Pair Trade: Long Repsol - Short Total

Wednesday, October 17th 2012

Investment Case

Technical Comment

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Companies Description

Analysts Recommendations:

Source: Bloomberg

Market Multiples

P/E EPS DY Net Debt/

2013 2011/13 2013 EBITDA

Est. CAGR Est. Est. Est. 2012

Repsol 9.27 -1.99% 5.56% 2.06

Total 7.31 3.75% 5.98% 0.54

Source: Bloomberg

Next Report Date

Repsol Q3 Results November 8th (bef-mkt)

Total Q3 Results October 31st (bef-mkt)

Source: Companies' Websites

Repsol (REP SM): After the expropriation of YPF assets, Repsol

decided going into a restructuring process. The company has to

reduce debt to retain its IG rating.

It has already made good progress on its non-core asset disposal

program. Repsol sold its Chile LPG business for $54m and a 20%

stake of its Ecuador upstream assets to Sinopec. Repsol has received

non-binding offers for its LNG business. The company seems to be

prioritizing this approach over more dilutive options to EPS. But, the

conversion of the preference shares into mandatory convertibles is

still a risk.

Total (FP FP): At its interim strategy update, Total announced a small

downgrade to 2015 production target. Growth is skewed to post

2015. Growth is expected to accelerate in 2016/7.

The Company aims to sell $15-20bn of assets over 2012-14 to

balance its cash cycle and maintain gearing within 20-30%. Increased

cost efficiencies/synergies were targeted in downstream. Total is

going through a heavy capex phase of investment, which could

penalize the company’s returns and free cash flow generation.

The Long Repsol (REP SM) Short Total (FP FP) ratio has a current

value of 0.3967. We’ll define as our target 0.4168 and use 0.3852 as

our stop-loss level. Moody’s has today confirmed Spain’s

government bond rate at Baa3 (still investment grade). This could

give some price momentum to Repsol’s stock price.

Market Price Data

Repsol (REP SM)

Last Price (€) 15.855

YTD Change -33.20%

Mkt Cap (€ bn) 19.917

Total (FP FP)

Last Price (€) 39.97

YTD Change 1.19%

Mkt Cap (€ bn) 94.534

Source: Bloomberg