Stock of the Month: What's happening with Repsol?

Repsol shares have fallen by almost 30% in the last year, primarily due to sharp declines in crude oil prices. But beware, because several trends could boost oil prices again in the medium term. However, Repsol's strategy is not convincing to some parts of the market. What can we expect from Repsol?

Oil remains the king of energy

Contrary to the prevailing narrative, the reality is that oil remains the world's primary source of energy, accounting for more than 30% of global energy consumption, followed by coal. In fact, global oil consumption increased by 1.9% annualized from 1965 to 2023, while it is true that this growth has slowed to 0.95% annualized since 2013. However, the relative importance of oil is declining, with greater growth in other energy sources such as renewables. In any case, it remains fundamental to our economy and will remain so in the coming years.

So much so that energy demand growth will continue to rise at rapid rates in continents such as South America and Asia, due to improved living conditions and generally increasing energy consumption. To name specific examples, China and India have increased their energy consumption by 5.6% and 3.4% annualized since 2000. Specifically, primary energy consumption per person stands at 33,267 kW in China, while in India it is only 7,586 kW, a gap that will narrow considerably in the coming years.

Oil price expectations

In the short term, crude oil prices are expected to remain below $70 a barrel, which will likely lead to a reduction in investment by companies in the sector. In fact, those with a lower breakeven price will be the winners in the future, once competition subsides. In Repsol's case, this breakeven price is close to $50 a barrel, so even at these prices, it could make money.

Repsol's business model

Repsol 's business model can be summarized in the following segments:

1. Exploration and production: which includes the upstream part (9.1% of revenues)

2. Industrial: includes oil refining, petrochemical, and trading activities (57.2% of revenues)

3. Customer: This includes the service station business, the marketing of petroleum fuels such as gasoline and aviation kerosene, and the sale of electricity and gas. This is Repsol's commercial branch (32.9% of revenue).

4. Low-carbon generation: This consists of electricity generation from renewable sources and combined cycle (0.8% of revenues).

However, we see Repsol placing a strong emphasis on low-carbon energy generation, even though its returns remain low. We don't fully understand the commitment to renewables, given that the sector is experiencing a significant inflow of capital, which typically leads to a decline in profitability.

This can also be seen in the reduction in its hydrocarbon production, which, along with the fall in the prices of these raw materials, is causing a reduction in its revenues.

Valuation of Repsol shares

Repsol's first-quarter 2025 results showed the expected weakness following the fall in oil prices. In fact, its revenue fell 4.7%, while its EBITDA fell 26% due to operating leverage.

Therefore, we have developed two scenarios to calculate the target price for its shares. The first focuses on 2025, while the second estimates normalized figures.

The target price for Repsol shares has been calculated using an EV/EBITDA multiple, and while we don't have potential for 2025, it does at normalized levels. Its margin of safety is narrow, but the stock should be closely monitored if natural gas or oil prices spike.