2023-07-31 11:43:26 ET
Summary
- We are drawn by Repsol’s strong execution, rising refining margins, successful navigation of the green transition, and cheap valuation combined with double-digit capital returns to shareholders.
- Repsol is trading at a discount to European oil major peers and to its history, we believe this discount does not properly reflect the company's fundamentals.
- We suggest building a long position in Repsol shares as we see at least 20% upside.
We present our note on Repsol ( REPYY ), a Spanish multinational energy and petrochemicals company. We are drawn by Repsol’s strong execution, rising refining margins, prowess in the low-carbon businesses, and cheap valuation combined with double-digit capital returns to shareholders. In this note, we will provide an overview of the business, a commentary on Q2 results, as well as our forecasts, valuation, and investment recommendation.
Introduction to Repsol
Repsol is a Spanish oil and gas company with activities in Europe, the Middle East, North Africa, Latin America, and the US. Repsol contains more than 300 companies incorporated in more than 40 countries, across the Exploration & Production, Industrial, Customer, and Renewables businesses. The group produces 550 Kboe/day and has 1909 Mbep of proven reserves. It owns six refineries with more than one Mbbl /day refining capacity. Repsol owns 4,651 service stations in Spain, Portugal, Peru, and Mexico and more than 1000 electric vehicle recharging points. Moreover, the group has energy assets with 3870MW of generation capacity, out of which 1645 GW are renewable.
Repsol has announced an ambitious strategic plan aiming to decarbonize the portfolio, moving into a new operating model towards net zero, all while generating strong financial results and remunerating shareholders. By 2030 Repsol aims to have ca. 45% of its capital employed in the low-carbon business. This transition is self-financing with oil at $50/bbl. and gas at $2.5 HH.
Repsol is listed on the BME (Madrid Stock Exchange) and has a current market capitalization of €18.3 billion.
Q2 Results
On July 27, Repsol printed adequate Q2 numbers, with adjusted income coming in around 1% below the company-compiled consensus . With recovering underlying commodity prices and increasing refining margins, we believe these results represent a trough for Repsol. Execution in Upstream was stronger than expected, with a low double digits production increase powered by higher production in Venezuela and Libya, the commissioning of new wells at US shale assets, and scope ( Inpex ). The performance of the Industrial business was in line, while Commercial and Renewables underperformed consensus expectations.
Repsol reiterated its upstream production guidance for the year at 590–610 Kboe /day and continues to expect a refining margin of $9/bbl. for the year. Reflecting lower gas prices and other contributing factors, Repsol lowered its CFFO (Cash Flow from Operations) guidance by €1 billion to €7 billion per year. This was expected by the markets and did not come as a surprise. Moreover, the company guided to 30% of CFFO being distributed to shareholders implying a cumulative amount of €2.4 billion of dividends and buybacks. Moreover, a new capital reduction program aiming for the redemption of 60 million shares by year-end was announced. This should result in mid-single digits accretion.
Robust Upstream Cost Structure And Improving Refining Margins
After the last oil and gas downcycle, Repsol has materially improved its cost structure in Upstream. It has reduced exposure to high-cost production areas by divesting assets and has a pipeline of lower-cost production assets. We are constructive on the latest explorations in Indonesia , Mexico , and the Gulf of Mexico.
In the Refining business, Repsol is among the European leaders and owns one of the most complex and largest refining networks in the continent. We have a positive view on margin progression in the following quarters driven by robust seasonal demand combined with a variety of issues affecting supply such as strikes, fires, etc.
Green Transition
Repsol is navigating the Green Transition deftly and we believe it will emerge as a winner. It currently has ca. 1.8 GW of renewable capacity and has an ambitious goal of reaching 20 GW by 2030. The acquisition of Asterion Energies in 2022 will add ca. 7.7 GW of additional capacity mainly in Southern Europe. In June 2022, Repsol sold 25% of its Renewables business to Credit Agricole Assurances and EIP at an implied total Enterprise Value of €4.4 billion against a much lower capital employed of <€2 billion, a 2x MOIC, demonstrating impressive value creation capabilities.
Moreover, Repsol has a considerable presence in EV charging and Biofuels, positioning itself as the European oil & gas player most exposed to the Green Transition relative to its size. Repsol has set a target of 1.9 GW renewable hydrogen capacity by 2030, and 0.55 GW by 2025. Given Spain’s solar power generation capabilities and positioning, we believe Repsol is well-positioned to benefit from the emergence of green hydrogen technology in the long run. However, given the low visibility, this is not part of our investment case.
Valuation and Capital Returns
In FY 2024, we forecast €59 billion of revenue, €6.8 billion of EBIT, and €3.7 billion of reported net income, implying an EPS of €3.0. With a market capitalization of €18.3 billion, a net financial debt position of €2.0 billion, and an enterprise value of €20.3 billion, Repsol is trading at 3x forward EBIT and at 4.6x forward EPS. Assuming €2.4 billion of distributions, 13% of the market cap will be returned this year. Assuming €0.70 DPS, Repsol offers a 5% dividend yield.
Repsol is currently cheaper than peers BP, TotalEnergies, Eni, Shell, etc. that trade at 25%+ higher forward PE multiples. Repsol also trades at a discount to its historical multiples. This discount does not reflect the underlying fundamentals of the company. We believe Repsol should trade at least at 5.5x forward EPS or at a share price of €16.5 or $18.2, implying at least 20% upside. Catching up to other leading European oil majors implies upside north of 20%. We find this very attractive especially combined with the double-digit level of shareholder distributions.
Risks
Risks include but are not limited to lower than expected oil and gas prices, lower than expected production, production risk in countries such as Venezuela or Libya, asset impairments, operational problems higher than expected costs, higher than expected capital expenditures, poor project execution, lower than expected refining margins, higher taxation and one-off/windfall taxes, more restrictive environmental regulations, foreign exchange movements, natural disasters and weather events, accidents, value destructive M&A, suboptimal allocation of capital to low IRR renewable projects, etc.
Conclusion
Given the valuation discount to peers combined with high dividends and buybacks, supported by strong fundamentals, refining tailwinds, and a smooth navigation of the green transition, we recommend building a long position on Repsol shares. Repsol is among our favorite names in the Big Oil space.
For further details see:
Repsol: Appealing Valuation And Double-Digit Shareholder Distributions