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Rating Action:

Moody's affirms Repsol's Baa2 ratings with negative outlook.

29 Oct 2015

London, 29 October 2015 -- Moody's Investors Service has today affirmed Baa2 long-term ratings of Repsol S.A. and Repsol International Finance B.V., as well as Ba1 rating on junior subordinated notes and P-2 short term rating of Repsol International Finance B.V. Moody's has also affirmed Baa3 and P-3 ratings of Talisman Energy Inc. The outlook on all ratings remain negative.

The rating action follows the announcement by the company of its updated strategic plan for 2016-2020.

"We view the plan as broadly credit supportive for Repsol's debt rating, but we are maintaining the negative outlook based on the continuing weak oil price environment, the company's high leverage in the wake of the Talisman acquisition, and expected strained cash flow metrics at least through 2016", said Tom Coleman, Senior Vice President.

RATINGS RATIONALE

The plan makes a concerted shift to a "value over volume" strategy in the upstream business, emphasizing cost efficiencies and a shift away from production growth. Key aspects of the plan include a sharp cut in capital and exploration spending beginning in 2016, higher targeted cost synergies with Talisman, and major cost reductions and job cuts in the upstream, downstream and corporate operations. The company is making debt reduction a top priority, tied to a sizeable increase in targeted asset sales to EUR6.2 billion by 2020, including EUR3.1 billion targeted in 2016-2017. At the same time, it remains committed to the dividend, while extending the scrip program in the near-term to conserve cash.

Repsol is adopting a stress pricing assumption of $50/bbl Brent over the entire plan period and is managing the business to become cash flow neutral post-2016 (after dividends and capital spending) and largely before any benefit from asset sales proceeds. The company is likely to be free cash flow negative in 2015 and 2016 under lower pricing assumptions, with asset sales, including an estimated EUR 600 million from the sale of LPG pipelines, helping to cover the cash flow gap in 2016.

On the investment side, Repsol will reduce total capital spending by 40% in 2016 and beyond relative to 2014 levels, and will also cut exploration spending from a combined $2.6 billion to $1 billion annually. The company will focus on high-grading the combined portfolio and asset sales to achieve and stabilize production in the area of 700,000 boe/day.

While lower spending will affect reserve replacement and production growth in the longer-term, it is in line with the value creation strategy and will afford more near-term flexibility to reduce debt. In addition, Repsol has good visibility on new production through 2020 and can ramp-up spending fairly quickly if oil prices rebound, particularly in the unconventional shale operations.

Repsol also increased its targeted savings from Talisman synergies by 60% to reach $350 million by 2018, as well as an additional EUR 1.1 billion of cuts in upstream capital and operating expenditures. These targets are aggressive but probably attainable. Part of Repsol's challenge will be to continue bringing down high costs in areas such as the North Sea and unconventional operations in the Eagle Ford shale.

Barring a recovery in oil prices, asset sales will be Repsol's main source of debt reduction. While low oil prices will hurt valuations and could hinder its ability to sell upstream assets, Repsol in the near term will depend more on mid-stream and downstream assets. However, there could also be room to opportunistically sell smaller or more marginal upstream assets.

We continue to view Repsol's Baa2 rating as weakly positioned and remain concerned about strained cash flow protection and negative free cash flow in 2016, with key metrics such as retained cash flow to net debt in the low to mid 20% area (including Moody's standard debt adjustments). However, with the Talisman acquisition it has a larger and more diversified upstream portfolio with production visibility and optionality.

In addition, the downstream refining operations have been upgraded and are generating free cash flow and benefiting from stronger margins. We note the strategic plan incorporates a mid-cycle margin view of $6.40/bbl of output, but that the recent strong refining margins may not be sustainable and are likely to prove more volatile over time.

Repsol's 30% stake in Gas Natural SDG, S.A. (Baa2 stable) has cash flow value as a stable dividend stream and optionality as a sellable asset, although the company does not intend to sell down its stake at this time.

Repsol's plan to issue up to EUR 3 billion of hybrid securities will be important to stabilizing its acquisition leverage. However, the hybrid issue still creates a fixed call on cash flow, and the "equity component" will remain a secondary consideration compared to Repsol's real progress paying down debt.

Moody's will observe Repsol's actual financial and operating results for 2015, and in 2016 on its delivery on cost reductions and integration of Talisman, and progress on assets sales to reduce leverage, before taking any further action to stabilize or downgrade the company's ratings.

Talisman's long-term debt, rated Baa3 with a negative outlook, is not guaranteed by Repsol and will continue to be notched below the parent company's debt rating.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David G. Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Repsol's Baa2 ratings with negative outlook.
No Related Data.
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