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TEXT-S&P revises Repsol-YPF S.A. outlook to negative
April 5, 2012 / 4:07 PM / in 6 years

TEXT-S&P revises Repsol-YPF S.A. outlook to negative

(The following statement was released by the rating agency)	
    Overview	
     -- Regional governments in Argentina have revoked several licenses of 	
Spanish oil and gas company Repsol-YPF S.A.'s subsidiary YPF  S.A. and we 	
believe that the country's operating environment has worsened.	
     -- We also believe that Repsol-YPF's debt could remain higher than we had 	
anticipated.	
     -- We are therefore revising our outlook on Repsol-YPF to negative from 	
positive and, at the same time, affirming our 'BBB' long-term corporate credit 	
rating on the company.	
     -- The negative outlook reflects the possibility of us downgrading 	
Repsol-YPF by one notch if the Argentine operating environment worsens 	
significantly further, or we do not see material improvement in the company's 	
credit metrics in 2012. 	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services revised its outlook on 	
Spanish oil and gas company Repsol-YPF S.A. to negative from positive.
At the same time, we affirmed our 'BBB' long-term and 'A-2' short-term corporate	
credit ratings on Repsol-YPF. 	
	
Rationale	
The outlook revision reflects our view of the increasingly difficult operating 	
environment in Argentina, and uncertainty about future improvement in 	
Repsol-YPF's consolidated credit ratios, which were weaker than we had 	
forecast in 2011. 	
	
We understand that the authorities in the Republic of Argentina (B/Stable/B; 	
Unsolicited Ratings) had previously revoked licenses for about 3% of the total 	
production of YPF S.A. (not rated), Repsol-YPF's 57% owned subsidiary. This 	
week, the Chubut regional government is said to have revoked another 	
production license. In addition, we believe that there could be increased 	
government interference in YPF's operations, or the revocation of further 	
licenses. Furthermore, we understand that YPF dividends, payable in May and 	
November 2012, will be paid in shares rather than in cash, which is in our 	
view a further negative development for the ratings, whereas previously the 	
steady dividend stream from YPF had mitigated the risk of operating in 	
Argentina.	
	
In addition, Repsol-YPF's operating and financial performance fell below our 	
projections for 2011, with Standard & Poor's fully-adjusted funds from 	
operations (FFO) to debt reaching only about 25%. On the one hand, reported 	
EBITDA (excluding Spanish equity affiliate Gas Natural SDG S.A. 	
 ) of about EUR7 billion was slightly lower than forecast, but 	
debt was almost EUR5 billion higher than assumed, due to the unexpected buy-back	
of 10% of treasury shares and a large working capital outflow.	
	
At year-end 2011, YPF had outstanding debt of EUR2.3 billion, compared with 	
Repsol-YPF's consolidated adjusted debt of EUR17.6 billion (excluding debt at 	
Gas Natural, which is proportionally consolidated in the reported figures). 	
However, of the total consolidated EBITDA (excluding Gas Natural), about 40% 	
is derived from YPF. 	
	
For 2012, we anticipate that Repsol-YPF's EBITDA (excluding Gas Natural) will 	
remain broadly unchanged from adjusted EUR7.2 billion in 2011, on the basis of a	
$100 per barrel Brent oil price assumption. We base our view on:	
     -- Operational improvements that we anticipate in the upstream segment, 	
thanks to increased production to about 350 thousand-360 thousand barrels of 	
oil equivalent per day (kboepd), up from 300kboepd in 2011, notably now that 	
Libyan production has resumed. Structurally, high oil prices are an additional 	
benefit.	
     -- Our generally weak outlook on the downstream segment, due to low 	
refining margins and the weak macroeconomic situation in its Spanish home 	
market. However, we also note that Repsol-YPF recently completed its 	
multi-billion refinery upgrading and capacity expansion program in Spain, 	
which should yield in a higher share of lighter refined products and 	
throughput.	
     -- Our view that YPF, which produced about 500kboepd in 2011, will be 	
constrained by the difficult operating environment, causing performance to 	
weaken further in 2012. 	
	
Our base-case scenario assumes disposal of the remaining 5% treasury shares 	
held on Repsol-YPF's balance sheet, with the other 5% already sold earlier in 	
2012. This, together with the newly introduced scrip dividend program, leads 	
us to assume that adjusted debt at year-end will fall to about EUR14 billion 	
(from EUR17.6 billion at end 2011), depending on working capital movements. We 	
therefore anticipate that the adjusted ratio of FFO to debt will be in the 	
35%-40% range, rather than the 40%-45% range we had previously assumed. 	
	
Liquidity 	
The short-term rating is 'A-2', reflecting our assessment of Repsol-YPF's 	
liquidity position as "adequate" under our criteria. We forecast that the 	
company's ratio of liquidity sources to liquidity uses will remain above 1.2x 	
in 2012.  	
	
We consider Repsol-YPF's liquidity sources in 2012 to include:	
     -- A large cash and cash equivalent balance of EUR1.8 billion (excluding 	
Gas Natural) as of Dec. 31, 2011 (after the 10% treasury shares acquired), 	
EUR500 million of which we treat as tied to operations and not fully available; 	
     -- Undrawn long-term committed bilateral bank lines that we understand 	
exceed EUR4.2 billion (excluding lines at Gas Natural and non-European 	
subsidiaries); 	
     -- Proceeds from issuing long-term debt of about EUR1 billion in early 	
2012; 	
     -- Operating cash flow in the order of EUR5.5 billion; and	
     -- Disposal of the 5% treasury shares already made in January, of EUR 1.36 	
billion.	
	
	
We also assume that the company will remain committed to selling the remaining 	
5% of the acquired treasury shares. 	
	
These sources compare to estimated liquidity needs in 2012 of:	
     -- Short-term debt of EUR3.9 billion at end 2011;	
     -- Capex of more than EUR5 billion; and	
     -- A cash portion of dividend payments assumed to be below EUR1 billion 	
(this assumes some success of the proposed scrip dividend program). 	
	
Outlook 	
The negative outlook reflects the possibility of us downgrading Repsol-YPF by 	
one notch in 2012, if the operating environment for YPF in Argentina continues 	
to worsen substantially. This could occur if the Argentine authorities make 	
further material license revocations without adequate compensation, or 	
otherwise intervene to limit YPF's operations. Our base-case assumptions do 	
not, however, factor in any loss of control or straight nationalization of YPF.	
	
Rating downside could also arise if Repsol-YPF's credit ratios do not 	
significantly improve in 2012, following the unanticipated increase in debt at 	
year-end 2011, through credit-supportive actions. These actions could include 	
disposals of the remaining treasury shares, stronger free operating cash flow, 	
or a lower cash portion of dividends. An adjusted FFO-to-debt ratio of 35%-40% 	
would be commensurate with the current rating in the absence of further 	
operational weakness. 	
	
Stabilizing rating factors would include a normalization of the situation at 	
YPF, and a strong improvement in Repsol-YPF's consolidation credit metrics. 	
However, going forward, we will also put an emphasis on Repsol's own metrics, 	
excluding YPF. 	
Related Criteria And Research	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate 	
     -- Issuers, Sept. 28, 2011	
	
Ratings List	
Ratings Affirmed	
	
Repsol International Finance B.V.	
 Senior Unsecured *                      BBB                	
 Commercial Paper *                      A-2                	
	
Ratings Affirmed; CreditWatch/Outlook Action	
                                        To                 From	
Repsol-YPF S.A.	
 Corporate Credit Rating                BBB/Negative/A-2   BBB/Positive/A-2	
*Guaranteed by Repsol-YPF S.A.	
	
 (Caryn Trokie, New York Ratings Unit)

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