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Repsol eyes recovery despite glitch-prone Q2, output downgrade

Highlights

Lowers 2021 upstream output guidance by 5%

Libya recovery supports oil output as gas volumes plunge

Petrochemicals, hydrogen seen as growth areas

Spain's Repsol on July 29 reported a 3% year-on-year decline in its oil production in the second quarter to 208,000 b/d and a much steeper drop in gas output on the back of technical issues, maintenance and asset sales, causing it to reduce its output guidance for the year by 5%.

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However, unveiling Q2 results the Madrid-listed company reported a financial recovery and better outlook for refining and especially petrochemicals, and also raised its longer term renewables-based hydrogen production targets.

The 12% drop in Repsol's hydrocarbon production, to 561,000 b/d of oil equivalent, was caused by outages and maintenance variously in Peru, at BP-operated fields in Trinidad & Tobago, and at its UK joint venture with China's Sinopec. It also cited "natural" decline at fields in Canada and its exit from the Arog oil joint venture in Russia in May.

Repsol's gas production fell by 17% on the year to 1.98 Bcf/d, with the main reductions in North and Latin America; its Peruvian production was impacted by a compressor problem at the Peru LNG export plant, which it relies on while not owning a stake. CEO Josu Jon Imaz said he expected the issue to be resolved by the end of August.

Production was also impacted by asset sales including fields in Malaysia and Vietnam and stakes in Norway's late-life Brage oil field and Algeria's Tin Fouyet Tabenkor gas field.

The reduction prompted Repsol to downgrade its full-year output guidance to 590,000-600,000 boe/d.

However, Repsol's output was supported by the resumption of operations in October 2020 in Libya, where it operates in the Murzuq basin, and higher production in Bolivia, the US Gulf of Mexico, Indonesia and Colombia.

Imaz outlined a series of investment decisions to be taken on new projects in the next 18 months and plans to increase shale oil and gas production in the US.

He said Repsol had recently deployed a new rig in each of the US Eagle Ford and Marcellus plays and would likely add another in each of the two plays in the coming weeks, and potentially a third in the Eagle Ford by year-end. "Having two rigs in each of these assets in the coming months is going to impact positively more or less 30,000 boe/d in 2022," he told investors.

Downstream recovery

Repsol's upstream business bounced back to an adjusted profit of Eur351 million ($417 million) from a Eur141 million loss a year earlier, while its downstream made an adjusted profit of Eur166 million, up from Eur8 million a year earlier.

It noted a gradual downstream recovery, with Spanish refineries ramping up and retail activity up 15% from levels in Q2 2019, before the pandemic. However, its refining margin indicator for Spain was still half of the levels a year ago, at $1.5/b, due to narrower middle distillate spreads and higher energy costs. It forecast full-year Spanish refining margins to be at $2/b.

The company increased its crude processing by 6% on the year to 8.8 million mt, but this was still well below the 10.6 million mt processed in Q2 2019. It also noted a hit to refining margins in Peru, where Repsol operates the largest refinery, La Pampilla.

But petrochemicals provided a boost, with margins for the first half of 2021 hitting record highs and the petrochemical indicator 74% higher than a year earlier in the second quarter, at Eur1,537/mt.

"Petrochemical margins have soared... A combination of strong consumer demand and supply constraints more than compensated the increase in the feedstock price," Imaz said. "Looking ahead we expect margins to decline, to go down smoothly towards the end of the year [but] we are confident that this positive outlook for chemicals will help compensate the ongoing weakness of refining."

Underlining its energy transition goals, Repsol raised its hydrogen production targets, based largely on solar power projects, to 0.55 GW by 2025 and 1.9 GW by 2030. "We have a clear ambition to lead this market in Spain and Repsol is going to play the card of being one of the European leaders in the new hydrogen market," Imaz said.

"We are in the right place. Spain is going to lead this market in Europe because we have a lower cost of renewable power production than some other European countries. We have a privileged situation in this country both in geographical natural terms and in regulatory terms," he added.

He said he was more optimistic than when the company published its first quarter results: "While maintaining a prudent approach...looking at the numbers, the second quarter results have brought us back to pre-pandemic levels. We have continued delivering on our strategy, facing the pandemic with a focus on capital discipline and cost efficiency."

Overall, Repsol reported an adjusted profit of Eur488 million during the quarter compared with a Eur258 million loss a year earlier, and a 20% reduction in its net debt compared with the end of Q2 2020 to Eur6.4 billion, a gearing ratio of 23.4%.