The rise in interest rates and the war in Ukraine have created a two-sided world. In the first are the indebted, who see how the installments to pay grow and that limits their spending plans (consumers) or investments (companies like Grifols). The second is inhabited by those who have been caught by the sharp turn in the price of money with savings or with little debt and who are worried about seeing if the banks decide to reward accounts and deposits once and for all and that allows them to make their money profitable. financial situation.
Repsol lives in a third. The oil company led by Antonio Brufau and Josu Jon Imaz is on another planet, where not only is it favored by the sharp rise in oil prices caused by the war in Ukraine, but even though it invested and increased the payment of dividends and the shareholder remuneration its low debt.
It fired 2022 with 2,256 million in net debt, which compares with a gross operating profit of 13,813 million and – with what is even better for those seeking good financial health – with a free cash generation of 8,000 million. In other words, if Repsol wanted to pay off all its debt in almost a quarter and it would stay at zero… with all its financial muscle intact to propose an acquisition with capital letters or -from another perspective- with an ‘ideal’ dam sign; understanding ‘ideal’ as an acquisition that pays for itself; with their own generation of money.
Although Repsol has risen strongly on the stock market in recent months, its market value is less than 20,000 million. Its volume of debt is anything but daunting for a corporate operation (unlike Cellnex) and its cash generation is sufficient to pay for its own purchase in a more than reasonable term.
considering that Repsol has advanced that it will allocate 5,000 million to investments during 2023 that will come from its own cash generation, if it is able to maintain similar levels of income and profitability, in four years it would pay for its own acquisition and -it would pay out- dividends . And it is not so clear that the cycle of expensive oil will have ended in 2022, although price declines are expected.
For example, Naturgy, in its audit report, makes its estimates considering a Brent price of $83.5 for 2023 and $78.5 and $74.5 for 2024 and 2025, respectively. The strategic plan that Repsol presented in 2020 for the period 2021-2025 was prepared on the basis of Brent crude at 50 dollars.
A jump in the European league?
Compared to other companies in the European energy sector born from oil, Repsol is small. Total Energy capitalizes 145,000 million; BP, 110,000 million and Equinor and ENI, 91,000 and 50,740 million, respectively. In an industry forced to reinvent itself by the energy transition process, size is relevant because it gives you the muscle to make the leap in a more forceful way; something that, by the way, climate activism is demanding from the most activist funds in this segment and that -in theory- should be valued positively.
Repsol has the financial capacity to take a transformational turn if it wishes and climb the ranking of European energy companies. Although the indebtedness is not viewed favorably right now and when making acquisitions the profitability metrics have to be changed (it is not the same to buy with financial costs at 4% than at 1%), the Spanish company could significantly increase its without exceeding the debt levels with which it has lived in the past.
Its peak in the last five years was reached in 2019-2020 with a ratio of more than 1 times. If it were to reach that height today, with its historic gross profit of 13,000 million, it has the capacity to raise its debt by around 13,000 million, which added to its cash generation would give it room to grow. Going to a ratio of two times (usual in the market) and with a less demanding ebitda figure, such as that of 2021 (8,170 million), the ability to assume debt would be similar.
Place your bet… will you shoot Repsol or will they shoot you?