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Morningstar | Repsol Is Tacking Back Toward Growth With Its Most Recent Investment Plan

Repsol is tacking back toward growth with its most recent plan for increased investment in the upstream and downstream segment, as well as expansion into low-carbon businesses to drive cash flow growth and improve returns. Repsol expects the upstream segment to deliver the bulk of the improvement through an increase of production to 750 mboed from 700 mboed (2.6% CAGR) and digitalization and efficiency programs. The addition of higher-margin production in North America, Southeast Asia, and Latin America, along with improvement efforts, should deliver a higher-quality portfolio, although we see margins still lagging its better-integrated peers.The downstream segment is expected to deliver cash flow growth on a mix of higher margins, profitability improvement initiatives, and expansion into low-carbon businesses. Margin improvement is likely to come from the implementation of IMO 2020, which is expected to lift global distillate margins and widen heavy crude spreads. Repsol is uniquely positioned to benefit, given its high distillate yield of around 50% and ability to process heavy crudes that could lead to several years of strong performance. Growth investments in the segment will focus on chemicals and global marketing, trading, and lubricants operations that can deliver earnings growth with lower capital requirements.Repsol intends to increase the dividend at an 8% CAGR through 2020, marking one of the more explicit high growth rates in the industry. The program and dividend growth are built around a $50/bbl oil assumption, suggesting actual cash flow would be higher than anticipated based on our current oil price deck, which management indicated would likely be directed toward reinvestment in the business, although share repurchases are a possibility.The dividend growth and potential for earnings upside related to IMO 2020 set Repsol apart from its integrated peers. However, it falls to the lower range of the group on production growth, while it lags on oil leverage. Digitalization and efficiency programs are wise pursuits and should deliver results but are likely to be replicated industrywide, setting up the potential for them to be competed away over time.