Moody’s downgrades Repsol rating, exposing vulnerability to YPF seizure
Moody's Investors Service decided to slash the long-term rating of Spanish oil company Repsol after the Argentine government seized 51% stake of Argentina based YPF, formally run by Repsol.
The rating downgrade reflects the negative impact of Argentina's expropriation of Repsol's in YPF on Repsol's overall credit profile, said Moody's Vice President Francois Lauras on Tuesday. The outlook on all ratings, however, is stable.
The loss of its controlling stake in YPF reduces the scale and diversity of Repsol's business profile, and deprives the group of sizeable assets and the YPF dividend stream, explained Lauras.
In a statement, Moody’s indicated that, in 2011, YPF accounted for approximately one third of Repsol's consolidated proved reserves and nearly half its hydrocarbon production (on a proportional basis).
“The expropriation also increases the group's relative exposure to the European refining sector, which has recently been particularly challenged due to overcapacity and weak demand conditions, and to the economic woes currently affecting its main downstream markets of Spain and Portugal”, Moody’s informed.
“From a financial standpoint, the action of the Argentinean government has resulted in a material deterioration in Repsol's credit metrics,” the rating agency remarked.
This comes at a time, according to Moody’s, when Repsol is engaged in high capital spending in order to bring its major upstream projects to market, which the agency expects to result in further negative free cash flow for the group over the next two years.
“The group will no longer derive a stable and substantial dividend income from YPF, which since 2003 has averaged in excess of one billion dollars per year.”
In 2011, YPF dividend accounted for around 30% of Repsol's retained cash flow. The Investors service also highlighted the reimbursement for the seizure of YPF was unsure further complicating the company’s financial situation.
“Meanwhile, the level and timing of any monetary compensation that Repsol could potentially secure from the Argentine government remains highly uncertain”.
Moody’s acknowledged nonetheless Repsol’s efforts to rebuild its assets after the seizure. “The stable rating outlook reflects Moody's expectation that Repsol's timely implementation of the various initiatives in the wake of the YPF expropriation, in parallel with the successful execution of its major upstream projects.”