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Rating Action:

Moody's affirms Talisman and Repsol ratings and changes outlooks for both to negative

19 Dec 2014

Approximately $4.7 billion of Talisman debt affected

Toronto, December 19, 2014 -- Moody's Investors Service affirmed Talisman Energy Inc's (Talisman) Baa3 senior unsecured and Prime-3 commercial paper ratings and changed its outlook to negative. Separately today, Moody's also affirmed Repsol S.A.'s (Repsol) Baa2 Issuer Rating and Baa2/(P)Baa2 senior unsecured long-term debt and Prime-2/(P)Prime-2 short term ratings of Repsol's guaranteed subsidiary, Repsol International Finance B.V. Repsol's outlook was changed to negative. These actions are in response to Repsol's announcement that it has agreed to acquire Talisman for $8.3 billion.

"The affirmation of Talisman's ratings with a change in outlook to negative is in line with Repsol's negative outlook. Parent support will be a key issue for Talisman's rating," said Terry Marshall, Senior Vice President. "Absent a parent guarantee, the Talisman debt is likely to remain rated one notch below Repsol's. If Talisman's debt remains unguaranteed post-closing and audited financial statements are not provided for Talisman, Moody's would withdraw the ratings on Talisman's debt."

The acquisition of Talisman will accomplish Repsol's goal of growing and rebalancing its upstream portfolio, with benefits for its cash flow, size and scale, and geographic diversification, but it will also measurably elevate financial leverage. Repsol's ratings were affirmed based on an expected gradual improvement in the company's cash flow and leverage profile over the next few years as it cuts costs, sells assets and focuses on its highest return upstream investments. The negative outlook reflects uncertainty over the timing and execution of its integration plan, as well as the uncertainty over cash flow and asset valuations created by a lower oil price environment.

Outlook Actions:

..Issuer: Talisman Energy Inc.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Talisman Energy Inc.

....Multiple Seniority Shelf (Foreign Currency), Affirmed (P)Baa3

....Senior Unsecured Commercial Paper (Foreign Currency), Affirmed P-3

....Senior Unsecured Regular Bond/Debentures, Affirmed Baa3

RATINGS RATIONALE

The total transaction is valued at almost $13 billion, including $8.3 billion cash for Talisman's equity and assuming $4.7 billion of its debt. The offer has been approved by the boards of both companies and is subject to a vote by Talisman's shareholders to occur in 2015.

Repsol entered into the transaction with a large cash position of $8.3 billion and relatively low net leverage, a result of asset sales and its large settlement earlier in 2014 related to the YPF expropriation. We estimate pro-forma leverage post-closing in 2015 to be elevated, with Debt/EBITDA in the area of 3.4x (including Moody's standard adjustments). The equity purchase will consume virtually all of Repsol's cash, but it plans to issue up to Euro 5 billion of hybrid securities to stabilize the balance sheet and provide a future cash cushion. If that financing does not go forward, we believe Repsol would still have adequate liquidity in the form of undrawn bank credit facilities, both for Repsol and Talisman.

The company's combined asset and cash flow profile will enlarge and diversify reserves and production, increasing proved reserves by about 55% to 2.35 billion BOE and oil and gas production by 75% to about 680,000 BOE/day. Talisman will add important new areas and operating expertise to Repsol's operations, including positions in unconventional shale resources in the US and Canada, as well as conventional resources in Asia and Norway. It will also re-balance the oil and gas portfolio geographically, increasing the operational concentration in low political risk environments.

Talisman's mature UK North Sea operations remain a problem area with high operating and abandonment costs. Moody's expects Repsol and Talisman to continue to work over the next few years with joint-venture partner Sinopec to reduce financial and operating exposures there.

As a result, we view Repsol as being in an operational and financial transition over the next few years as it evaluates the portfolio and makes decisions about cost efficiencies, asset sales, and capital spending, including where to focus its upstream investment and any potential cutbacks in capital spending.

In the meantime, Repsol has a number of levers to pull to maintain flexibility and gradually reduce leverage. It plans to reduce overhead costs, citing a combined potential of up to Euro 2 billion in cost reductions and asset sales over the next two years. However, it has not identified specific assets to sell, as it plans to re-evaluate the stable cash generating and growth assets in the portfolio as it integrates Talisman's operations. In addition, Repsol's refining and marketing operations will remain a sizeable 30% of its capital employed post-acquisition, providing a relatively stable free cash flow generating profile. Beyond its core oil and gas and downstream assets, it holds a 30% stake in Gas Natural SDG, S.A. (Baa2, stable outlook), with a current market value of Euro 6.3 billion, which could also be monetized.

The ratings affirmation also considers that growth in Repsol's cash dividend will be checked by its scrip program and that management is unlikely to pursue aggressive share repurchases, given Talisman's integration challenges and investment opportunities and the pressures of an uncertain oil price environment.

DRIVERS OF RATING CHANGE

Positive ratings momentum could develop over the next few years if Repsol successfully integrates the Talisman assets and reduces financial leverage in line with its asset sales and cost reduction program, leading to stronger credit metrics, including RCF/net debt above 40% and total debt/capital in the area of 30%.

The rating could be downgraded as a result of failure to execute on the integration and cost reduction strategy and sell assets, leading to persistent elevated financial leverage.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Talisman is a Calgary, Alberta-based independent oil and gas exploration & production company that has approximately 891 million barrels of oil equivalent (boe) of proved reserves and approximately 283,000 boe per day of production.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

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.

Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S Carter
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's affirms Talisman and Repsol ratings and changes outlooks for both to negative
No Related Data.
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