Repsol YPF S.A. (REP) reported better-than-expected third-quarter earnings of 50 cents per ADR, topping the Zacks Consensus Estimate and year-earlier earnings of 47 cents. Net income from continuing operation was $578 million, up 5% year over year.
Total revenue in the quarter was $18.9 billion, up 4% from the year-earlier quarter. The strong results were driven by improved commodity prices, higher volumes, appreciation of dollar and solid contribution from the Downstream segment.
Operational Performance
Adjusted Upstream operating income in the quarter was $400 million, down 7.4% year over year mainly due to exchange rate differentiation. In euro terms, operating income increased 2.6% driven by increased commodity price realizations and production volumes.
Total production averaged 346 thousand barrels of oil equivalent per day (MBOE/d) – 41% liquids – up 5.8% from the year-earlier level. Production mix in the reported quarter improved on higher oil production, particularly attributable to the incorporation of Barua Motatan field in Venezuelaand the increased quota in Libya. This was partially offset by declining production at the Shenzi fields due to several maintenance turnarounds and production tests.
Repsol’s liquids price realizations averaged $70.6 per barrel, up nearly 12% from the year-ago quarter. The average natural gas price realization during the quarter was $2.7 per thousand cubic feet (Mcf), up 29% year over year.
Investments in the Upstream segment were $463 million, up approximately 12% from the year-ago level. Exploration expenses increased considerably year over year to $192 million.
Adjusted operating income from the Downstream segment was $333 million, more than double from the third quarter of 2009. The company invested $535 million in its Downstream segment during the quarter. Adjusted operating income from YPF increased significantly (more than 68%) from the year-earlier quarter to $507 million.
The company’s adjusted income from operations in Gas Natural Fenosa segment plunged 52% year over year to $155 million. Finally, Repsol’s LNG division earned $61 million during the quarter, up significantly from the prior-year quarter.
Cash balance at the end of the quarter stood at $3.2 billion and debt balance was about $20 billion, representing a debt-to-capitalization ratio of 41.8%.
Outlook
Repsol and Sinopec entered into an alliance in Brazil, creating one of the largest private energy companies in Latin America. Repsol is the second largest license holder in offshore Brazil. In its 2010–14 plan, Repsol indicated that it will spend a substantial amount on the development of upstream opportunities in Brazil.
With the fresh $7.1 billion capital from Sinopec, the future momentum of this development program appears positive. YPF SA, the Argentine counterpart of Repsol also plans to sell up to $600 million of bonds as the company is seeking to expand in the Upstream space.
We believe Repsol’s Downstream segment will continue to underpin the company’s overall strength driven by a sharp pullback in European refining margins.
As we believe that upstream activity in Brazil associated with Sinopec will positively impact the company in the long run, our recommendation for Repsol is Outperform. However, we do not foresee any catalyst in the near term that can aid the company’s underlying valuation. Consequently, short-term recommendation remains Neutral with the Zacks #3 Rank (Hold).
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