Zacks_Analysts' Blog : Repsol-Sinopec Complete Alliance - Analyst Blog

Spain’s largest integrated oil and gas company, Repsol YPF, S.A. (REP) and Chinese oil major China Petroleum & Chemical Corp., aka Sinopec (SNP) announced the successful completion of their agreement to form a Brazilian alliance worth $17.8 billion. The deal, which was announced on October 1, mainly aims at jointly developing the exploration and production of Brazil offshore assets.

With the completion of the deal, Repsol has managed to raise funds of $7.1 billion from Sinopec, which has acquired a 40% stake of Repsol Brazil. The Spanish group retains a 60% stake in the alliance, which is expected to be Latin America’s largest private energy groups.

Repsol also added that it booked an accounting capital gain of $3.757 billion through the agreement. The transaction value also assures Repsol to make necessary investments in order to develop the Brazilian offshore assets that include renowned discoveries like Guara and Carioca. Furthermore, not only will both companies carry on with their respective expansion plans in Brazil, they will also partake mutually or individually, in future bids in Brazil.

Brazil’s offshore fields has the world’s fast growing hydrocarbon reserves on account of its strong oil deposits below the formation of hardened salt. The fields also attracted many Chinese companies like Sinopec, which has been going overseas aggressively due to China’s heavy oil consumption level.

Repsol is the second largest license holder in offshore Brazil. In its 2010–14 plan, the company indicated that it will spend a substantial amount on the development of upstream opportunities in Brazil. With the fresh $7.1 billion capital from Sinopec, Repsol will be able to invest in the prolific projects as subsalt projects need substantial capital to explore.

Hence, we maintain our long-term Outperform recommendation for Repsol as we believe that upstream activity in Brazil associated with Sinopec will positively impact the company in the long run.

However, in the absence of any near-term catalyst that can aid the company’s underlying valuation, Repsol holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.