Fossil Fuel Revenues Will Diminish As European Policies Tighten

Key Takeaways

• Structural headwinds from decarbonization, oversupply, and ESG pressures threaten core profitability and increase the risk of stranded assets and write-downs.
  
• The slow pace of renewables expansion limits competitive positioning and future earnings growth, while rising capital costs constrain shareholder returns.
  
• Expansion into low-carbon and renewables businesses, strong core operations, and disciplined shareholder returns are strengthening Repsol's resilience and revenue diversification for long-term growth.

Catalysts

Operates as a multi-e energy company in Spain, Peru, the United States, Portugal, and internationally.

• The acceleration of decarbonization policies and stricter European emissions targets, alongside the increasing adoption of electric vehicles and alternative mobility, threaten to erode long-term demand for fossil fuels, which is likely to produce sustained revenue headwinds for Repsol even as it increases investments in legacy upstream and refining assets.
  
• High capital intensity, continued investment in large-scale oil and gas projects, and a legacy asset base restrict the company's ability to pivot quickly to renewables, heightening the risk of stranded assets and impairment charges, which could considerably pressure net margins and lead to significant write-downs over time.
  
• Slower scalability of renewables and low-carbon businesses versus core oil and gas operations exposes Repsol to a decline in competitive positioning relative to peers, potentially impacting future earnings growth and lowering the long-term return profile of its energy transition investments.
  
• Persistent global oversupply risks from expanding US shale and Middle Eastern oil producers may structurally depress hydrocarbon prices, leading to prolonged refinement margin contraction, weaker cash flow from operations, and undermining profitability in key divisions.
  
• Intensifying ESG scrutiny, regulatory compliance costs, and potential divestment by institutional investors are likely to raise Repsol's cost of capital, putting further strain on net income and reducing available capital for shareholder distributions such as dividends and buybacks.

Repsol Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Repsol compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Repsol's revenue will decrease by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.4% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach €2.2 billion (and earnings per share of €2.41) by about August 2028, up from €668.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, down from 22.7x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 3.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

Repsol Future Earnings Per Share Growth

Risks

• Repsol is strategically capturing growth in the energy transition through expansion of low-carbon businesses, including renewables, biofuels, and green hydrogen, which is already supporting non-oil revenue and improving margins and could help sustain or boost net income and margins in the long term.
  
• The company continues to benefit from strong and improving refining and commercial businesses, as utilization rates and margins recover quickly from one-off impacts, such as the Iberian Peninsula blackout, so resilience in these core businesses supports steady operating cash flow and EBITDA.
  
• Upstream portfolio optimization and production growth-underpinned by new projects in the UK, Alaska, Trinidad & Tobago, and Libya-are increasing high-quality, cash-generative barrels, which may drive higher production volumes, stronger cash flow from operations, and improved ROCE.
  
• Shareholder returns are being prioritized through increased dividends and major share buybacks, supported by robust capital discipline and a strong balance sheet, which can underpin earnings per share growth and valuation upside.
  
• Repsol's multi-energy model and successful asset rotation in renewables has positioned the company for self-financing growth in low-carbon segments, with the Customer and Power & Gas businesses exceeding targets and supporting higher overall revenue diversification and more resilient long-term cash generation.

Valuation

• The assumed bearish price target for Repsol is €11.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Repsol's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €18.0, and the most bearish reporting a price target of just €11.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €42.2 billion, earnings will come to €2.2 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of €13.34, the bearish analyst price target of €11.0 is 21.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.