EUR 850.00 For Business Accounts Only

Morningstar | Repsol’s Earnings Rise Despite Downstream Weakness

Repsol's adjusted income increased to EUR 588 million from EUR 528 million the year before as strength in the upstream segment was offset by downstream weakness. Upstream adjusted income grew to EUR 368 million from EUR 148 million on higher oil and gas prices. Production volumes fell slightly to 691 mboed from 693 mboed last year as higher production in Libya and new project start ups were offset by lower natural gas volumes in Venezuela and the sale of assets in Russia. Year to date, production has risen nearly 4%. Downstream adjusted income fell to EUR 336 million from EUR 502 million last year on weaker refining and chemical results. Year-to-date operating cash flow of EUR 3.4 billion is running below last year’s EUR 3.6 billion largely due to a build in working capital. Meanwhile, capital spending is up slightly, leaving free cash flow (excluding disposal proceeds) lower than it was last year at this point. However, we continue to expect the delivery of new production volumes and cost reductions along with capital discipline to result in growing free cash flow over time. Our fair value estimate and moat rating are unchanged.

Shares have come under pressure recently on falling oil prices and concerns about the implementation of IMO 2020, of which Repsol should be a beneficiary. While oil prices remain above our midcycle level of $60/bbl, suggesting further potential weakness, we think the concerns over IMO 2020 are overblown. Although the ultimate effect on refined product markets and crude spreads from implementation of the new regulations is uncertain, implementation is less so with all indications pointing to a scheduled start on Jan. 1, 2020.

For more on our integrated oil outlook, see our Sept. 4 report: "Integrated Oils: A Free Cash Flow Story."