Europe's First Biomethanol Plant And Global Projects Will Shape Future Operations By 2028

Key Takeaways

• Repsol's high-grading of its upstream portfolio and strategic divestments may enhance cash flows and earnings while boosting revenue with new project developments.
  
• Significant low carbon investments and expansion in the Customer division aim to increase net margins and improve revenue through growth in mobility and retail clients.
  
• Reduced gas prices, divestments, and high debt levels strain Repsol's financial flexibility and earnings across multiple divisions, jeopardizing revenue stability and net margins.

Catalysts

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

• Repsol expects to enhance cash flows and lower breakevens through high grading its upstream portfolio, including successful divestments and new wells in Libya, potentially positively impacting earnings.
  
• Development of major upstream projects such as Leon-Castile in the Gulf, Pikka in Alaska, Campos-33 in Brazil, and Block-29 in Mexico are slated to increase production and enhance revenue streams by 2028.
  
• Repsol plans for significant low carbon investment, including Europe's first gasification plant for biomethanol, aiming to achieve substantial future EBITDA contributions, thus potentially increasing net margins.
  
• Expansion in the Customer division, including a projected annual EBITDA of €1.4 billion by 2027, grounded in increased mobility and Power and Gas retail client growth, suggests potential improvements in revenue and earnings.
  
• Repsol's strategy to monetize its renewable business via asset rotations and maintain the flexibility to adapt capital expenditures promises stable cash flows and efficient capital allocation to boost earnings per share (EPS).

Repsol Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Repsol's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.2% in 3 years time.
• Analysts expect earnings to reach €2.7 billion (and earnings per share of €2.58) by about March 2028, up from €1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €3.5 billion in earnings, and the most bearish expecting €1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, down from 8.3x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 8.2x.
• Analysts expect the number of shares outstanding to decline by 4.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.43%, as per the Simply Wall St company report.

Repsol Future Earnings Per Share Growth

Risks

• Lower gas prices and lower production volumes in the Upstream division led to a 16% decrease in full year adjusted income, which could continue to pressure revenue and earnings.
  
• The refining margins have normalized compared to the strong environment of previous years, and any further decline could adversely affect net margins and cash flow.
  
• Significant divestments and disposals, such as in Colombia, could impact future production volumes and profitability, impacting revenue stability.
  
• The Chemicals business continues to struggle with negative EBITDA contributions, which could weigh on overall earnings if challenges persist.
  
• High debt levels and ongoing capital commitments, including €5.7 billion in net CapEx, place pressure on the financial flexibility of the company, potentially affecting net margins if that leverage isn't managed effectively.

Valuation

• The analysts have a consensus price target of €14.317 for Repsol based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be €52.2 billion, earnings will come to €2.7 billion, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 11.4%.
• Given the current share price of €12.14, the analyst price target of €14.32 is 15.2% higher.
• 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.