.2% year-over-year to €70 million ($100 million).
 
Adjusted operating income from the Downstream segment was €206 million ($294 million), down 47.3% year over year, mainly due to the impact of lower refining margins.  Repsol realized a refining margin of 30 cents per barrel, down nearly 96% year over year. The company invested €457 million ($653 million) in its Downstream segment during the quarter.
 
Adjusted operating income from YPF was €211 million ($302 million), down 53.2% from the year-ago quarter, reflecting lower liquid sales, partly offset by lower operating costs.
 
The company’s adjusted income from operations in Gas Natural SDG was up 63.8% year over year to €226 million ($323 million). Finally, Repsol’s LNG division earned €5 million ($7.1 million) during the quarter, down nearly 87% from the prior-year quarter.
 
Repsol’s net debt was about €10.58 billion ($15.12 billion) at the end of the quarter, reflecting a net debt-to-capitalization ratio of 29.6%.
 
We believe that the long list of challenges facing Repsol will continue to weigh on its valuation, limiting its upside from current levels. These include declining reserves, weak volumes, very low reserve lives and rising costs. Consequently, we maintain our Neutral rating for the stock.

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