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Rating Action:

Moody's upgrades Repsol's rating to Baa1; stable outlook

10 Dec 2018

London, 10 December 2018 -- Moody's Investors Service upgraded Repsol S.A.'s (Repsol) issuer rating and guaranteed long-term debt ratings to Baa1 from Baa2. Concurrently, Moody's upgraded to (P)Baa1 from (P)Baa2 the shelf program and to (P)Baa1 from (P)Baa2 the MTN program ratings of Repsol International Finance B.V. as well as to Baa3 from Ba1 the rating on Repsol International Finance B.V.'s junior subordinated notes. Moody's affirmed Repsol International Finance B.V.'s Prime-2 (P-2) commercial paper rating and its (P)P-2 short term rating. In addition, Moody's upgraded Repsol Oil & Gas Canada Inc.'s long-term debt ratings to Baa1/(P)Baa1 from Baa2/(P)Baa2. The outlook is stable.

"There are three main drivers for our upgrade of Repsol's ratings: the material improvement of the company's credit metrics over the last two years, the resilience of Repsol's operations during times of very volatile oil prices, and its strategic decision to adopt its business model to the energy transition," said Sven Reinke, a Senior Vice President and the lead analyst for Repsol S.A.

RATINGS RATIONALE

Repsol's key credit metrics have improved substantially since 2016 and are now sufficiently strong to justify a Baa1 rating. The company's Moody's adjusted net debt / EBITDA ratio improved to 1.1x as of LTM September 2018 compared to 3.3x in 2016 and its RCF / net debt cash flow metric rose to around 44% as of LTM September 2018 from 23% in 2016. Different to many of its integrated oil and gas peers, Repsol's key credit metrics did not only improve as a result of higher EBITDA and operating cash flow generation but also due to substantial debt and net debt reduction. The company's Moody's adjusted debt and net debt fell to €15.6 billion and €8.8 billion in September 2018 from €19.5 billion and €14.8 billion in 2016, respectively.

The upgrade also reflects Repsol's resilient cash flow profile, based on its sizable downstream operations in Europe, that reduced earnings downside during the time of low oil prices in 2015 and 2016. Despite some earnings softness during the first nine months of 2018, Moody's expects Repsol's downstream operations to remain resilient and maintain its solid contribution to the earnings.

Moody's considers Repsol's strategic decision to adopt the company's business model for the energy transition by developing a profitable low carbon energy business as credit positive. Repsol is going to re-invest the EUR 3.8 billion disposal proceeds from the sale of the 20% stake in Gas Natural SDG, S.A. into the new low carbon energy business as well as into the expansion of its other downstream sub-segments thereby further increasing its resilience to volatile oil prices.

Based on a Brent oil price of $65/bbl as per Moody's current oil prices assumptions, the rating agency expects Repsol to generate Moody's adjusted EBITDA of €8-9 billion and Funds from Operations (FFO) of $5.5-6 billion in 2019-20 p.a., which compares favourable with lower EBITDA and FFO generation in recent years. However, due to rising dividend payments and in particular high capital expenditure in the next two years, Moody's forecast Repsol to generate negative free cash flow of around €1 billion annually in 2019-20. Nevertheless, Moody's expects that strong EBITDA and operating cash flow generation will largely offset higher cash outflow for shareholder remuneration and growth projects thereby keeping Moody's net adjusted debt/EBITDA ratio at around 1.5x. The retained cash flow (RCF)/net adjusted debt coverage will only fall slightly to around 35% over the next 12 -- 18 months.

RATING OUTLOOK

The stable outlook recognises that Repsol is solidly positioned in the Baa1 rating category. Rising shareholder remuneration and investment related cash outflow is compensated by Moody's expectation of relative stable EBITDA and operating cash flow generation amid a range of oil price scenarios. While Moody's forecasts negative FCF generation in 2019-20, Repsol's high cash balance as a result of material disposal proceeds over the last three years mitigates the limited period of high investment activities.

What could change the rating -- UP

While there is limited potential for a positive rating action in the mid-term, a combination of several factors could lead to a higher rating: further growth of Repsol's upstream scale, evidence of a successful execution of its strategy to develop a profitable low carbon energy business, and a stronger financial profile measured by a sustainable RCF/Net Debt metric of at least 50%.

What could change the rating -- DOWN

While not anticipated at this stage, a re-leveraging of the balance sheet, with RCF/net debt falling sustainably below the mid-30s, could lead to a downgrade of the rating.

LIST OF AFFECTED RATINGS

..Issuer: Repsol International Finance B.V.

Affirmations:

....BACKED Senior Unsecured Commercial Paper, Affirmed P-2

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

Upgrades:

....BACKED Junior Subordinated Regular Bond/Debenture, Upgraded to Baa3 from Ba1

....BACKED Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

....BACKED Senior Unsecured Shelf, Upgraded to (P)Baa1 from (P)Baa2

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Repsol Oil & Gas Canada Inc.

Upgrades:

....Multiple Seniority Shelf, Upgraded to (P)Baa1 from (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Repsol S.A.

Upgrades:

.... Issuer Rating, Upgraded to Baa1 from Baa2

Outlook Actions:

....Outlook, Remains Stable

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Repsol is a medium-sized integrated oil and gas company, and ranks as one of the largest industrial corporation in Spain, with revenue of around €42 billion in the 12 months ended 30 September 2018 and current market capitalization of around €24 billion.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Sven Reinke
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
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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