Repsol’s LNG Plant Goes Online – Analyst Blog

Repsol YPF, S.A. (REP) has launched the Peru LNG (liquefied natural gas) project, the first gas liquefaction plant in South America. The plant has an annual output capacity of 4.4 million tons and can process up to 620 million cubic feet of gas per day. The Peru LNG project is situated 170 kilometers to the south of Lima.

Though Repsol has an exclusive right to sell the entire output of the plant for the next 18 years, the $4 billion project is financially supported by a consortium, in which a 20% stake is held by Repsol, 50% by Hunt Oil USA, another 20% by SK Energy South Korea and the remaining 10% by Marubeni Corporation Japan.

South America is an integral part of the company as the majority of Repsol’s operating earnings come from this region. The key positives in the company’s story include its leverage to the LNG market.

Repsol is focusing on optimization of downstream profitability. Apart from the investment in the South America’s LNG market, the company is planning to invest significantly in Spain for the enhancement of refining margin.

Although the company has been actively engaged in new discoveries in the past few months, we are skeptical about any short-term changes in earnings trend. Repsol expects to reach a reserve replacement ratio of 125% by 2012 following the replacement of 94% of its production in 2009, representing one of the weakest efforts in its peer group.

However, we believe that the stock will perform in line with the broader equity market on the back of success on the exploration front and strategic moves to reduce its Argentine exposure. We keep our Neutral recommendation unchanged at this stage.