| Preview of Income Statement, 2nd quarter of 1997 |
| 1.- INTRODUCTION 1.1.- Income Statement Repsol’s net income for the second quarter of 1997 was 17.4% higher than in the same period a year earlier, at 30,590 million pesetas. Operating income was 18.6% up over the 1996 figure, at 50,903 million pesetas, and quarterly cash flow showed a rise of 27.7%, reaching a total of 71,655 million pesetas. This good performance over the second quarter led to a very considerable improvement in accumulated income for the first half of 1997, with a net growth in the company’s cash-flow of 24.4%. Operating income for the first six months rose by 8.1% in comparison to the same period in 1996, to 103,854 million pesetas, and net income was 61,627 million pesetas, showing an increase of 0.3% over year earlier figures, in spite of the fact that first quarter income had registered a fall of 12.3% in comparison to the first quarter of 1996. In evaluating these figures, it is important to note that company income during the first half of 1997 was negatively affected by several non-recurring circumstances, which were duly explained in our last quarterly income preview. The most important of these was the price freeze on LPG, which continued to curtail income over the second quarter, having a negative effect on net income which may be estimated at 14,700 million pesetas. A mild winter cut back net income for the first half of 1997 by 8,450 million pesetas. And to this must be added a reduction in operating income of 9,823 million pesetas, due to a voluntary asset revaluation carried out at the beginning of 1997. In spite of the aforementioned negative factors, figures for the first half of 1997 improved in comparison with those for the same period of last year, as a result of the favourable context enjoyed by some businesses and the performance shown by investments made during the past financial year and the first half of this year, as explained in the break-down by activities given in this report. Company investments in Latin America were outstanding. High levels of expenditure continued over the first half of this financial year, reaching an overall figure for investment in the region of 106 billion pesetas, and establishing an important basis for development. Net debt at the end of the first half was 115,230 million pesetas higher than at the beginning of 1997, and reached 496,775 million pesetas. Although this increase was largely due to the company’s investment efforts, the effect on accounts of the peseta’s depreciation against the dollar added 43,600 million pesetas to the aforementioned debt level over the six-month period. 1.2.-Expansion in Latin America. Repsol progressed considerably in its Latin American expansion during the second quarter of 1997, via the successful completion of several transactions, the main details of which are as follows: At the beginning of April, a stake in the company Mexpetrol Argentina, S.A. was acquired, through Astra. Following this operation, with an investment of 102 million dollars, Astra now holds a controlling 66.5% interest in the aforementioned company, and is also operator of the Port�n Buta Ranquil field, where Mexpetrol has a 50% stake. In fact, this acquisition has raised Astra’s oil production and level of proved reserves by approximately 11%. Via Astra, interests were purchased from the Grupo Comercial del Plata (CGC) and JME Inversiones in several refining and marketing companies, raising the former’s refining capacity to 3.2 million tonnes per year, and the manufacture of asphalts, lubricating oils and specialty products. In addition, Astra took control of 91.5% of a service station network with 700 outlets, representing around 15% of the Argentine market. Overall capital expenditure for this transaction, which will be completed in the third quarter of this year, will be over 300 million dollars. Through Astra, again, the companies Algas and Poligas Luj�n, were acquired. Both these companies are engaged in the distribution and storage of LPG, Algas being one of the main LPG companies in Argentina, with a market share of about 13%. This transaction involved an investment of 79.2 million dollars. On June 2nd last, Repsol won a concession to exploit the Mene Grande area in Venezuela, as part of the Third Round of Operating Concessions awarded by the Venezuelan Government. An offer of 330 million dollars was made, and will become effective during the third quarter of this year. Repsol expects to boost current production level in the region from the 5,500 barrels per day now extracted to 60,000 barrels per day, and to obtain some 250 million barrels of reserves. The consortium made up of Gas Natural Latinoamericana (50/50 Repsol and Gas Natural SDG) and Iberdrola, with an approximate shareholding distribution of 70% and 30% respectively, was awarded a 53.7% stake in the company distributing natural gas to the city of Santa Fe de Bogot�. This whole operation involved an investment of 149 million dollars, of which Repsol’s part will be 78.5 million dollars. Two other large operations were successfully completed in July, 1997: Gas Natural SDG, with 33.5%, and Pluspetrol Energy, with 4%, participated in the winning consortium in the privatization tender for Brazilian gas companies, Companhia Estadual de Gas (CEG) and Riogas, which distribute piped gas in the metropolitan area of Rio de Janeiro and the rest of the State. Here, overall investment outlay was 576 million dollars, of which Repsol’s part will be 95 million dollars. Gas Natural Latinoamericana won a concession to distribute natural gas in the metropolitan area of Toluca, very near Mexico, D.F. 1.3.-Last Public Share Offering The last Public Offering of Repsol Shares belonging to the State closed on April 28th, last, when the SEPI (Sociedad Estatal de Participaciones Industriales) sold its remaining 10% of the company, for almost 180 billion pesetas. This operation was an unprecedented success as far as the Spanish equity market is concerned. There was a total demand for 4,300 billion pesetas, of which 3,600 billion came from the Spanish retail tranche. The offer was therefore about 27 times oversubscribed. Repsol now has over one million shareholders. The special treatment given to employees in this offering was outstanding. Both the amount taken up by them (15% of the offer), the size of demand (nearly 50 billion pesetas) and the number participating (54% of the total payroll), together with an innovative financial purchasing formula, make this a landmark in the Spanish equity market. 1.4.-Other outstanding events in this quarter There were other events, apart from those detailed above, which we would like to mention. During this quarter, a new polypropylene plant went on-stream at Tarragona. This new plant, with a nominal capacity of 190,000 tonnes per year, and an investment of 16 billion pesetas, will considerably improve the level of integration between base and derivative petrochemicals at the Tarragona petrochemical complex, thus improving the sector’s competitive situation. The Annual General Shareholders’ Meeting, held on June 6th last, approved a total gross dividend for 1996 of 181 pesetas per share. This was 6% higher than the previous year. A final gross dividend of 102 pesetas per share was paid on July 9th, last. On June 23rd last, an agreement was signed with the European Investment Bank for an amount of 30 billion pesetas to be used in financing various projects. On July 16th last, the Chairman of Repsol and the Secretaries of the main trades unions, Comisiones Obreras and the Uni�n General de Trabajadores, signed a new Protocol Agreement for the Repsol Group. This agreement will be in force from 1997 to 1998, and harmonises criteria for labour relations in all Repsol group companies on matters to be included in, and developed through, the various companies’ labour agreements. This step marks the beginning of a new phase in Repsol’s labour relations, and will standardise working conditions within the group, whilst introducing coherence and solidarity. As part of corporate policy to rationalize assets, two Petronor vessels, the Arteaga and the Butron, were divested, obtaining an extraordinary income of 4,805 million pesetas. On July 29th last, the Repsol, S.A. Board of Directors approved the project for a new propylene oxide and styrene complex at Tarragona. This is expected to involve an investment outlay of approximately 67 billion pesetas, and the new plants will go on stream in the first half of 1999. Production capacities will be 150,000 tonnes per year of propylene oxide and 340,000 tonnes per year of styrene. The project for this new complex includes units for the manufacture of derivatives (mainly polyols and propylene glycols) and an 85 MW cogeneration plant. There follows a more detailed break-down of the company’s performance by activities. 2.- ANALYSIS OF RESULTS BY ACTIVITIES 2.1. Exploration and production E&P operating income for the second quarter of 1997 was 9,359 million pesetas, in comparison to the 6,149 million pesetas for the same period a year earlier, and the previous quarter’s 12,130 million pesetas. Accumulated operating income for the first half was 104.9% higher than in 1996, at 21,489 million pesetas. Operating cash-flow for the period was 21,793 million pesetas, and for the first half amounted to 43,795 million pesetas. This compares with last year’s figures of 13,096 million pesetas and 23,968 million pesetas, respectively. Oil prices had a negative effect on quarterly income. The average price of Brent over the second quarter of 1997 was $17.99 per barrel, in comparison with $19.65 per barrel for the second quarter of 1996, and $21.11 per barrel in the first quarter of this year. In contrast, the higher exchange rate of the dollar against the peseta had a positive effect. In fact, the dollar strengthened by 3.2% over its first quarter levels, reaching an exchange rate of 144.72 pesetas per dollar, and showing a further revaluation of 13.5% over the level for the second quarter of 1996. Better performance by this activity in respect to year earlier figures is due to the inclusion of Astra in this business area (incorporating Mexpetrol income), which added 4,264 million pesetas, and higher exploitation margins from the entry in production of fields with higher added value. Amortizations were also lower thanks to a greater success rate in exploration, especially in Egypt and the U.K. Repsol’s production of hydrocarbons for the second quarter was 41.8% up on the previous year, at 3.39 million tonnes of oil equivalent (Mtoe). The Harding field is currently producing more than 80,000 barrels per day, and production in Libya has reached 50,000 barrels per day, as scheduled. Over this second quarter, several discoveries of gas and condensate were made at the Khalda concession, in the Western Desert of Egypt, (Shams-2X; Falak West-1) ; and in the North East Abu Gharadig concession, (BW-1 well); oil was also found in the Upper Egypt exploratory concession. In the British North Sea, proved reserves increased at the Buckland field. 41,020 million pesetas were invested in this area over the three month period, as against 10,978 million pesetas a year earlier. Accumulated first-half investments were 106,433 million pesetas, 60,888 million pesetas of which were spent to finance the part of Mexpetrol, Pluspetrol and Astra acquisitions relevant to this activity, whereas the remainder went to exploration and development activities. 2.2. Refining and Marketing Operating income for the second quarter of 1997 was 28,339 million pesetas, showing a rise of 69.3% over the same period a year earlier, and of 23.7% over the preceding quarter. Accumulated first-half operating income was 38.6% higher, at 51,245 million pesetas, in comparison with 36,984 million pesetas for the first six months of 1996. Operating cash flow was 47,934 million pesetas, as against 42,057 million pesetas in the first quarter and 29,311 million pesetas for the second quarter of last year. This improvement in the operating figures was due to higher international refining margins, which rose by 50 cents per barrel over margins for the previous quarter, and were 80 cents per barrel higher than those obtained a year earlier. The higher dollar/peseta exchange rate also boosted income. 3,820 million pesetas of income from refining and marketing activities in Latin America (Argentina, Peru and Ecuador), which did not exist in the second quarter of 1996, was also entered as operating income for this quarter. Lastly, higher marketing margins counteracted the negative effect of not computing leaded gasoline from Holland and Germany (where it has disappeared) in the maximum price formula. As we mentioned in our first quarter income preview for 1997, higher amortizations resulting from asset revaluation lowered quarterly operating income for this area by 3,276 million pesetas. Repsol refineries processed 9.03 million tonnes of crude oil over the three months, which is 25.1% more than in the same period of 1996. Incorporation of the La Pampilla refinery and the signing of a labour agreement which ended strikes at Petronor, more than compensated for loss of production through scheduled shut-downs at the Petronor conversion units and the Tarragona refinery. As has already been mentioned, a sales policy involving selective price discounts, with particular emphasis on unleaded 95 octane gasoline, was introduced in September, 1996. It has undergone several improvements since then, and has produced successful results. Last May, Repsol, with the official backing of Ministries and Associations connected with the motor-vehicle industry, launched an information campaign to encourage a wider use of this type of fuel. Under this heading, we wish to mention an extensive agreement signed between Repsol and the Corte Ingl�s to found a joint venture company to develop and run top grade service stations, as part of Repsol’s sales network, where a new type of establishment selling consumer goods will be introduced. Sales of light products in Spain rose by 4.6% in comparison to the second quarter of last year, however, fuel-oil sales fell by 7.4%, due mainly to abundant rainfall. Investment outlay over the first half was 39,210 million pesetas. In the marketing area, this was mainly for strengthening control over and constructing service stations, and, in refining, to improve efficiency. 2.3 Chemicals Operating income from chemicals for the second quarter of the year was 4,807 million pesetas. This was 36.4% down on the second quarter of 1996, and 33.7% down on the first quarter of this year. Accumulated first-half income was 12,053 million pesetas, in comparison to 13,127 million pesetas a year earlier. Cash flow from this business over the first six months of 1997 was 15,232 million pesetas, showing a fall of 5.6% over the same period in 1996. Lower income over this second quarter is basically attributable to a long shut-down at the Tarragona cracker, which had a negative effect of 2,050 million pesetas on base chemicals and around 1,400 million pesetas on derivative chemicals. Higher amortizations resulting from asset revaluation, and the start up at the new polypropylene plant also reduced income levels. Margins on base chemicals were higher than in the first quarter and for the same period last year. Derivative petrochemical margins improved in comparison with the preceding quarter, but were generally lower than the second quarter of 1996, as markets have not absorbed higher feedstock costs in selling prices. 380,000 Mt of petrochemical products were sold during the three month period, that is, 17.4% less than the equivalent period of 1996, as a result of the aforementioned shutdown at the Tarragona cracker. Base chemical sales registered a fall of 43.4%, whereas derivative sales fell by 2.4%. Investments over the quarter rose by 50.7% over last year’s outlay for the period, to 6,132 million pesetas. Accumulated first-half expenditure was 9,869 million pesetas, in comparison to 8,601 million pesetas in 1996. Main projects already completed include the aforementioned polypropylene plant, and a 33 Kt capacity increase at the LDPE plant in Tarragona. A 64 MW cogeneration unit is currently under construction, and is scheduled to go on stream in September. Extensions to the polyol unit at Puertollano and the methyl metacrylate unit at Tarragona are also under way. 2.4 Gas Second quarter operating income from this area was 8,659 million pesetas, in comparison to a year earlier 12,752 million pesetas, and the 10,937 million pesetas reported for the first quarter of 1997. Accumulated half-yearly income figures: 19,596 million pesetas, in contrast to a year earlier 35,981 milllion pesetas, were a clear sign of the the problems facing this business over the period. Temperatures were mild and the price freeze on LPGs continued. Operating cash-flow for the first half of 1997 was 32,865 million pesetas, as against 45,631 million pesetas in 1996. LPG quarterly operating income was 1,832 million pesetas, as opposed to 5,654 million pesetas obtained for this period a year earlier. The negative effect of the LPG price freeze for the three months amounted to 2,800 million pesetas, and asset revaluation reduced operating income by 450 million pesetas. The financial impact of warm temperatures may be estimated at approximately 2,450 million pesetas. Total second quarter LPG sales in Spain were 17% below 1996 levels, at 535,000 tonnes. This fall may be attributed to the aforementioned high temperatures. Natural gas registered a quarterly operating income of 6,648 million pesetas, 6.3% lower than the same period of the previous year. Unusually warm weather caused residential and commercial sales to drop; unitary margins were lower because of the time lapse in adjusting feedstock purchasing prices to selling prices, and, thirdly, amortization costs were higher as a result of asset revaluation and the Maghreb-Europe pipeline. All in all, higher sales to the industrial sector and power stations were unable to make up for these negative factors. The residential-commercial sector consumed 6,383 million thermies of gas, showing a 1.8% decrease in comparison with the second quarter of 1996, in spite of achieving 200,000 new customers, that is, an increase of 50,000 over this quarter. Demand from the industrial sector was 20.3% higher than for the same period in 1996, at 20,829 million thermies. In Peru, 32,000 tonnes of LPG were sold during this quarter through Solgas and Rimac. First half investments in gas amounted to 57,100 million pesetas. Of this, 31,795 million pesetas were spent on the natural gas area, where there was an outlay of 11,315 million pesetas on the previously mentioned investment in Colombia. Expenditure in LPG was 18,335 million pesetas, and included 11,687 million pesetas for the purchase of the Argentinian company, Algas. The remaining 6,970 million pesetas was spent on the electricity sector in Argentina. As part of the Atlantic LNG project to construct a Liquified Natural Gas plant in Trinidad and Tobago, (in which Repsol has a 20% stake), a financing agreement for 600 million dollars was signed on July 1st, last, with the ABN Amro, Barclays and Citicorp banks. Finally, Repsol has decided to invest 12 billion pesetas in the construction of an underground facility to store butane and propane gas in the Valley of Escombreras (Murcia). 2.5 Corporate and others This caption shows a negative amount of 261 million pesetas, compared to a negative 272 million pesetas a year earlier. This figure basically reflects the expenses incurred by Repsol’s corporate headquarters, and not accountable to group companies. 3.- FINANCIAL RESULTS Net financial expenses for the second quarter of the year were 5,766 million pesetas in contrast to 1,275 million pesetas registered for the same period a year earlier, which included a capital gain of 981 million pesetas from divestment of financial assets, and 3,143 million pesetas in the first quarter of 1997. The latter figure included an income of over 3,000 million pesetas from the share-out of quotas/dividends by Musini. This increase in net financial expenses was mainly due to Repsol’s higher financial debt level, resulting from its large investment outlay in international development, and the consolidation of debt assumed for acquired affiliates. Net financial debt at the end of this quarter was 496,775 million pesetas, compared to the 381,545 million pesetas reported at the close of 1996. 4.- EQUITY ON EARNINGS OF UNCONSOLIDATED AFFILIATES The figure entered under this caption for the second quarter of 1997 was 523 million pesetas, in comparison to 83 million pesetas for the same period last year, and 69 million pesetas in the first quarter of 1997. Of all the minority affiliates, Gas Argentina, S.A. made an outstanding contribution to income over this quarter, with a figure 367 million pesetas higher than that obtained in the first quarter. This may be explained by the seasonal nature of this business, for the second quarter of the year is winter in Argentina. 5.- GOODWILL AMORTIZATION Goodwill amortization for the second quarter of 1997 was 465 million pesetas. This was a similar figure to that entered in the first quarter, and is slightly higher than that registered a year earlier. 6.- EXTRAORDINARY ITEMS The second quarter of 1997 reported an extraordinary profit of 7,621 million pesetas, which may be broken down into an extraordinary income of 9,808 million pesetas, and extraordinary expenses of 2,187 million pesetas. The most important items under this caption refer to an income of 5,468 million pesetas from divestment of assets (the sale of two Petronor vessels, the Arteaga and the Butron, obtained a capital gain of 4,804 million pesetas). Second quarter extraordinary expenses were to cover manpower reduction programmes and provisions for potential risks and losses in certain group companies. 7.- MINORITY INTERESTS Income attributable to minority shareholders, at June 30th, 1997, was 9,576 million pesetas, as against 4,259 million pesetas registered for the first half of 1996. The higher balance under this caption is basically because Repsol had not yet acquired Astra and the La Pampilla refinery during the first half of 1996, and these companies have an important minority interest contribution. 8.- TAXES Income tax estimated at June 30th, 1997, was 29,423 million pesetas, which represents an effective tax rate of 29.2%. Our current information leads us to calculate a probable tax rate for the whole year of approximately 30%. REPSOL SUMMARISED INCOME STATEMENT (Million pesetas) (Non-audited figures)
______________________ BREAK-DOWN OF REPSOL OPERATING INCOME BY ACTIVITY (Million pesetas) (Non-audited figures)
BREAK-DOWN OF REPSOL OPERATING CASH-FLOW BY ACTIVITY (Million pesetas) (Non-audited figures)
__________________________________________________________________________ BREAK-DOWN OF REPSOL OPERATING REVENUES BY ACTIVITY (Million pesetas) (Non-audited figures)
BREAK-DOWN OF INVESTMENTS BY ACTIVITY (Million pesetas) (Non-audited figures)
_________________________________________________________________________ REPSOL COMPARATIVE BALANCE SHEET (Million pesetas) (Non-audited figures)
REPSOL CONSOLIDATED STATEMENTS OF CASH-FLOWS (Million pesetas) (Non-audited figures)
OPERATING HIGHLIGHTS
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