“If thine eye offend thee, pluck it out.” Painful though it is, Repsol may have to heed the scriptures.
The acquisition of Argentina’s YPF in 1999 was supposed to herald the Spanish company’s emergence as a global oil major. Instead, it has left Repsol heavily exposed to economic and political turmoil.
Rumours that Argentina might emulate Bolivia’s recent renationalisation is just the latest headache. Repsol is now considering refloating part of YPF.
Last year, Repsol split its Argentine, Brazilian and Bolivian operations (ABB) into a separate division. Even if you assume ABB is worth zero, the implied enterprise value for Repsol is 8 times 2007 debt-adjusted cash flow. That is, undeservedly, at the high end of the sector. But the wonder is that it is not higher, with 45 per cent of group cash flow being discounted.
Despite its problems, ABB is clearly worth something. Relisting would provide a benchmark and also provide some insurance against expropriation. Actually doing it presents several challenges. Buenos Aires has taken even more of a beating than other emerging markets recently. Morgan Stanley’s base case enterprise value for ABB is €16.1bn, including €4.3bn of debt. Under this assumption, a one-fifth flotation would be worth €2.4bn – more than the total raised from all Argentine initial public offerings over the past decade, according to Dealogic.
Splitting up oil companies on paper to “unlock value” has become a bit of an analytical fad recently – just ask BP. An IPO of ABB, however, would be a bold statement of Repsol’s willingness to restructure in the face of adversity. That said, it would not be a panacea for Repsol’s wider issues. Outside ABB, it has attractive refining and natural gas assets but remains sub-scale and needs to diversify. There is a tragic circularity to that. It was Repsol’s earlier, equally bold attempt to address these very issues that got it into this position in the first place.