We can say that Repsol is a company present in the entire oil value chain, from exploration to refining and marketing of energy and gas. In addition, in recent years it has been diversifying its business, previously more focused on the oil value chain and now also involved in electricity generation.


Before going into the details, it is important to know that the oil&gas sector divides its activity into 3 sub-sectors:

• Upstream: exploration, extraction, production and processing.
• Midstream: Transport and storage.
• Downstream: Refining and distribution.

In the case of Repsol, its business is focused on upstream and downstream. In his web, he gives a very general picture of the company and the specific projects it has underway. Unfortunately, it does not include the EBIT percentages that each section provides. The objective of this analysis is to understand what Repsol's business is like, how it is managed and if it is an option to incorporate it into a Buy&Hold focused portfolio. We usually divide the analysis in 3 sections to be better organized: the balance sheet, the income statement and the final valuation.

1 Balance Sheet Analysis

To begin with, we are going to outline Repsol, S.A.'s capital structure, that is, what it spends the money on (and how much) and to whom it is owed (and how much). We will calculate some ratios and see their progression over time. We are going to organize it in the following points:

• 1.1 Asset analysis
• 1.2 Analysis of liabilities and equity
• 1.3 Indebtedness
• 1.4 Safety margin
• 1.5 Liquidity/Treasury
• 1.6 Working capital

1.1 Asset analysis

The structure of the assets will indicate the degree of immobilization of Repsol, S.A.'s resources. In other words, how much of its total assets are fixed assets (real estate, investments, goodwill, etc.). In this case:



It presents a high immobilization with variations between 60 and 80%. This is completely normal, Repsol needs large and complex installations to extract and process oil and gas. In addition, it is buying renewable energy assets through its subsidiary Repsol Renovables, which also helps to keep this ratio high.


If we represent the breakdown of the asset by time, we make visible which part is current and which part is fixed. Its variation over time can give us information on profound changes in the company:



In this case, the total asset has been decreasing since 2015 and we see that it is because the fixed asset has decreased. It is not a significant decrease a priori, nothing that draws attention, but let's break it down a little more to see which items are affected.



The items that have decreased most in fixed assets are tangible fixed assets and investments in companies. On the one hand, Repsol has sold assets and on the other it has gradually disposed of its stake in Gas Natural (now called Naturgy), so the asset items are currently as follows:

• Tangible fixed assets (55,90%)
• Investments accounted for using the equity method (17,48%)
• Deferred tax assets (9,78%)
• Other intangible assets (5,55%)
• Goodwill (5,24%)
• Other assets Non-current (3,15%)
• Non-current financial assets (2,74%)
• Real estate investments (0,16%)

We do the same with the current assets, which, as we have seen above, have been increasing in recent years:



Once again, the two main items in the increase in fixed assets are inventories and pending collections from customers. In short, the business is bigger, requiring more stock and charging more for it (in absolute terms), a good figure:

• Stocks (27,88%)
• Customers by sales (22,95%)
• Cash (18,07%)
• Other current financial assets (18,00%)
• Other debtors (6,04%)
• Current tax assets (5,84%)
• Other current assets (1,18%)
• Non-current assets held for sale (0,03%)

1.2 Liability Analysis

In this section we will see the structure of Repsol, S.A.'s liabilities, which gives us information about the origin of the resources available to the company. It tells us where the money comes from and to whom it is owed. In order to know the proportion of the capital that belongs to the company compared to that of others, we have the following formula:



In the last year there has been an abrupt fall in the equity ratio and there can only be 3 reasons for this.

• Equity has fallen in relation to debt capital.
• Outside capital has increased in relation to equity.
• The previous two at the same time

Let's see which of the 3 options is the right one, as with assets, we are going to break down the liabilities. We'll start with a grouped chart and then break it down:



The answer is that both circumstances are occurring, but mainly the net worth has decreased this last semester, in the following graph we will see why:



Basically because of "the result of previous years", i.e. the losses incurred in 2019. The most important items are:

• Results of previous years (80,32%)
• Share premium (24,90%)
• Issued capital (6,21%)
• Other equity instruments (4,06%)
• Others (2,35%)
• Reserves (1,24%)
• Minority interests (1,11%)

Now the current liabilities:



In the last 2 years, an increase in current liabilities is perceived, mainly due to debts with credit institutions. This is something that we normally do not like to see, since this type of debt carries associated interest that has to be paid. We will see the cost of this debt, both short and long term, a little later and discover if it is bearable. The most important items that make up the current liabilities are:

• Short term debts to credit institutions (42,71%)
• Suppliers (24,12%)
• Other creditors (23,22%)
• Current provisions (5,73%)
• Other current liabilities (2,63%)
• Current tax liabilities (1,27%)
• Other short term financial liabilities (0,32%)

As for the fixed liabilities:



Long-term bank debt also increased, in line with current liabilities. The most important items are:

• Long-term debt with credit institutions (61,20%)
• Provisions Non-current (22,23%)
• Deferred tax liabilities (13,49%)
• Other non-current liabilities (2,57%)
• Other long-term financial liabilities (0,49%)
• Grants (0,02%)

1.3 Debt Analysis

Once we have seen the composition of the balance sheet in general terms, we are going to review some key figures. A very important concept in the valuation of a company is the debt, since a company that does not have debts cannot go bankrupt. The progression of the debt ratio tells us how big a company's debts are in relation to its equity:



Repsol comes from times of great indebtedness that it has gradually controlled. However, as we had anticipated, in the last financial year it has increased notably.


In general, Repsol's indebtedness is lower than the average for the sectors in which it operates:

• Energy (202,17%)
• Oil (131,12%)

In fact, the average debt of the IBEX35 is 256%, above Repsol.



Relating the debt to the EBIT, we see that in the last semesters before the losses, it was of the order of 12-15 times EBIT. Although it is not too high, until we see the associated expenses we cannot claim victory. In fact, it does not currently make sense to relate it to EBIT because it is negative.

1.4 Safety Margin

For companies to function properly, they normally need their fixed assets to be covered by their own capital plus long-term debts. This is known as the safety margin. Otherwise it would mean that part of the fixed assets of the company (offices, land, machinery, financial assets...) have to be paid with short term debt, which can be quite dangerous. This is not something that has to be complied with yes or no, but it is a sign of good health.



It stays around 100%, on this side nothing to worry about.

1.5 Liquidity/Treasury

It is important and healthy that this ratio be maintained at or above 100%.



Liquidity must always be close to 100%, otherwise there may be problems in paying debt maturities or short term payments. In the case of Repsol, it has the right liquidity, indicating that it can cope with short-term debts.

1.6 Working Capital

The working capital indicates the amount of current assets that are financed with permanent resources. The higher it is, the fewer financing problems there will be if there are quarters with less turnover. To evaluate working capital we relate it to current assets and sales:



Repsol's working capital has fallen considerably in recent semesters. This is probably the reason why it has needed to increase its debt in order to continue its activity without shocks.

2 Analysis of the Income Statement

When studying the income statement, we will calculate the following ratios and their progression over time:

• 2.1 Analysis of income, expenses and profit.
• 2.2 Return on Equity (ROE) y Return on assets (ROA)
• 2.3 Margin on sales

2.1 Analysis of income, expenses and profit

We start with net profit and FGO (funds generated by operations):



In Fundamental Analysis we like to show the FGO together with the net profit, which is the money the company has managed to earn. In order to calculate it, we add the amortizations to the net profit and thus avoid possible adjustments by decreasing this concept. Some companies may be forced to make up the profit in this way if they have not done particularly well.


FGO and Repsol's profits have fallen sharply in the last six months. To begin with, the analysis of the income statement is quite conclusive, but we will see where these losses come from and what implications they may have.


Inevitably, for a company to make money it needs revenue, so let's see if that's what caused that negative outcome:



Sales have fallen, but not enough to cause such a disruption in the outcome. Rather, this drop in revenue is due to lower oil and natural gas prices.


Another piece of information that is usually interesting and throws a lot of light on this type of search is the breakdown of expenses:



Expenses have fallen by tracing the income curve except for our culprit, the deterioration of fixed assets. Repsol has recorded an impairment of more than 5 billion euros in the value of its assets. According to its annual report, the provisions have been recorded mainly in upstream assets in the U.S. and Canada. The reason for this is that, as the price of oil and gas has fallen, these assets are no longer worth what they used to be and do not generate the value they used to. In addition, to comply with the Paris Agreement, the company must continue its energy transition to zero emissions by 2050 and that is not cheap either.


Although we already know that the culprit of the losses is the deterioration of assets, we are going to see what the financial expenses look like (costs of the debt) and see if there are other problems in addition to that provision. To put these costs in context, we are going to represent them together with EBIT:



En general han estado controlados, salvo este semestre, que como es lógico, no se pueden cubrir con el EBIT.In general they have been controlled, except for this half year, which of course cannot be covered by EBIT.

2.2 Return on equity (ROE) y Return on assets (ROA)

The ROE, or Return on equity, measures Repsol, S.A.'s profits compared to its own funds. It is a way of measuring the profitability and the quality of the business management. It only makes sense to see it this way when it is a sustained ROE over time. A high ROE in an isolated financial year can be caused by an increase in debt, which gives a greater capacity to buy assets and therefore an increase in profit. The problem comes later, when that debt has to be paid off and expenses skyrocket. In the case of Repsol, it does not make sense to talk about ROE as it has presented losses, however, we can see how the historical ROE has been:



Leaving aside the loss periods, Repsol's ROE is between 5 and 7%, but with a fairly high variance. As a comparison, the average ROE of the energy in Spain is 3.33%, well below that of Repsol. On the other hand, it would be in the average ROE of the IBEX35 at 7.47%. As for the ROA, the same thing happens as with the ROE and they follow very similar graphs.

2.3 Margin on Sales

We are going to calculate the margin on Repsol, S.A.'s sales, that is to say, what proportion of the sales ends up being a constant and significant profit:


The historical sales margin of the last 3 years is around 5%. The ratio is not too bad, what is not so attractive is the great variability it has.



We can also see how Repsol's margins behave. On the one hand, we have the operating margin, which tells us what proportion of sales ends up being EBIT. On the other hand, the operating margin tells us the proportion of sales that ends up being profit before tax.



Under normal circumstances, Repsol operates with fair but correct margins.

3 Dividend and general valuation

At present, Repsol, S.A. has 1,566,044,000 shares in circulation, with a treasury stock of 1.57%. It has a profit per share of -2.48€ and is currently paying a dividend of 0.92€ per share per year in the form of an "election dividend". A scrip dividend brings value to the shareholder if at the same time the company implements a share buyback plan, which is what Repsol has been doing. However, we are not in favour of distributing dividends when the company has made losses, no matter how much cash it has generated. One thing is to sell non-strategic assets that the company does not want to have in order to distribute that cash in dividends and another is to provision 5,000 billion euros and continue to distribute as if nothing had happened. In order to buy the company following a Buy&Hold strategy this puts us back, especially because the losses at Repsol seem to be coming every few years due to the energy transition it wants (and must) undertake. At current prices (8.43€) it gives a dividend yield of 10.91% and the book value is 16.09€. Despite being at knock-down prices, we have our doubts:

• Repsol has to go through a comprehensive energy transformation. It has committed itself to being a zero emission company by 2050 and as an oil company it has a lot of work ahead of it. It has been acquiring renewable assets for some years, but we have looked for the proportion of EBIT contributed by the renewable business and we cannot find it. What this tells us is that if Repsol does not boast about it, it is not representative.
• Low margins
• Very competitive environment
• Oil/gas price down by more supply than demand. This makes some fields unviable.

It is clear that the price is much lower than its book value and that the company is cheap, the problem is that we are not very clear about the return for the shareholder in the next 20 years. It could be bought in moderation without making up a large percentage of the portfolio. We believe that the price will rise very surely, but once it recovers the usual prices, the uncertainty begins.