Fitch Ratings has revised the Rating Outlook on Spanish oil and gas company Repsol, S.A.'s Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the Long-term IDR at 'BBB'.
The Positive Outlook reflects the progress in implementation of Repsol's strategy and the company's strong financial profile and a track record of commitment to a conservative financial policy. Fitch believes that the recent partial disposals of the renewable and upstream segments are long-term positives, as they provide the financial flexibility to accelerate the transformation of the business in light of the long-term energy mix changes. More visibility on the business profile of the company and sustainability of the prudent financial policy following the use of proceeds from the disposals will be a key rating determinant to resolve the Positive Outlook.
Repsol's ratings are supported by its large-scale upstream and downstream segments and geographically diversified operations. They also incorporate the company's proactive stance on energy transition.
Key Rating Drivers
Accelerated Transformation: Repsol has recently announced sales of a 25% stake in the upstream business to the U.S. investor EIG Partners for USD3.4 billion and disposal of a 25% stake in its renewables business to Energy Infrastructure Partners and Credit Agricole for EUR0.9 billion. The proceeds from the transactions will be retained on the balance sheet to accelerate investments in transformation of the business to meet the expected changes in the long-term energy mix. Fitch forecasts Repsol's funds from operations (FFO) net leverage to remain strong at around 1.1x over 2022-2025.
Deals a Long-Term Positive: Fitch views the recent transactions as a long-term positive given the expected decline in oil and gas sales in the long-term perspective. At the same time, the transactions dilute Repsol's effective interests in specific renewable and upstream projects. Fitch will take into account the dividends paid to minorities in our FFO calculation. Fitch understands that Repsol plans to maintain majority shares in both businesses in the foreseeable future. Full assessments of the transactions will also only be possible once proceeds are deployed in new operations.
Strong Upstream Results: European natural gas prices remain elevated due to tensions caused by the Russia Ukraine conflict and the resulting tightness in Europe with repercussions to the global LNG market. Oil prices were similarly high throughout 2022, supported by OPEC+ actions despite growing risks from lower global GDP growth. Fitch forecasts Repsol's upstream segment will record strong results in 2022 and 2023 on the back of Fitch's oil and gas price decks.
Uncertainties in Downstream: Refining margins have been very strong since February 2022 on the back of lower Russian exports of fuels to Europe, which will further reduce from February 2023 due to the EU sanctions. Gasoline crack spreads have decreased recently, but diesel cracks are still strong, which Fitch expects to continue.
Petrochemical margins were elevated throughout 2022, but higher energy prices and recession fears result in an uncertain outlook for margins in 2023. Fitch continues to model Repsol's downstream segment in line with the agency's approach to cyclical industries assuming a moderation of margins from 2023, in line with the average for the last five year.
Solidarity Payment: The EU energy ministers have recently agreed to a solidarity contribution, which will be levied on 'surplus taxable profits' of European oil and gas companies. Details on the implementation of the tax are yet to be announced given national governments can prepare country-specific measures within the broad EU guidance. Fitch assumes the tax will be related to European operations and estimates its impact will be limited to 0.2x on FFO net leverage for Repsol with no rating implications.
Focus on Energy Transition: Repsol plans to increase capital employed in low carbon businesses to 45% in 2030 from 2% in 2019. Repsol's decarbonisation strategy is embedded in all its key operating segments. In upstream, Repsol aims to focus on low-capital-intensive projects with short pay-back periods and low emission intensity. In the industrial segment, Repsol plans to invest in waste and used cooking oil treatment plans, higher biofuel production, chemicals circularity and biogas generation.
Repsol's commercial business will expand by offering multi-energy solutions to customers and growing the charging network. Renewable capacity is projected to reach 20GW in 2030, a target recently increased from 15GW.
Derivation Summary
Repsol compares well with EMEA peers such as OMV AG (A-/Stable) and MOL Hungarian Oil and Gas Company plc (BBB-/Negative). Repsol benefits from a larger scale and more diversified operations with an upstream output of 572kboe/d (including 214kboe/d from JVs in 2021) and a refining capacity of 1,000 kbbl/d versus OMV's 486kboe/d and 357kbbl/d (excluding the stake in the Ruwais refinery in the UAE), and MOL's 110kboe/d and 380kbbl/d, respectively. Repsol's upstream business is significantly smaller than Eni's (A-/Stable), which had a consolidated production of 1,332kboe/d in 2021.
Key Assumptions
Fitch Brent oil price assumption of USD100/bbl in 2022, USD85/bbl in 2023, USD65/bbl in 2024 and USD53/bbl thereafter;
Fitch natural gas assumptions for Henry Hub of USD7/mcf in 2022, USD5/mcf in 2023, USD4/mcf in 2024, USD3/mcf in 2025 and USD2.75/mcf thereafter;
Significant dividend going forward, along with buybacks from 2022 in line with management guidance;
Capex in line with the 2021-2025 strategic plan.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Consistent application of the strategy coupled with investment of the disposal proceeds in new low carbon businesses and commitment to a conservative financial policy;
Increase in the share of cash flows coming from low emission operations;
FFO net leverage below 2.2x or net debt to EBITDA below 2.0x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Rating Outlook is Positive, therefore, Fitch does not expect a negative rating action at least in the short term. Aggressive financial policy and/or investments in operations increasing the business risk profile would lead to a revision of the Outlook to Stable from Positive.
Change in business strategy that would reduce cash flow visibility and add to business risk may be negative for the rating;
Change in financial profile that would prioritise shareholder returns coupled with FFO net leverage above 2.7x or net debt to EBITDA above 2.5x on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Good Liquidity: As of end-June 2022, Repsol reported cash and cash equivalents of EUR4.3 billion (excluding the balance of a loan from Repsol Sinopec Brasil), along with EUR1.9 billion of marketable securities, which comfortably covers short-term maturities of EUR3.7 billion. Repsol's liquidity position is further supported by undrawn committed credit lines of EUR2.7 billion.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
REPSOL S.A. 
