Repsol’s Downtrend is set to Continue

Repsol’s Downtrend is set to Continue
October 29, 2015

Repsol SA (BME:REP) is another key European player involved in the oil and gas market. They also have a strong presence all over the world, with activities both in the upstream and downstream sectors.

The downstream consist of oil and gas refining, supply and sale, but also in exploring/finding new energy solutions. The upstream sector on the other hand, deals with the finding and exploration of both oil and gas.

The downstream division seems to be generally unaffected by current oil prices. Refiners seem to have managed to find an edge to fight this oil glut. The upstream however, is a little tricky. In order to find, discover and exploit new oil fields, investment is necessary, and investments are made on the forecasted value of oil prices. If you look at Repsol’s recent findings, it has more than forty discoveries since 2007. This includes eight of the largest findings in the world, which makes it hard to believe that the exploitation costs have been calculated based on the oil price being below the $50/barrel level.

As a result, it may be that the company’s future finances will be affected as the level of debt is rising. We can only assume that they will have some liquidity problems in the future as there seem to be no signs for global growth. With oil production and inventories at record levels, oil companies will need to adapt, reinvent, or die.

In order to avoid that, Repsol plans to sell €6.7 billion of assets and cut investment by as much as 38%. This move has been made in order to keep paying a dividend and, this is a sign that all the factors listed above are correct in interpretation.

If you look at the company’s share price from 2008 to today, the general direction was only to the downside. They went from around the €30/share level, down to the €11/share is is dealing at now.

This downtrend is supposed to end, as it is the fourth time in the last seven years that the €10/share area has been tested. I would say this is a pivotal level. Now that the ECB is ready to increase the amount of stimulus, it may be possible for Repsol to find some bounce, but not until oil prices rise.

Based on all the above, I will keep a bearish bias on Repsol until December’s ECB meeting. Therefore, a put option trade is recommended from current price. Use a one month expiration date or aim for an expiry at the end of November.

Moving on, if the ECB is cutting rates further into the negative territory or increases the pace and size of the QE, then it may be enough for a call option on Repsol with end of December expiration date.

All in all, difficult times for oil companies and no one is expecting them to disappear quickly, hence the costs cutting Repsol is making on their five year strategy.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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