Repsol’s net income for the third quarter of 1999 was 49,636 million pesetas, and was 59.4% higher than that obtained in the same period of 1998.

Quarterly operating income, at 139,208 million pesetas, and net cash flow, at 162,052 million pesetas more than doubled the figures obtained a year earlier.

In terms of earnings per share, this rose from 34.60 pesetas in the third quarter of 1998 to 42.68 pesetas in 1999.

Cash flow per share rose from 86 pesetas in 1998 to 139 pesetas in 1999.

The contribution from YPF in this improved performance was decisive. The acquisition of this company has signified 14 billion pesetas of additional net profit after subtracting all aspects of debt and goodwill amortisation connected with the operation.

Additionally, this acquisition has boosted earnings per share from the 39.7 pesetas that Repsol would have obtained with its former capital and debt level to the figure of 42.68 pesetas achieved on the new number of shares and debt level.

If conditions were the same, it could be said that cash flow per share had risen from 99.7 to 139.3 pesetas.

It is therefore clear that this deal has been accretive from the start, much sooner than was originally foreseen.

These quarterly results practically counterbalance the effect on accumulated results of adverse circumstances during the first half of the year, and the write-offs that have been made in connection with the acquisition of YPF in the second quarter.

Cumulative net income after the write-off of over 27 billion pesetas of expenses associated with the acquisition of YPF, was 96,861 million pesetas, that is 8.0% below 1998 results. Three-quarterly operating income was 272,797 million pesetas, showing a 35.6% increase, and net cash flow rose 35.8% to reach 345,290 million pesetas.

In the third quarter 1999, the company made investments of 196,594 million pesetas, whereas it generated a net cash flow of 162,052 million pesetas. This situation includes an extraordinary non-recurring amount of expenditure in refining to comply with year 2000 specifications and in chemicals to cover the last construction phase of the PO/SM plant.

Net debt at the end of the quarter was 2.8 trillion pesetas, providing a net debt to capitalisation ratio of 54.3%. This aggregate is now slightly lower than it was at the beginning of July last, following disbursement for the capital increase.

The exploration and production activity was conducted under favourable conditions, with high oil prices, a larger daily production, lower operating costs and a successful replacement of reserves. The refining and chemical areas were affected by low international margins and caution on the part of Repsol-YPF in passing on to the consumer in the price of oil products the effect of higher crude oil prices.

Other third quarter highlights were as follows:

Measures were introduced to combat inflation in Spain, two of which may negatively affect this company: a price freeze on bottled LPG and a change in the formula for setting natural gas prices to the industrial market.

It is not easy to quantify the effect of the first measure. During this year, it is expected to cause a loss of approximately 4.2 billion pesetas if the price of Brent remains around $22 per barrel. For the whole term from October 99 to September 2000 during which the selling price of bottled LPG will be frozen, the final effect on results will largely depend on the evolution of oil prices. If current prices are maintained throughout the period, total impact before tax would be some 8.8 billion pesetas: 4.2 billion in 1999 and 4.6 billion pesetas in 2000. In lower oil price scenarios, this would be much less, or even zero.

The change in the price formula for natural gas to the industrial sector in effect eliminates the current time lapse, and causes Gas Natural, SDG a loss of 4 billion pesetas of non-recurring profit which it would otherwise have obtained, with an effect on Repsol-YPF results this financial year of some 1.8 billion pesetas, which will, of course, be recovered when oil prices fall.

The first steps taken after acquiring YPF, and an important discovery in Bolivia which will boost the company’s proved reserves by an amount which may vary between 100 and 200 million barrels of oil equivalent were also of relevance, and have already been covered by specific press releases.

The remainder of this third quarter income preview will explain in detail the captions of the income statement, beginning with operating and economic aggregates for each business area.

2.- ANALYSIS OF RESULTS BY ACTIVITIES

2.1.-  Exploration and production

Third quarter results

Operating income for this activity in the third quarter of 1999 was 78,386 million pesetas. This compares with the 10,985 million pesetas obtained in the second quarter of this year, and the 2,697 million pesetas for the third quarter a year earlier.

The main reasons for this highly improved performance were as follows:

• The full incorporation in this quarter of YPF, from which 80% of E&P income was obtained.
• An increase in daily production of oil and gas. Average production for this third quarter was 1.07 million boepd (74% from YPF) in contrast to a production of 0.34 million boepd for the second quarter of this year and 0.25 million boepd for the third quarter of 1998.
• Higher Brent oil prices, which reached an average for the quarter of $20.6 per barrel in comparison to $15.5 per barrel in the previous quarter, and $12.5 per barrel a year earlier.

It is also worth noting that year-on-year third quarter lifting costs in Argentina were reduced by 8.7%, falling to $2.1 per boe.

Accumulated results

Accumulated operating income to September 1999 was 91,130 million pesetas, and was equivalent to six times that obtained for the same period a year earlier.

The reasons for improved accumulated performance were the same as those previously quoted with reference to the third quarter.

At the end of September, reserves replacement was already estimated at 387 million boe, and surpassed production for the period by 288 million boe, permitting a positive reserves replacement of 99 million boe. Additionally, oil and gas was discovered last October in Bolivia, with net reserves for Repsol-YPF estimated at probably more than 100 million barrels of oil equivalent.

Investments

72,133 million pesetas were invested during the third quarter of 1999, mostly for developing fields and drilling discovery wells.

Third quarter results

Third quarter refining and marketing income (LPG income will be included under this business area from January 1st of next year) was 37,615 million pesetas (8,120 million from YPF). This was 24.5% up on the second quarter, and 12.3% down on third quarter 1998 figures.

As mentioned at the beginning of this report, international refining margins were low, and income was reduced because of the company’s caution in passing on to the consumer in the price of oil products the effect of higher crude oil prices.

Spain

The company’s refining contribution margin indicator in Spain was $1.3 per barrel, in comparison to $1.4 per barrel in the preceding quarter, and $2.6 per barrel in the third quarter of 1998.

The distillation level in Spain, at 8.74 million tons, was 4% higher than in the second quarter of 1999 and 1.6% lower than in the third quarter of 1998.

With reference to marketing, in the third quarter, Repsol-YPF sales of gasoline and gas oil rose by 1.7%, and despatch of these products from CLH facilities increased by 2.3%.

Marketing margins narrowed because rises in oil prices could not be immediately applied.

Argentina

Refining margins in Argentina were $2.3 per barrel over the quarter. Distillation was 4.18 million tons.

A similar policy to that in Spain has been applied in Argentina, deferring the application to oil product selling prices of the higher cost of crude oil, here also causing a reduction in marketing margins.

Overall costs at the Argentine refineries have fallen from $2.76 per processed barrel in 1998 to $2.5 per barrel in the third quarter of 1999.

Accumulated results

Accumulated Refining and Marketing results at September 30^th were 10.7% down on year earlier levels, at 101,881 million pesetas (8,883 million pesetas from YPF). This lower performance was almost entirely due to narrow international refining margins, which fell to a level of $0.2 per barrel in comparison to $1.26 per barrel for the first nine months of 1998.

A cumulative distillation volume of 34.3 million tons of oil products was obtained (4.3 million tons from the incorporation of YPF). In 1998, 31.5 million tons were distilled.

In total, 21.3 million tons of gasoline, gas-oil and kerosene were sold during the period (3.7 million tons from the integration of YPF), showing an 11.9% rise over 1998.

Investments

Third quarter investment in refining and marketing was 52,192 million pesetas, mostly to upgrade refining units, to adapt products to comply with year 2000 specifications, and to develop and construct new service stations in Europe and Latin America.

2.3.- Chemicals

Third quarter results

Operating income from chemicals for the third quarter of this year was 8,025 million pesetas. This figure includes a non-recurring revenue of 4,275 million pesetas for the sale of rubber producing technology associated with the formation of a joint venture company to produce and market solution synthetic rubber.

Apart from the foregoing, this business sector has been marked by a negative international context during the third quarter 1999.

Base chemicals improved in comparison to the second quarter 1999 following a rise in the prices of ethylene and propylene, placing them above the price of naphtha.

Margins on derivative chemicals maintained the same levels as the second quarter. Although margins on plastics improved, this was not the case in intermediate products, where higher feedstock prices could not be passed on in selling prices.

This better performance with regard to 1998 was due to the aforementioned sale of rubber technology, although as already explained above, the effect of this was lessened by lower margins.

Accumulated results

Cumulative income to September 30^th was 14,129 million pesetas, and this was 38% lower than for the first three quarters of 1998.

Sales for the period were 21% up at 1,813 Kt. Sales growth was 31% in base chemicals and 17% in derivative chemicals.

These higher sales and the aforementioned rubber technology offset the sharp drop in margins.

Investments

28,521 million pesetas were invested in chemicals during the third quarter of 1999, and accumulated investment was 85,956 million pesetas. Apart from the amount spent on acquiring YPF chemical assets, most of expenditure went to the styrene/propylene oxide project in Tarragona and the ammonium/urea project in Argentina.

2.4.1. LPG

Third quarter results

Third quarter LPG operating income was 7,394 million pesetas. YPF contributed 1,031 million pesetas of this income.

Improved performance in comparison to the same period of 1998 was mainly due to the positive effect of the time lag between the cost of feedstocks on the international markets and the price of LPG resulting from application of the price formula as legally stipulated in Spain.

In Latin America, LPG activity posted an operating income of 1,423 million pesetas in comparison to 585 million pesetas obtained for the period a year earlier.

 

Accumulated Results

Three-quarter accumulated income from the LPG sector rose by 42.3% to reach 27,253 million pesetas.

Income from Latin America was 1,316 million pesetas, and contrasted sharply with the 294 million pesetas obtained there in the first nine months of 1998.

Investments

Third quarter investments in LPG amounted to 5,856 million pesetas. Most of this expenditure went to the development of marketing activity in Spain and Latin America.

2.4.2 Natural gas and electricity

Third quarter results

Operating income from natural gas and electricity activities posted a 26.1% rise over the same period of 1998, reaching 12,851 million pesetas. Income from assets in Latin America was 26.2% up, at 6,620 million pesetas.

In this third quarter 1999, the Gas Natural Group sold 8,730 million thermies to the residential and commercial sector, with a 19.3% rise over equivalent 1998 figures. This sales improvement came from an increase in the customer list. The Gas Natural Group distributes gas to over 5,205,000 residential and commercial customers, showing an increase of 584,000 customers over the past twelve months, 253,000 of these in Spain, 219,000 in Mexico, and 56,000 in Argentina.

27,253 million thermies were consumed by the industrial sector during the period, 8.8% up on year earlier figures. Here, better performance was mainly attributable to general improvement in Spain’s industrial situation and expansion in the markets covered by the Gas Natural Group.

The consolidation of 45.3% of GASA contributed 2,928 million thermies for the residential and commercial sector, which was similar to that for the same quarter in 1998. Sales to the industrial and power station sectors accounted for 4,140 million thermies, and showed a rise of 15.1%. Most of this demand growth came from power stations.

Accumulated results

Cumulative operating income for the three quarters was 40.3% higher than in 1998, at 45,106 million pesetas. Of this, 32,671 million pesetas came from business activity in Spain, and this was 35.8% more than a year earlier.

12,435 million pesetas of the above came from Latin America, and this was 53.7% more than in the same period a year earlier. Part of this growth was the result of consolidating 45.3% of GASA, and good performance by the other distributors.

Investments

Third quarter investments amounted to 12,023 million pesetas, and were mainly to develop gas infrastructure and for projects to integrate the gas-electricity chain in Spain and Latin America.

3.- FINANCIAL RESULT

Net financial expenses for the third quarter of 1999 were 44,160 million pesetas, and this includes all costs relating to the external financing taken up for the acquisition of 82.5% of YPF, and financial expenses associated with YPF debt, which began to integrate via global consolidation on June 23^rd last.

Net financial debt rose from 587,939 million pesetas at December 31^st, 1998 to 2,807,662 million pesetas at September 30^th, 1999. This figure represents a debt to capitalisation ratio of 54.3%.

This substantial increase in external financing responds to three main items. The first was the acquisition of almost all YPF ordinary stock in February and June of this year, involving a total disbursement of $14,855 million. The second was the aforementioned integration of debt registered on the YPF balance sheet, which amounted to $4,060 million at September 30^th last.

From the sum of these two aggregates should be deducted the third item affecting financial debt variation, which was the amount of 942,648 million pesetas (5,655 million euros) obtained from the capital increase carried out last July.

4.- EQUITY ON EARNINGS OF UNCONSOLIDATED AFFILIATES

Net income from unconsolidated affiliates this quarter was 1,094 million pesetas, as opposed to a loss of 542 million pesetas in the third quarter of 1998. Income for the first nine months of 1999 was 7,242 million pesetas, showing a significant rise over the 511 million pesetas for the same period a year earlier. This large increase mainly came as YPF net income from the period when Repsol held a 14.99% stake in the latter.

5.- GOODWILL AMORTIZATION

Goodwill amortisation for the third quarter of 1999 was 9,402 million pesetas, in comparison to 1,816 million pesetas a year earlier. The figure for the first nine months of 1999 was 13,551 million pesetas, in contrast to 5,394 million pesetas for the same period of 1998.

The sharp increase under this caption came from $3,939 million of goodwill amortisation associated with the acquisition of 97.46% of YPF, to be amortised over a period of twenty years. In this third quarter 1999, 7,934 million pesetas have been amortised in this respect.

The purchase of YPF also generated an additional goodwill amortisation of $4,258 million which have been allotted to the new company’s exploration and production assets. This goodwill will be amortised at the same rate as the reserves to which it was allotted are produced.

6.- EXTRAORDINARY ITEMS

There was a net extraordinary income of 2,053 million pesetas in the third quarter 1999. Accumulated figures to September 30^th showed an extraordinary loss of 19,101 million pesetas, in comparison to an extraordinary profit of 3,559 million pesetas in 1998.

Third quarter income may be largely explained by the partial reversion of a provision of 1,165 million pesetas set aside in 1998 to cover the position of WTI crude, and the regularisation of 2.4 billion pesetas of expenses from the YPF operation.

7.- MINORITY INTERESTS

Income attributable to minority shareholders for the third quarter of 1999 was 9,760 million pesetas, in comparison to 7,534 million pesetas in 1998. For the first nine months of 1999, total income was 21,608 million pesetas in comparison to 19,224 million pesetas in 1998.

Higher income in the third quarter of 1999 came from the increase in minority interests mainly resulting from better performance on the part of Astra (952 million pesetas) and the inclusion for the first time of YPF minority shareholders (1,076 million pesetas).

8.- TAXES

The effective tax rate for the third quarter of 1999 was 33.0%, showing a rise over the 30.2% registered in the third quarter of 1998. The tax rate for the first three quarters was 32.1%.

REPSOL SUMMARISED INCOME STATEMENT

(Million pesetas)

(Non-audited figures)

_______________________________________________________
(1) 1998 figures were calculated on 900 million shares resulting from the share split of april 1999.
1999 figures were calculated by taking the number of shares up to July 7th as 900 million, from July 7th to 19th as 1,140 million, and from July 20th onwards as 1,188 million

$ =141.770 pesetas in 3Q98
$ =161.196 pesetas in 2Q99
$ =156.026 pesetas in 3Q99

BREAK-DOWN OF REPSOL OPERATING INCOME BY ACTIVITY

(Million pesetas)

(Non-audited figures)

_____________________________________________________________________
1)Includes Repsol Exploraci�n, Astra exploration activity and since June 23rd, 1999, YPF exploration activity.
2)Includes C.L.H. refining & marketing of Repsol Petr�leo, Petronor, Repsol Comercial de Productos Petrol�feros, La Pampilla Refinery and Eg3 and YPF refining & marketing activity from the date of its incorporation.
3)Includes basic petrochemicals from Repsol Petr�leo and Petronor plus derivative petrochemicals from Repsol Qu�mica, and YPF chemical activity from the date of its incorporation.
4)Includes Repsol Butano, Solgas, the 45.3% stake in the Gas Natural Group, and Astra's electricity and gas activities and YPF gas activity from the date of its incorporatio
5)Mainly includes Repsol-YPF overheads.

BREAK-DOWN OF REPSOL OPERATING CASH-FLOW BY ACTIVITY

(Million pesetas)

(Non-audited figures)

_____________________________________________________________________
1)Includes Repsol Exploraci�n, Astra exploration activity and since June 23rd, 1999, YPF exploration activity.
2)Includes C.L.H. refining & marketing of Repsol Petr�leo, Petronor, Repsol Comercial de Productos Petrol�feros, La Pampilla Refinery and Eg3 and YPF refining & marketing activity from the date of its incorporation.
3)Includes basic petrochemicals from Repsol Petr�leo and Petronor plus derivative petrochemicals from Repsol Qu�mica, and YPF chemical activity from the date of its incorporation.
4)Includes Repsol Butano, Solgas, the 45.3% stake in the Gas Natural Group, and Astra's electricity and gas activities and YPF gas activity from the date of its incorporatio
5)Mainly includes Repsol-YPF overheads.

BREAK-DOWN OF REPSOL OPERATING INCOME BY ACTIVITIES AND GEOGRAPHICAL AREAS

(Million pesetas)

(Non-audited figures)

BREAK-DOWN OF REPSOL OPERATING REVENUES BY ACTIVITY

(Million pesetas)

(Non-audited figures)

________________________________________________________
1)Includes Repsol Exploraci�n, Astra exploration activity and since June 23rd, 1999, YPF exploration activity.
2)Includes C.L.H. refining & marketing of Repsol Petr�leo, Petronor, Repsol Comercial de Productos Petrol�feros, La Pampilla Refinery and Eg3 and YPF refining & marketing activity from the date of its incorporation.
3)Includes basic petrochemicals from Repsol Petr�leo and Petronor plus derivative petrochemicals from Repsol Qu�mica, and YPF chemical activity from the date of its incorporation.
4)Includes Repsol Butano, Solgas, the 45.3% stake in the Gas Natural Group, and Astra's electricity and gas activities and YPF gas activity from the date of its incorporation.
5)Mainly includes Repsol-YPF overheads.

BREAK-DOWN OF INVESTMENTS BY ACTIVITY

(Million pesetas)

(Non-audited figures)

________________________________________________________
1)Includes Repsol Exploraci�n, Astra exploration activity and since June 23rd, 1999, YPF exploration activity.
2)Includes C.L.H. refining & marketing of Repsol Petr�leo, Petronor, Repsol Comercial de Productos Petrol�feros, La Pampilla Refinery and Eg3 and YPF refining & marketing activity from the date of its incorporation.
3)Includes basic petrochemicals from Repsol Petr�leo and Petronor plus derivative petrochemicals from Repsol Qu�mica, and YPF chemical activity from the date of its incorporation.
4)Includes Repsol Butano, Solgas, the 45.3% stake in the Gas Natural Group, and Astra's electricity and gas activities and YPF gas activity from the date of its incorporation.
5)Mainly includes Repsol-YPF overheads.

REPSOL COMPARATIVE BALANCE SHEET

(Million pesetas)

(Non-audited figures) 

REPSOL CONSOLIDATED STATEMENTS OF CASH-FLOWS

JANUARY-SEPTEMBER - 1998 AND 1999

(Million pesetas)

(Non-audited figures)

OPERATING HIGHLIGHTS