Global Insight Perspective

Significance

The plan anticipates 21.1 billion euro (US$26 billion) of investments, with around half of the total concentrated on exploration and production projects in North Africa, the Caribbean, the Atlantic Basin and the Middle East. There will also be 1.5 billion euro (US$1.8 billion) worth of divestments in non-strategic areas.

Implications

The company's strategy of greater geographical diversification will help to reduce its exposure to Argentina, and careful watch of its debt profile will make it more able to withstand external shocks in the future.

Outlook

The company's reserve replacement target will be welcomed by investors, but as the company's recent experiences in Bolivia and Argentina show, acquiring new reserves will only affect the company's value if there is a stable legal environment in place to justify their development.

2005-2009 Strategic Plan 

The Spanish-Argentine energy group Repsol-YPF's 2005-2009 Strategic Plan anticipates 21.1 billion euro (US$26 billion) of investments. This amount will be spent as follows: 54% on upstream projects in Latin America, Africa and the Middle East; 27% on refining and marketing; 11% on its gas operations; and 6% on its chemical business. The company said that 31% of its total planned investments would be made in Argentina, Bolivia and Brazil; 31% would be made in Spain; and 38% would be directed outside these countries. Although the total intended investment under the plan is 2.3 billion euro higher than that anticipated under its 2003-2007 Strategic Plan, the resources that will be allocated to upstream projects have remained stable compared to the previous plan. During this period, Repsol-YPF will also divest 1.5 billion euro (US$1.8 billion) of non-strategic assets to cut costs. 

Growth Targets 

Repsol-YPF sees its upstream operations as the driver behind the company's growth over the next five years. Under the plan, the company has set itself an oil and gas production target of 1.312 million b/d in 2009, representing a 13.6% increase on current production. It also hopes to raise its reserve replacement rate to 100% by 2009 from 33% in 2004, with reserves in North Africa expected to grow by 170%.

Investment Plan 2005-2009 (billion euro)
	Upstream	Refining and Marketing	Gas	Chemicals	Total
TOTAL	11.4	5.7	2.3	1.7	21.1

As expected, the bulk of Repsol-YPF's planned investments under the 2003-2007 Strategic Plan will be spent on the company's upstream operations in Latin America and, to a lesser extent, on its downstream operations in Spain. Nevertheless, although there will be a continued emphasis on its core business areas in Spain and Argentina, there will also be an attempt to diversify its medium-term growth by increasing investments in its upstream operations in other areas such as Venezuela, Trinidad and Tobago, Algeria and Libya and by putting special emphasis on gas. Indeed, Repsol-YPF expects the company's production in Argentina to fall by 9% to 687,000 b/d by 2009.

Keeping Costs Down 

Investment Plan 2003-2007 (billion euro)
	Upstream	Refining and Marketing	Gas & Power	Chemicals	Total
TOTAL	11.280	4.888	1.504	1.128	18.8

The strategic plan reveals that the company remains committed to keeping its debt leverage down. Repsol-YPF is the foreign-owned energy company with the largest exposure to Argentina. The deepening of the crisis in Argentina in late 2001 put pressure on the company to accelerate its debt reduction programme. Under Repsol-YPF's debt reduction programme, the company had initially planned to reduce its debt-equity ratio to between 30 and 35 per cent by 2005. Instead, that debt target was reached three years early, thanks to the sale of non-core assets and the implementation of a cost-cutting programme. As a result, Repsol-YPF's net debt at end-2002 was reduced by over 9 billion euro to -7.472bn euro, and its debt-equity ratio fell to 29.2% from 42.9% at end-2001 (and stood at 22% in Q1 2005). Under the 2005-2009 Strategic Plan, in addition to the planned divestments, Repsol-YPF has announced a 1.2 billion euro cost-cutting target and pledged to continue its track record on financial discipline. The company also said that the strategic alliance with Gas Natural should result in cost savings of 10 million euros per year.

Outlook and Implications

Investors will be reassured to see that Repsol-YPF is seeking to reduce its dependence on Argentina by increasing the share of its planned investment in other countries. Although its exposure to other 'high risk' emerging markets such as Bolivia, Venezuela and Cuba may not be regarded so favourably, the diversification of its upstream portfolio will help to reduce the perception of risk associated with the company due to its previous heavy exposure to a single market. The company's continued commitment to financial stability will also be regarded positively. Meanwhile, its shareholders will welcome the announcement that the company plans to increase its dividends by 20% in 2005.

Although the diversification policy can be seen as the positive lessons of the Argentina crisis, the company retains a heavy exposure to Latin America. Economic growth across the region has had a positive effect on the company's sales but the company's operations have faced increased political interference and regulatory uncertainty under the current governments inArgentina,Bolivia and Venezuela. Furthermore, the recent approval of a controversial hydrocarbons law in Bolivia has raised doubts about Repsol-YPF's ability to monetise the gas reserves it already holds in the country.