The downgrade partially reflects upstream challenges, which include "resource nationalism" in South America, according to S&P.
"Rebalancing upstream operations away from South America to Organization for Economic Cooperation and Development (OECD) countries is supportive of credit quality, but it will take several years to improve the business profile materially," S&P analyst Emmanuel Dubois-Pelerin said.
OECD has 30 member countries, of which Mexico is the only one in Latin America.
S&P also expects Repsol YPF will adhere to its moderate financial policies as a result of the "highly volatile economic, legal, and fiscal conditions across mainland South America," the statement said.
"In the medium term, selling a large part of [Repsol YPF's Argentine upstream arm] YPF or non-core assets and successfully redeploying capital away from South America could support higher ratings," Dubois-Pelerin was quoted as saying.
In the medium term, S&P also expects Repsol YPF's upstream division to unlock additional resources that would sustain a six-year proven reserve life in Argentina, the statement said. A further downgrade is not likely.
S&P also affirmed the company's A-2 short-term rating.
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