Repsol's Brazil Equity Offer - Analyst Blog

Spain’s largest integrated oil and gas company Repsol YPF (REP) yesterday filed its intent with Brazil’s securities regulators to sell voting shares of its Brazilian unit through an IPO (initial public offer).

Repsol intends to use the proceeds for exploration and production activity at its offshore fields. Repsol owns a stake in Brazil’s Guara field near Tupi, which may hold as much as 2 billion barrels of oil.

With the turnaround in global demand and strong prices, Repsol’s adjusted upstream operating income in the recently completed quarter has more than doubled year over year.

While production mix in the second quarter improved on higher oil production, Repsol is also on track with its natural gas initiatives. The company recently found a 1 trillion cubic feet gas deposit in southeastern Bolivia. The area known as Rio Grande has a ready infrastructure in place for gas production.

We view the company’s forthcoming Brazil IPO as a positive catalyst. Brazil is one of the company’s core areas for growth, which the market is presently pricing at a discount. On successful completion of the IPO, we believe that Repsol will be able to fund its upstream activities.

We also appreciate the company’s strategic moves to reduce its Argentine exposure to 51% from the current 85% in slow-growth YPF.

However, Repsol’s Brazil IPO is reliant on the successful completion of the Petrobras (PBR) equity offer expected shortly and favorable market conditions. Additionally, trimming of the YPF exposure will also take a few years to be accomplished. Consequently, we maintain our Neutral recommendation with the Zacks #3 Rank (Hold).