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Rating Action:

Moody's changes outlook on Repsol's Baa3/P-3 ratings to stable from negative

01 Mar 2013

Approximately $9.3 billion of rated debt securities affected

London, 01 March 2013 -- Moody's Investors Service today changed the outlook on the Baa3/Prime-3 (P-3) ratings of Repsol S.A.(Repsol) to stable from negative. Concurrently, Moody's has affirmed all of Repsol's ratings, which include the Baa3 issuer rating, the Baa3/P-3 senior unsecured debt ratings of Repsol International Finance B.V. and the Ba2 preferred stock rating of Repsol International Capital Limited.

"We have changed our outlook on Repsol's Baa3/P-3 ratings to stable following the company's announced agreement to sell its liquefied natural gas assets for $6.7 billion to Royal Dutch Shell," says Francois Lauras, a Moody's Vice President - Senior Credit Officer and lead analyst for Repsol. "We expect that the successful completion of the transaction will enable Repsol to reduce its debt leverage significantly."

RATINGS RATIONALE

Today's rating action follows Repsol's announcement that it has reached an agreement with Royal Dutch Shell Plc (Aa1 stable) to sell its liquefied natural gas (LNG) assets to the group for $6.7 billion, which includes a cash consideration of $4.4 billion and the assumption of debt-like obligations such as finance and operating leases. The assets to be sold include Repsol's minority stakes in Atlantic LNG (Trinidad & Tobago), Peru LNG and Bahia de Bizkaia Electricidad (BBE) as well as the LNG sale contracts and time charters with their associated loans and debt. The transaction is expected to close by the end of 2013 subject to regulatory approvals and other conditions precedent.

The successful completion of the above transaction will enable Repsol to reduce its adjusted net debt (excluding Gas Natural) by EUR4.6 billion, compared with Moody's estimate of EUR12.7 billion at year-end 2012. Moody's believes that Repsol should be able to reposition its credit metrics more solidly within the Baa3 rating category because of (1) the transaction, and (2) the fact that the rating agency expects Repsol's future operating cash flow generation will continue to be underpinned by the group's ongoing execution of its major upstream projects.

In full year 2012, Repsol reported a marked improvement in the operating profitability of its core businesses (i.e., excluding Gas Natural and YPF), with a 50% increase in current cost of supply operating income to EUR3.4 billion. This was largely driven by the upstream business benefiting from a rebound in production, reflecting the resumption of production in Libya and the increased output in Bolivia and the US, and higher price realisations.

Looking ahead, Moody's expects that Repsol's future cash flow generation will be further bolstered by the start-up of an additional four major upstream projects scheduled to come on stream in the period through 2016. While the challenging economic environment prevailing in Spain is likely to continue to weigh on marketing volumes and margins, Repsol's downstream results should be supported by an uplift in refining margins, underpinned by the recent upgrade of the group's Cartagena and Bilbao refineries. The continuing success of the scrip dividend programme may also yield further cash savings for the group and boost its retained cash flow (RCF).

Without failing to recognise the multiple channels of contagion that exist between the sovereign and corporate issuers domiciled in Spain, the stabilisation of the outlook also reflects the fact that Moody's considers that Repsol's credit profile could accommodate a one-notch difference between its rating and the sovereign rating of Spain (Baa3 negative). While the group's business portfolio includes sizeable refining and retail/marketing activities in Spain, which generated 15% and 14% of group EBITDA (excluding Gas Natural and LNG) in 2012 respectively, the majority of Repsol's earnings and cash flows are generated from its upstream operations. Therefore, they are driven by the dynamics of the international oil markets and the price of crude oil.

In addition, Moody's notes that the group's liquidity position has been strengthened during 2012 by various divestments, working capital initiatives and the placement of a EUR1 billion 7-year bond and a EUR750 million 5.5-year bond. Repsol's liquidity profile is currently underpinned by cash balances of EUR4.6 billion and available committed lines of EUR4.4 billion (half of which are maintained with foreign international banks and EUR3.2 billion expire beyond 12 months), while debt obligations (including finance leases) falling due before the end of June 2014 amount to EUR4.2 billion. This leaves the group in a good position to cope with any potential renewed volatility within the credit markets.

WHAT COULD CHANGE THE RATING UP/DOWN

Looking ahead, positive momentum for the rating could develop, but only in the context of a stabilisation of the sovereign environment. In addition, to consider a rating upgrade, Moody's would require evidence of a further permanent and significant reduction in Repsol's indebtedness, in conjunction with a material strengthening of the group's operating cash flow generating capacity, driven by the successful start-up of its key upstream growth projects. This would most likely be evidenced by a marked improvement in the group's financial metrics, including RCF/net debt (based on the equity accounting of Gas Natural) rising markedly above 30% on a sustainable basis.

Conversely, negative rating pressure could arise as a result of (1) Repsol delivering a weaker-than-expected operating performance; and/or (2) significant delays and cost overruns affecting the group's major upstream projects. Such developments could delay a rapid recovery in Repsol's financial metrics in support of the Baa3 rating, including RCF/net debt (based on the equity accounting of Gas Natural) above 25%.

The principal methodology used in this rating was the Global Integrated Oil & Gas Industry published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Madrid, Spain, Repsol is a major integrated oil and gas company with consolidated total proved hydrocarbon reserves of 1.3 billion barrels of oil equivalent (boe) at year-end 2012 and a strong downstream presence in the Iberian peninsula. In 2012, the group reported total hydrocarbon production of 121 million boe.

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.

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.

Francois Lauras
VP - Senior Credit Officer
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

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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 changes outlook on Repsol's Baa3/P-3 ratings to stable from negative
No Related Data.
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