Repsol Prospects Brighten On Different Fronts

The prospects of Spanish oil major Repsol YPF took a turn for the better yesterday when an improved debt picture, a ratings upgrade and rumours about new investors sent its shares soaring.

As of 1107 GMT the stock was up eight percent to 12.28 euros, clawing back some of the 30.5 percent decline seen in 2002. Repsol bond prices spiked up temporarily before returning to levels seen at Thursday's close.

Repsol's investor relations director told a Madrid radio station the company would cut debt ahead of schedule in part because a stronger euro would trim up to 1.2 billion euros from its mostly dollar-denominated obligations.

Net debt, which ballooned on an ill-fated venture in Argentina, was pegged at 10 billion euros by year end, less than half what it was in 2001.

The brokerage arm of Spain's largest bank Santander Central Hispano than upped its recommendation on the stock to buy from underperform, assigning a new target price of 15.60 euros from 14.00, saying poor investor sentiment had bottomed out.

That came on top of market rumours that at least two deep value funds, those searching for long-term investments, had increased their positions in Repsol, which the company could not confirm.

"The truth is that the stock has been penalised and is trading at a major discount to other oil companies," said Enrique Blasco, a fund manager at Caja Madrid, who said he recently added Repsol to one fund but was considering taking profits on it in others.

"But you still have to be very cautious. The Argentine government has ways of undoing deals that were done and you never know what could happen there. These gains could be short term," Blasco said.

Bond traders said the firm's 5.75 per cent eurobond due December 2006 was trading at 89.53 per cent of face value at 1019 GMT -- up from 89.1 per cent at market open. However, traders said that the bonds had already started to slip with some seeing bids at around 89.2 per cent of face value.

"The news is positive and there has been a fair amount of anxiety around Repsol so this may quiet that," said a trader at a European bank. "But the market will need to see more concrete measures before getting really positive."

This year has been a nightmare for Repsol, mostly because of the vicious circle produced by Argentina, where it does about half its business.

Board members in May suggested that executive chairman Alfonso Cortina name a CEO to help him deal with the trying times, according to sources close to the board. Cortina fended off the challenge to his authority and no CEO was named.

Repsol debt soared to finance its $15 billion purchase in 1999 of Argentine oil company YPF, in a deal that was hailed as a bargain at the time, but that was in the early stages of Argentina's economic crisis.

The devaluation of the peso has erased billions in Repsol's asset value, in turn increasing its debt as a ratio to capitalisation. Today, Repsol's group stock market worth is less than what it paid for YPF.

Meanwhile, the shaky Buenos Aires government has looked to the oil industry to tap into more funds, floating a number of evolving tax and retention schemes for crude and gasoline, which has created the kind of uncertainty that investors loathe.

Repsol in the past has taken a beating from the markets for failing to meet debt reduction targets so to make sure that does not happen again the group in May sold a 23 per cent stake in gas distributor Gas Natural.

The deal trimmed about 4.9 billion euros off Repsol debt but left analysts fretting that Repsol had sold off the family silver. Shares sank to a five-and-a-half year in June.

Recently, however, Repsol has been on a roll.

The Argentine government this week eliminated a gasoline export tax, and the appreciating euro is shoring up the balance sheet. The stock market flotation of Gas Natural's pipeline unit Enagas came off smoothly, taking more debt off Repsol's books.

Speaking to reporters on Wednesday, Cortina predicted buoyant second-quarter results. Investor relations director Antonio Gomis told radio station Intereconomia, earnings would be better than those of the first quarter but still worse than those reported in the second quarter a year ago.

"The sale of Gas Natural and Enagas will reduce debt between 5.0 and 5.3 billion euros and the strengthening of the euro against the dollar between 1.0 and 1.2 billion euros," Gomis said. "Between March and June, debt will be reduced by at least 6.0 billion euros."

"Debt will be reduced from 16 billion euros ($15.58 billion) at the end of March to 10 billion euros at the end of 2002, less than half of what it was a year ago," investor relations director Antonio Gomis told the radio station.

Repsol stock was down 30 per cent this year as of Thursday's close as its heavy debt load has weighed on sentiment.

Gomis said the debt reduction would place Repsol "in line with the industry."

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