| Preview of Income Statement, 2nd quarter of 1998 |
| 1.- INTRODUCTION 1.1.- Income Statement Repsol’s net income for the second quarter of 1998 was 35,846 million pesetas, showing a 17.2% rise over the same period a year earlier. Operating income was 30% up over 1997 figures, at 66,156 million pesetas, and quarterly cash-flow rose by 13.5% over that of last year, reaching a total of 81,336 million pesetas. Net income, before extraordinary income, for the second quarter, was up 34.7% in 1998 as compared to the same period in 1997, during which an important capital gain, due to divestment of the Petronor fleet, was registered. The strong performance of the first two quarters resulted in significant improvements in the accumulated income. Net cash flow for the semester experienced a growth of 16.2%, reaching 176,381 million pesetas. Operating income for the first six months was 137,401 million pesetas, showing an increase of 32.3% against 1997 figures. Net income rose by 20.3% in comparison to the same period in 1997, to 74,129 million pesetas. As it occurred during the first quarter of this year, we can see an improvement in the income, showing Repsol’s increased capacity for generating funds, achieved in spite of negative factors such as low crude oil prices, and the Asian economic crisis, particularly affecting the derivative chemical business. During the second quarter of 1998, a capital expenditure of 98,158 million pesetas was made, basically in exploration and production, and in natural gas. Financial expenses for the quarter were 6,676 million pesetas, showing a rise of 15.8% against 1997 figures. Corporate net debt amounted to 568,644 million pesetas at the end of the second quarter of 1998. Repsol maintains the ratio of net debt to capitalization at 30.4%, the level it had at the beginning of the year .1.2.-Outstanding events in this quarter An important event of the quarter was the signature of the Strategic Agreement with Amoco which entails basically a contract for 6 bcm of gas, of which a minimum of 4.5 bcm will be under a "take or pay" regime for the Spanish market, an initial purchase of a 10% stake in Amoco’s reserves in Trinidad and Tobago with an option for the Group lead by Repsol to increase this percentage up to 30%, a participation of Amoco in electric projects of the Repsol-Iberdrola Group in Spain, and the undertaking of joint-ventures in the Latin American gas and electricity markets. Since the signing of the Agreement, intensive work is being done to finish the gas contract and to present the project for approval by the partners of Atlantic and the Government of Trinidad and Tobago itself. This past April, Astra made a large oil discovery in the Quiamare-La Ceiba exploratory block in Venezuela. It concerns the well called Tacata Tag 12 E, whose drilling has already been finished. There were three positive production tests, giving an overall flow of 16,000 barrels of 35� and 41� API oil per day. A 3D seismic campaign has been carried out and, in the next few months, a drilling program will be initiated in order to evaluate this structure as well as to find other possibilities in neighboring areas. In order to protect this discovery, Astra acquired a 50% stake in the Gu�rico Occidental block, with an extension of 4,000 km2, in Venezuela. This block, which has only been slightly explored, has a field in declination and, above all, an important potential with the same objectives as the Quiamare-La Ceiba block. Repsol bought from the National Company of Azerbaijan (SOCAR) a 5% stake in the Kurdasi Block in Azerbaijan. It has an extension of 550 km2 and is found in the western part of the Southern Basin of the Caspian Sea. The block is operated by AGIP. During this past April, Repsol and Mobil agreed to found a 50-50 joint venture to produce, import and market lubricating oils manufactured by both corporations, using the Eg3 sales network as one of their main retail channels. Repsol has sold its 50% stake in Silqu�mica S.A. to Degussa A.G, who is the owner of the remaining 50% stake. Silqu�mica is a company which produces white fillers and zeolites. This sale, which produced an extraordinary income of 927 million pesetas, reflects the policy of the chemical division to concentrate on its strategic activities. During June, a capital reshuffling in the LPG business in Argentina was completed. Astra sold 48.9% of its stake in Algas and Poligas Lujan to Pluspetrol Resources, for $38.6 million, and bought 10.5% of Refinor for $16.5 million, making it possible for Astra and Pluspetrol Resources to control the LPG production in the Ramos Field, the processing and separation of Refinor and the final market of Alg�s. The final result of this transaction for Astra was an increase in cash of $22.1 million, as well as a capital gain of $5.5 million. This past July 24th, Repsol purchased for $26.2 million a 75% interest in DURAGAS, a company which markets LPG in Ecuador. DURAGAS has a 49% share in Ecuador’s LPG distribution market and it sells a total of 300,000 tons per year. This operation complements Repsol’s LPG production activity in the area. On July 18th, the Ministry of Industry and Energy liberalized bulk LPG prices and the prices for botted LPG with a capacity of less than 8 kilograms. During the last few months, Repsol has increased by 5.8% its stake in the Argentine company Astra, to a total participation of 62.5%. The Selection and Remuneration Committee of the Repsol Board of Directors has defined the basIs for a medium term incentive program for the top management of the Repsol Group. The amount of this incentive, which will be paid at the beginning of the year 2001, is linked to the stock market price of Repsol stock, which will be the objective by which the top management will be assessed. The net cost for the company of this incentive in a medium term is 165 million pesetas each year it is in force and will partly replace the variable yearly incentive. 2.- ANALYSIS OF RESULTS BY ACTIVITIES 2.1. Exploration and production E&P operating income for the second quarter of 1998 was 5,233 million pesetas, in comparison to 9,359 million pesetas for the same period a year earlier, and the previous quarter’s 6,794 million pesetas. Accumulated operating income for the first half was 12,027 million pesetas, an amount which is 44% less than that of the first half of 1997. Operating cash-flow for the period was 17,874 million pesetas and for the first half amounted to 37,427 million pesetas, as compared to 21,793 million pesetas and 43,795 million pesetas respectively for the same periods last year. The contribution of Astra’s exploration and production assets to operating income during the second quarter of 1998 was 2,219 million pesetas, in comparison to 4,264 million pesetas in the second quarter of 1997 and 2,275 million pesetas in the first quarter of 1998. The drop in income for the second quarter of 1998, as compared to the same period last year was due, as it is well known, to the evolution of crude oil prices (the average price for Brent during the second quarter of this year was $13.31 per barrel, as compared to $18.03 per barrel during the same period of 1997). This fall was partially compensated by the fact that production for the second quarter of 1998 was 7.7% higher than that of the same period last year, and also by the favorable evolution of the dollar/peseta exchange rate. Comparing the first and second quarters of this year, this activity’s drop in income is due basically to lower crude oil prices and the unfavourable evolution of the peseta/dollar exchange rate. Repsol’s production of hydrocarbons for the second quarter amounted to 22.34 million Boe. In Latin America, production for the same period was 10.7 million Boe, showing a 15% rise over that of the same quarter in 1997. Positive factors during the first half of 1998 were the growth in the production from the Harding field (British North Sea) which reached a total average production of more than 87,000 barrels per day, as compared to 80,000 barrels per day for the same period last year, and the start-up in the exploitation of the Mene Grande field in Venezuela, with a production of almost 5,000 barrels per day.
30,269 million pesetas were invested in this area during the first quarter. Accumulated investments for the first half were 55,780 million pesetas of which 41.309 millions were spent on the development of fields. 2.2. Refining and Marketing Second quarter operating income was 39,376 million pesetas, representing a boost of 39% over that of the second quarter of 1997, and a 23.7% rise over that of the first quarter of this year. Accumulated income for the first half adds up to 71,209 million pesetas, showing an increase of 39% over the 51,245 million pesetas in 1997. The second quarter’s operating cash-flow was 57,999 million pesetas, as compared to 51,811 million pesetas for the previous quarter and 47,934 million pesetas for the second quarter of 1997. The operating income for the Repsol’s refining activity in Spain has been positively affected by an improvement in the margin which was higher than that of the preceding quarter and of the second quarter of 1997. At the same time, distillation in Spain reached 9.13 MTep, showing a 15% rise over that of last year. Operating income was also favourably influenced by the evolution of the dollar/peseta exchange rate. Margins at the La Pampilla Refinery rose by 11% with respect to the first quarter, although they were lower than those of the second quarter of last year. The distillation level remained very high, 1.2 million Tep, being 12% above that of the first quarter of 1998 and 15% over that of the second quarter of 1997. The Eg3 Refinery in Argentina, whose distillation figures for the second quarter of 1998 were similar to those of the first quarter, has posted margins which are 12% higher than those of the previous quarter. The total amount of crude oil processed by Repsol refineries during the second quarter was 10.8 million tons, an amount which is 20% greater than that of the same period last year, even though the Eg3 Refinery in Argentina had still not been incorporated at that time. Turning to the logistics activity conducted by CLH, this transported 6.9% more products than in the same quarter a year earlier, mostly because of increases in gas-oil (12,5%) and aviation fuel (10%), since the gasolines remained practically the same and fuel oil experienced a drop of 3.4%. Sales of light products in Spain, excluding sales to other operators, grew by 4.0% in comparison to 1997. Fuel oil sales also experienced a 3.0% decrease. Margins for light products rose by 5.3% with respect to those of the second quarter of 1997. In Peru, the sales of fuels, through Corpetrol, present for the second quarter a growth spurt of 27% and they have grown by fourfold over those of the same period last year. This is due to the development of the service station network and the launching of direct sales business. Commercial activity in Ecuador advanced by 3% in its sales during this quarter and experienced a jump of 32% as compared to the same quarter in 1997. This upswing in the activity is due to the development of the network. During the second quarter, marketing activity in Argentina experienced a 4% drop in sales in comparison to the same period in 1997, due to the implementation of a selective commercial policy, reducing sales to some low margin customers. Investments Quarterly investment in refining and marketing amounted to 19,611 million pesetas, mostly to enlarge conversion units, adapt product qualities, and develop the service station network. Accumulated investments for the first half were 34,392 million pesetas, as opposed to 39,210 million pesetas invested during the first half of 1997. .2.3 Chemicals Second quarter operating income from Chemicals was 7,759 million pesetas, up 61.4% over last year’s second quarter, and 21% lower than that of this year’s first quarter. Accumulated income for the first half reached 17,559 million pesetas, showing a 46% gain over the 12,053 million pesetas obtained in 1997. Operating cash-flow generated by the activity during the second quarter of 1998 adds up to 10,046 million pesetas, showing an increase of 56,4% over the same period in 1997 and a decrease of 16.4% as compared to this last quarter. The strong growth in income during the second quarter of the previous year was due to the robust increase in sales, which was more than 42% (it should be mentioned that, during the second quarter of 1997, the Tarragona olefin cracker was shut down), which more than compensated for the pronounced deterioration in the margins in base chemicals in international markets. Turning towards derivative chemicals, the margins were similar during both periods. The fall in income, compared to the first quarter of 1998, is basically attributable to the descent in international margins, both in basic chemicals and in derivative chemicals. Nevertheless, it should be pointed out that this negative effect has been partially compensated by an increase of 10% in sales. Higher income during the first half of 1997 was caused by higher margins in derivative chemicals, associated with a rise of 25% in sales for the whole chemical activity. These positive effects were partially neutralized, taking into account the drop in the margins of basic chemicals. Investments The quarterly investment in chemicals was 5,083 million pesetas while the accumulated investment for the first half totals 9,990 million pesetas. The year’s investments went mainly to the construction of a PO/SM plant in Tarragona and a hydrogenation project for SBS rubber in Santander. 2.4 Gas and electricity Operating income for the second semester was 14,266 million pesetas, in comparison to 8,659 million pesetas for the same period last year and 23,264 million pesetas for the first quarter of this year. The accumulated income, 37,530 million pesetas, as compared with that of last year, 19,596 million pesetas, evidences a surge of 91.5%. Operating cash flow for the quarter was 21,697 million pesetas in comparison to 15,211 million pesetas for the second quarter of 1997 and 33,200 million pesetas for the first quarter of 1998.
3.- FINANCIAL RESULT Net financial expenses for the second quarter of 1998 were 6,676 million pesetas, in comparison to 5,766 million pesetas shown for the same period last year. This increase in net financial expenses can be mostly attributed to a greater volume of debt, amounting to 568,644 million pesetas as of 30th June 1988, in comparison to 496,775 million a year earlier. It should be noted, nevertheless, that the greater part of the increase of the last twelve months was produced during the second half of last year. The rise during the first half of 1998 was only 20,161 million pesetas. 4.- EQUITY ON EARNINGS OF UNCONSOLIDATED AFFILIATES The figure entered under this caption for the second quarter of 1998 was 974 million pesetas, in comparison to 523 million pesetas for the same period during the previous year, and to 79 million pesetas obtained during the first quarter of 1998. Among the group of unconsolidated affiliates, mention should be made of the positive quarterly contribution of the Argentine affiliates EASA y GASA. 5.- GOODWILL AMORTIZATION Goodwill amortization for the second quarter of 1998 was 1,728 million pesetas, an amount which is similar to that obtained for the first quarter of 1998 and which surpasses the 465 million pesetas of the second quarter of 1997. 6.- EXTRAORDINARY ITEMS The second quarter reported a postive extraordinary item of 2,817 million pesetas. The most important items among the quarter extraordinary revenues were the capital gain from the sale of the 50% stake in Silqu�mica, 927 million pesetas, and the capital gain for the divestment of the 49% participation in Algas and Poligas Lujan, 839 million pesetas. 7.- MINORITY INTERESTS The income attributed to minority interests reached, on June 30, 1998, 11,690 million pesetas as compared to 9,576 million pesetas reported in the first half of 1997. The increase is mostly due to the inclusion in the first half of 1998 of 4,138 million pesetas attribuable to the stockholders of preference shares issued by Repsol at the end of last year. 8.- TAXES The estimate for Corporate Tax expense, as of June 30, 1998, amounts to 37,973 million pesetas, representing an effective tax rate of 30.7%. 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 JANUARY-JUNE - 1997 AND 1998 (Million pesetas) (Non-audited figures)
OPERATING HIGHLIGHTS
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