Repsol Misses Consensus - Analyst Blog

Repsol YPF S.A. (REP) reported adjusted fourth-quarter 2010 earnings of 56 cents per ADR, below the Zacks Consensus Estimate of 60 cents. However, fourth quarter profit improved the year-earlier level of 29 cents attributable to higher refining margins as well as capital infusion for its 40% stake sale in its Brazilian unit.

Total revenue in the quarter was $23.7 billion, up 20% from the year-earlier quarter. Full-year 2010 revenue stood at $80.2 billion, compared with $68.4 billion in 2009.

Operational Performance

Adjusted Upstream operating income in the quarter was euro 361 million (US$490.8 million), reflecting a substantial increase of 60.4% year over year, mainly due to exchange rate differentiation and increased commodity price realizations. However, lower production volumes adversely affected the quarter's results.

Total production averaged 341 thousand barrels of oil equivalent per day (MBOE/d) – 41% liquids – down 2.3% from the year-earlier level. The result was due to the several field inspections at the Shenzi field in the United States as well as field decline. This underperformance in production was partially rewarded by the start-up of the Peru LNG project.

Repsol's liquids price realizations averaged $80.2 per barrel, up nearly 15.6% from the year-ago quarter. The average natural gas price realization during the quarter was $2.9 per thousand cubic feet (Mcf), up 11.5% year over year.

Investments in the Upstream segment were Euro 400 million (US$543.8 million), reflecting a major increase from the year-ago level of Euro 180 million (US$244.7 million). Exploration expenses decreased 12.5% year over year to Euro 154 million (US$209.4 million).

Adjusted operating income from the Downstream segment was Euro 164 million (US$223 million), up 72.6% from the fourth quarter of 2009. The company invested Euro 466 million (US$633.6 million) in its Downstream segment during the quarter.

Adjusted operating income from YPF increased 12.1% from the year-earlier quarter to Euro 371 million (US$504.4 million). The company's adjusted income from operations in the Gas Natural Fenosa segment plunged 15.7% year over year to Euro 214 million (US$291 million). Finally, Repsol's LNG division earned Euro 33 million (US$44.9 million) during the quarter, up significantly from the prior-year quarter level.

Cash balance at the end of 2010 stood at Euro 6,448 million (US$8,557 million) and debt balance was Euro 7,224 million, representing a debt-to-capitalization ratio of 19.5%.

Outlook

Repsol is Spain's largest integrated oil and gas company. Its wide footprint in Latin America yields the majority of operating earnings for the company with Argentina comprising the largest share of the pie.

Repsol and Sinopec completed their deal in Brazil, creating one of the largest private energy companies in Latin America. The alliance assures that Repsol will make necessary investments in order to develop the Brazilian offshore assets. Hence, with $7.1 billion capital infusion from Sinopec, the future momentum of this development program appears positive.

The company's recent deal with Petrobras Colombia Limited, the local unit of Brazil's Petroleo Brasileiro (PBR or Petrobras) and Colombian state oil firm Ecopetrol SA (EC) for an oil exploration project in the country, also marks a significant step for the company. This Colombian exploration and production agreement reflects Repsol's aggressiveness toward upstream development in exotic locations.

Given the company's oil-centric development strategy and funds raises through non-core assets divestment, we maintain our long-term Outperform recommendation.