Repsol YPF reported net income in 2004 was 3.5% lower year-on-year at EUR1,950 million, after large provisions and write-offs amounting to EUR682 million. Operating income rose 17.8% year-on-year, to EUR4,547 million, reflecting the company's high capacity for income generation.
Repsol YPF´s strong operating performance was thanks to the positive growth of all the company's business areas, which throughout 2004 experienced a significant increase in their results. This growth was especially important with respect to refining, where operating income jumped 36.2% and margins registered record highs. At the same time, in the area of Exploration & Production, operating income rose 12.2% to EUR2,638 million, and average oil and gas production was 3% higher.
These earnings were achieved in a scenario of higher international oil prices driven by increased global demand, as well as in the context of a weaker dollar against the euro ($/euro exchange rate fell 9.9% in the year), and a rise in corporate tax from 32% to 37.5% because of higher exploration results and lower tax credits related to the normalization of the Argentine economy.
Extraordinary provisions and write-offs, reserves' audit and debt reduction
The sound performance posted by Repsol YPF's industrial activities made it possible to undertake a rigorous program of provisions and write-offs – and accounted for as extraordinary items - to the amount of EUR682 million, practically all of which (EUR667 million) was booked in fourth quarter 2004.
The breakdown of these EUR682 million is as follows: EUR422 million were set aside for possible tax contingencies (mainly in Spain and Argentina); EUR89 for asset depreciation, primarily related to Repsol YPF service stations in Brazil (EUR35 million) and in Peru (EUR10 million); EUR140 million for contingencies relating to contracts, mainly that signed with Petrobras (EUR56 million) and with OCP (Oleoducto de Crudos Pesados) in Ecuador (EUR89 million); and EUR20 million for the liquidation of the mercantile contract with the company's former chairman.
At year-end 2004, the independent consulting firms, De Golyer & McNaughton and Gaffney, Cline and Associates, concluded an audit on 100% of booked reserves started three years before.
As a result of this audit, and in compliance with the most strict Securities and Exchange Commission (SEC) standards, under the caption "revisions of previous estimates", proved reserves were revised downward by 4.1%, to 4,926 million barrels of oil equivalent (boe). This downward adjustment corresponds to the gas fields in Ramos and Loma La Lata, and Trinidad & Tobago, as well as the Albacora Leste oil field.
Strong cash flow generation throughout the year, up 19.9% in the whole of 2004, and 68.2% in the fourth quarter, enabled Repsol YPF to progress in its debt reduction program. In this respect, at the close of 2004, Repsol YPF net debt stood at EUR4,920 million, 2.5% lower than in 2003, with a major debt reduction of EUR678 million booked in the last quarter. The debt ratio dropped to 20.7%, while financial expenses shrank 28.3%, from EUR400 million to EUR287 million.
Repsol YPF investments in 2004 were down 2.3% year-on-year to EUR3,747 million.
Exploration & Production: Operating income up 12% as production rises 3%
At EUR2,638 million, operating income from exploration & production in 2004 showed a year-on-year rise of 12.2% in euros and 23.3% in dollars. This growth came mainly from higher international crude oil prices; improvement in gas realization prices; and gas production and sales growth in Bolivia, Argentina, and Trinidad & Tobago.
On the downside, there was the depreciation of the dollar versus the euro, exploration amortizations and the wider price differential between light and heavy crude oils. In Argentina, the effect of strikes, the 20% tax levied on natural gas exports, and a rise in export tax on oil and oil products were also negative factors.
Repsol YPF's liquids realisation price averaged $30.85 (EUR24.83) per barrel in the year versus $25.52 (EUR22.58) per barrel in 2003. Average gas prices in 2004 were $1.29 per thousand standard cubic feet (tscf), 20.6% up on 2003, reflecting a price increase in Argentina and the greater relative weight of Trinidad & Tobago sales, at higher prices than the company average. In Argentina, the average price of gas was $1.07/tscf, 25.9% up year-on-year following the staggered price increases approved by the Argentine Government.
In 2004, average oil and gas production rose 2.9% year-on-year to 1,165,800 boepd, despite operating difficulties and labour conflicts in Argentina and Trinidad & Tobago.
Repsol YPF gas production in 2004 climbed 11.2% to 598,500 boepd. Strong performance was spurred by 51.2% production growth in Bolivia from the start of exports to Argentina and higher sales to Brazil. There was also a rise in gas production of 8.3% in Argentina and 13.5% in Trinidad & Tobago.
2004 investments in the E&P business area were 45.4% lower year-on-year, at EUR1,183 million. Investments in development, 70% of total expenditure, were spent mainly in Argentina (65%), Trinidad & Tobago (10%), and minor percentages in Bolivia and Venezuela.
One of the highlights in this area was the contract awarded to the consortium comprising Repsol YPF (60%) and Gas Natural SDG (40%) on a major integrated project for the joint exploration, production, and marketing of Liquefied Natural Gas (LNG) in the Gassi Touil Rhourde Nouss and Hamra regions of eastern Algeria. This is the largest contract for an integrated LNG project to be awarded by the Algerian authorities, and the first ever granted to a consortium of foreign companies in Algeria. Significant discoveries were also made in Trinidad & Tobago, Venezuela, and Argentina.
Refining & Marketing: record high operating income and refining margins.
Operating income in the refining and marketing area was up 36.2%, reaching a record high for the company of EUR1,629 million versus EUR1,196 million a year earlier. This strong performance was mainly driven by a 79% year-on-year rise in refining margins expressed in dollars per barrel, following the strategic investments made over recent months in production units for gas oil, the price of which has been forced upwards by global demand.
Marketing margins in Spain, in line with the general market trend, were slightly lower year-on-year, while in Argentina these were severely cut by the impossibility of passing higher product prices on to retail prices.
Total oil product sales in 2004 reached 55 million tons, up 2.6% year-on-year. Sales in Spain rose 3.5% to 33 million tons, and in Argentina, amounted to 12.8 million tons. Sales in other countries totalled 9.2 million tons, 2.9% higher on the year.
Total LPG sales were up 0.8%, despite a 1.9% fall in Spain because of the development of other energy sources and increased competition in this sector. Sales in Latin America were 5% higher than the year before, thanks to growth in market share and positive performance in Peru and Ecuador. Investments in 2004 were EUR1,310 million, 97.6% up on 2003. In refining, expenditure was mainly allotted to projects aimed at increasing margins, such as the mild hydrocracker at the Puertollano refinery, whilst in marketing, the acquisition of Shell´s service station network in Portugal was an important item.
Chemicals: an excellent year, with 63% rise in operating income
In Chemicals, operating income in 2004 surged 63.2% year-on-year to EUR253 million. Stronger sales and wider international margins on base and derivative chemicals in Argentina contributed to this enhanced performance, whereas the margin on derivative chemicals in Europe shrank with respect to 2003.
Total petrochemical sales in 2004 were 4.1 million tons, versus the 4.0 million tons registered in 2003.
Investments in the Chemical area totaled EUR293 million, 261.7% more than in 2003, and were mainly spent in the acquisition of the Sines complex (Portugal), and the upgrading of existing units and capacity increases, amongst which should be highlighted work begun to revamp the Tarragona propylene oxide/styrene complex to make this business considerably more competitive.
Gas & Power: Operating income up 29%
Gas & Power operating income in 2004 rose 29.2% to EUR274 million, versus the EUR212 million recorded in 2003. This increase basically denotes the impact of Repsol YPF's higher stake in Gas Natural SDG, and that company's positive performance in the year thanks to growth in gas distribution activities in Spain, organic growth in American activities, and acquisitions made in Puerto Rico, Brazil, and Italy.
Total natural gas sales in 2004 were 32.85 Bcm, 8.3% up year-on-year, thanks to higher international wholesales, and sales growth in Latin America and Italy. At year-end, there were 326,000 new customers in Spain, bringing the total to 4.8 million.
Investment in 2004 was EUR779 million, rising 52.4% year-on-year. This rise is mainly attributable to the acquisition of an additional stake in Gas Natural SDG accumulated over the period to reach a current holding of 30.8%, and that company's higher rate of investment in 2004.
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