Net Income Up 93% and Production Up 3% While Capex Stays Under Guidance

Spanish energy company Repsol (ticker: REP.MA) reported adjusted net income for the quarter of €307 million, 93% higher year-over-year. CFO Miguel Martinez San Martin cited the company’s improved year-over-year results as demonstrating “our resiliency in the lower part of the commodity cycle.”

Production from the Upstream division averaged 671,000 BOEPD, lower than the previous quarter average of 697,000 but 3% higher year-over-year. Average 2016 production is still forecasted to reach 690,000 to 700,000 BOEPD, in line with guidance.

Total CapEx for 2016 is expected to be below guidance of €3.9 billion as a result of “ongoing project optimization, strict cost control and the referral of non-critical in business.”

Updates on Key Assets

Production increases were supported by the acquired Gudrun assets in Norway, the ramp up of the Cardón IV project in Venezuela and Sapinhoá in Brazil, and higher production in Peru. Volumes were impacted by the ending of production in the Varg field in Norway and by planned maintenance in Trinidad and Tobago, Malaysia and Vietnam and a lower working interest in the Eagle Ford.


Repsol Ahead of Schedule on 2016-2020 Strategic Plan

Source: Repsol 3Q Investor Presentation

Fourth quarter expected developments include the start-up of Lapa in Brazil and the ramp up of production in Trinidad and Tobago.

2016-2020 Strategic Plan

Martinez also gave an update on the company’s 2016-2020 Value and Resilience Strategic Plan. “Year-to-date, our delivery on the strategic objectives has maintained a good pace and by year end we expect to surpass some of the principle KPIs set for the year. By the end of the quarter, projects have commenced that will secure our original savings target for the year,” said Martinez.

“The progress achieved in the first nine months of the year put us on track to deliver well over our previously revised €1.2 billion target for 2016. In fact, we now believe an accelerated target of €1.4 billion is achievable this year.”

Repsol Ahead of Schedule on 2016-2020 Strategic Plan

Source: Repsol 3Q Investor Presentation

Also in the quarter, synergy projects delivered 90% of the run rate target for the year, with more than 80% of the action required to capture the $400 million run rate for 2020 already in place.

The company’s divestment program has already has already surpassed the €3.1 billion target set for the end of 2017. The sale of its 10% stake in Gas Natural, a Spanish gas utility, to Global Infrastructure Partners puts total proceeds and benefits captured since the plan was presented in October 2015 at roughly $5 billion.

Analyst Q&A

Q: Could you provide a bit more color on where you think you’ll end up for this year and in 2017 in terms of CapEx?

REP: I estimate we are going to end up this year around €3.5 billion. And regarding 2017, we have not finished yet the budget program, but I estimate that we are going to be around that figure as well, so €3.5 billion I think is a figure you can put in your models.

Q: On your North American Upstream segmental reporting. It looks like decent profitability in the third quarter despite some lower volumes and obviously lower commodity prices.  Is that an improvement in the cost structure of that North American Upstream business? Could you say if it’s Canada or its U.S. specifically? And is an increase going to happen as we look into 2017 for the U.S.?

REP: I think that the advantage we have had in this year were based in prior decisions. I mean first, the impairments of the Mid-Continent that were strong and have reduced the depreciation. That has been a factor. So lower technical amortization. And in Eagle Ford is true that the agreement with Statoil which has been with the group, instead of having two operators, we have just one operator. And advantage per barrel we are obtaining as our first estimate is little around $10, $10 per barrel having just one operator and also having just one rig. So, I’ll say, we have lower volumes, but the cost structure is improving.

Q: On the upstream, where do you think breakeven can get to given the lower CapEx spend, and what is the split between sustaining and growth CapEx in the upstream?

REP: I think that that’s something that depends much on your CapEx program. So, it’s not an easy question to be answer in straight. I mean, any project that you develop day one, you invest and you don’t produce. So, it’s not that easy to say that’s my breakeven. We can talk about breakeven of fields that are already producing, we can talk about our breakeven thinking in the long-term, but it’s not a so simple as to say, well my breakeven today is $65. So, it’s not that easy. What I can show is that you have the results of the Upstream division this year and you have the average price. And you can see that we have been more or less even at today prices and this is the best approach I can give you. And the split between sustaining and growth CapEx, there we have a couple of advantages, I think in comparison with our peers.

The first one is that our growth has come a) because of the acquisition of Talisman, we have doubled our size. And I will say second, if you remember the 10 projects for former Repsol, they are either full invested or almost as Lapa and that will come on-stream by the end of this year. And [ph] Regen that will come – will produce their first gas next year.

But we have also the ramp up there. So, CapEx is going to be small, while increasing productions going to be important, this ramp up processes. But if I have to give a split of all the CapEx between what is growth and what is based on existing reserves, I’d say it’s a 40-60, 40 for growth and 60 for base reserves or 35-65 for Q1, two-thirds, one-third to the limit.

Q: Have you been able to get back into Libya at this point or was there any update on the stages of your facilities or operations there? And then more broadly just

REP: Well, in relation with Libya, there are no news. We have data that the installations remain stable. I mean there has not been any damage to those. And we know that politically talking especially the U.S, Italy and France are trying to put pressure in order to solve and help into a solution, but till now, no major changes. So, we keep it at zero production there.

Q: In the upstream, given some of the changes you’re making to the capital spending price fall for this year and to next year, should we be thinking about any decline rates or should we be thinking about decline rates differently?

REP: Our declined rate maybe for the existing assets a little bit below 4%. That’s the average. I think that is not that big, because a) we are quite gussy and B) some of our projects are – most of them are plateau. So, no major changes. And capital spending profile for the next year, I have to wait as mentioned before in relation with the question about the U.S. CapEx. I have to wait to answer the question till I have the final figures from 2017 budget.

Q: You had quite a big drop in your profitability in Latin America, in upstream, just wondering if it’s entirely related to reduction in gas prices, was there another item we should consider?

REP: The drop in profitability basically refers to in one hand Trinidad and Tobago, I mentioned that there was an adjustment from prior quarters that was executed this third quarter, and for sure also the impact of the oil price in the gas we sell from Bolivia, that is indexed to the oil price with a lag of six months going to Argentina and three months going for the gas that goes to Brazil, so this is the other factor that has reduced the results in Latin America.
Links to the company’s earnings release, conference call, and investor presentation are provided.

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