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Morningstar | Repsol Reports Decent 2Q Thanks to Strong Upstream Performance

No-moat Repsol reported decent second-quarter 2018 results as adjusted net income increased 23% to EUR 549 million relative to last year. Higher oil prices and strong production of 6.7% year over year were the largest contributing factors in driving solid upstream results, which grew to EUR 360 million versus EUR 115 million last year. While this performance is good, its gassier production (64% gas and 36% liquids), paired with gas realizations (up 11.1% year on year) and lagging oil realization appreciations (up 53% year on year), meant that relative to peers, Repsol’s upstream enjoyed less of a tailwind. Total production increased to 722 thousand barrels of oil equivalent per day from 677 mboe/d last year on the back of startups and increased production from Libya and Norway, bringing it within touching distance of its 2020 target of 750 mboe/d. Weakness in Repsol’s large downstream segment relative to its upstream weighed also on earnings. Refining and chemicals was less affected by narrower refining margins than peers, but a weak market for chemicals, a planned maintenance shutdown in its Portuguese cracker, lower refining margins in Peru, and disadvantageous currency movements dragged on earnings. Adjusted net income for the total downstream segment came in at EUR 337 million for the second quarter versus EUR 429 million a year ago. Repsol’s fair value estimate and no-moat rating are unchanged.

Following its strategy to position itself for a low-carbon future, Repsol reached an agreement to acquire Viesgo’s low-emissions electricity generation and distribution businesses for EUR 750 million. If this deal clears all regulatory hurdles, it will add half of the targeted 4.5 gigawatts of electricity generation capacity (2,350 megawatts) by 2020 to Repsol’s business. The firm's net debt/capital ratio stands at 8% after the sale of its 20% stake in Naturgy.