Repsol Profits Drop 48% On Weak Refining Results

FEBRUARY 25, 2010, 11:56 A.M. ET | http://online.wsj.com

By Bernd Radowitz

Of DOW JONES NEWSWIRES

MADRID (Dow Jones)--Spanish oil firm Repsol YPF SA (REP) Thursday said its profit, excluding inventory effects, plunged 48% in the fourth quarter as its refined products sales fell while Spanish refining margins flattened.

Higher exploration costs also dented earnings, but improved profits at its Argentine unit YPF was a bright spot.

While refining margins in the first quarter are showing "signs of life," Repsol Chairman Antonio Brufau acknowledged that it could take two or three years before refining margins return to more economical levels.

Refining margins in Spain, where most of Repsol's refineries are located, dropped to zero in the final quarter of 2009, down from $8.6 a barrel in the fourth quarter of 2008.

ING oil analyst Jason Kenney said he doesn't expect Repsol's refining margins to significantly recover before mid-next year.

"Downstream will continue to be challenging," Kenney said. ING has a sell rating for Repsol. ING's price target for the oil company is currently under review.

Repsol shares closed down 1.45% at EUR16.36 Thursday.

Together with a 9.8% fall in refined products sales, it was enough to push replacement cost adjusted operating profit in the company's downstream unit down 83% to EUR95 million.

As a consequence, Repsol's replacement cost adjusted net profit fell to EUR241 million in the fourth quarter, from EUR467 million in the same period a year earlier.

Replacement cost adjusted net profit, or clean replacement cost of supplies, is the figure most closely watched by analysts, as inventory effects can often be volatile.

Repsol's unadjusted net profit in the fourth quarter was EUR211 million, versus a net loss of EUR187 million a year earlier.

Replacement cost adjusted operating profit in the fourth quarter fell 27% to EUR750 million from EUR1.02 billion in the year-earlier period.

Despite higher oil prices during the period, an intense exploration campaign, above all in Brazil, together with losses stemming from a weaker dollar, marred upstream results. Adjusted upstream operating income fell 11% to EUR225 million.

The company's increased upstream focus is bearing fruit, however. Repsol's oil and gas production--excluding the Argentine YPF unit--rose 5.8% to average 349,000 barrels of oil equivalent a day in the fourth quarter, boosted by new production from the Gulf of Mexico Shenzi field.

Repsol has high hopes that recent oil discoveries--most notably in Brazil's promising subsalt oil region--will boost oil output further. The company last year replaced 94% of all its oil reserves excluding Argentina with new reserves, having only replaced 65% in 2008 and 35% in 2007. Brufau said from now on, reserve replacement rates will be above 100%.

But developing the vast Brazilian resources could become too expensive for Repsol to shoulder. Brufau reiterated that the company may seek a partner in Brazil.

"If (expected) capex (for Brazil) will be higher than $15 billion, than that's going to be too much in one single place," Brufau said during a conference call.

"If that's the case, we will try to find partners to go with us, swapping assets, or try to find a partner to farm in to go with us in the development phase," Brufau said.

Repsol's Exploration and Production Director Nemesio Cuesta added the company won't take a decision on a possible sale of the Brazilian assets this year as it first wants to wait for Brazil to pass new oil legislation.

If exploration and other business opportunities were to drive up investments too much, Repsol may also consider selling its 30.8% stake in Gas Natural SDG SA (GAS.MC) in three to four years, Brufau added.

"Gas Natural is a very good asset," he said, but added that the company had a number of options in place for the asset.

Adjusted operating income from the Gas Natural stake contributed positively to Repsol's fourth quarter results, rising 36% to EUR185 million.

Incorporating production results from the YPF unit, Repsol's overall oil and gas output fell 2.6% to 915,000 barrels of oil equivalent a day due to declines in mature Argentine fields.

Nonetheless, adjusted operating profit at YPF surged 153% in the fourth quarter to EUR331 million amid a rise in Argentine fuel prices and greater income from exports.

Company Web site: http://www.repsol.com

-By Bernd Radowitz, Dow Jones Newswires, +34-91-395-8125, djmadrid@dowjones.com