Repsol-YPF has put out to tender to several Investment Banks the divestment management for the sale of its assets in the United Kingdom and Indonesia.

This sale will include the company�s upstream and downstream assets in the aforementioned countries, and forms part of the programme to finance the acquisition of YPF.

Apart from the foregoing, and if current negotiations have not progressed satisfactorily, next January the bank or banks winning this tender will be awarded the sale of the Argentine companies Eg3 and Edenor, and the Crescendo field in the USA.

The goal of this financing programme is to obtain funds of not less than 2.5 billion dollars between this year and next, thus reducing the level of corporate debt to below 40% by 2002.

1. HISTORY

   100 days have now gone by since Repsol took control of YPF following the success of the Tender Offer for YPF Shares.

   The company has therefore decided that this is a good moment to take stock of progress to date, thus fulfilling its commitment to keep the market informed.

   An initial assessment is that events are following their normal course, and forecasts regarding integration, cost saving and synergies are being revised upwards as targets are achieved in advance of schedule.

    

2. CORPORATE STRUCTURE

At the close of these first 100 days, the new company�s corporate structure has been fully designed, and is published down to the third level on the company�s web site.

A classical pattern of corporate structure has been followed, with single operating and working areas on a world scale, opting for maximum integration from the start.

In fact, the philosophy of the model chosen follows the criteria already announced by the company:

• Positions have been filled exclusively on the basis of professional capacity, combining former Repsol and YPF management, as though dealing with a friendly merger and not an acquisition.

• The greater weight in upstream management, including the top executive, will be borne by YPF, whereas the weight and top management of downstream will be borne by former members of Repsol, in deference to the importance and tradition of each of these activities when the companies operated separately.

• The former Chairman of YPF has joined the project as Executive Vice-president for Exploration and Production, which accounts for almost 50% of the company�s business.

This new structure is already working satisfactorily, and as proof of its acceptance we put forward the statistic that only three members of staff have voluntarily resigned.

 

3. RESTRUCTURING OF AFFILIATE COMPANIES

   
   Restructuring and reorganisation of affiliates has already begun with the aim of unifying and simplifying Repsol and YPF operating structures in all countries outside Argentina, where both companies were already operating.

   This process will have been completed by December, and there will be single structures with optimised operating and fiscal efficiency in Peru, Ecuador, Venezuela, Bolivia, Brazil and the USA.

   From that time onwards, the savings achieved by these processes (estimated at a revised figure of 80 million dollars per year) will become effective.

   Restructuring in Argentina is pending until the new government takes possession.

    

4. LEGAL FRAMEWORK

In these 100 days, the rules of the game on the Argentine oil and gas markets have been clarified, and former doubts have been dispelled, in all cases with respect for the principles previously announced to the market by our company.

• In refining and marketing, it has already been made known that, within a period of 18 months, Repsol promises to divest an equivalent refining capacity and market share to that currently held by Eg3. The company�s objective is to exchange the assets involved for others of a similar nature in a country of interest, and efforts will be made to achieve this during the rest of 1999. If these should not prove successful, the aforementioned assets would be put up for sale at the beginning of the year 2000.

• In LPG, where there will be a large cost saving, our commitment is to reach an initial market share of 35%, and there will be no additional limitations.

• In natural gas, a framework has been negotiated under which the company has promised to make an early cancellation of purchase contracts from other producers for re-sale. In this way, Repsol-YPF will achieve its goal to sell exclusively its own production, which will be boosted as much as possible to serve that part of the market previously covered by the sale of gas produced by third parties.

5. DIVESTMENTS

Higher oil prices and improved medium-term performance expectations may make it possible for the company to achieve its objectives in financial structure by implementing a much smaller divestment programme than the 2.5 billion dollars originally announced.

Despite this, the above figure will be retained as a minimum divestment goal, and it will be attempted to go forward in advance of the original schedule, with the dual aim of regaining greater financial flexibility more speedily than previously anticipated.

It was with this in mind that our recent communication was released to the market announcing the immediate divestment of assets in the United Kingdom and Indonesia, to be followed by a similar operation in the United States, and those demanded by the Regulator in Argentina.

 

6. PROGRESS IN COST SAVINGS AND MANAGEMENT EFFICIENCY

100 days is hardly time enough to see tangible results from the cost cutting programmes currently in place.

However, certain effects have already been detected:

• Operating manpower costs for the whole of Repsol-YPF were lower in August than in July, on a homogeneous basis, to the extent of an equivalent annual saving of 3 billion pesetas.

• The overall payroll in Latin America has fallen by 1.3% since taking control.

• Average daily production for the third quarter was 1.06 million barrels of oil equivalent per day, in comparison to an average 1.03 million boepd obtained in 1998 from the sum of Repsol and YPF production. This is a rise of 3%.

• Lifting costs in Argentina for the third quarter of 1999 averaged $2.1 per barrel, against $2.3 per barrel a year earlier.

• Production replacement has also been positive. From January to August, a production of 256 million barrels of oil equivalent had already been replaced, and 70 million barrels added to the level of proved reserves at the close of 1998.

• Finally, total costs at Argentine refineries fell from $2.76 per processed barrel in 1998 to $2.5 per processed barrel in the third quarter of 1999.

7. UPWARD REVISION OF SAVINGS

The work carried out over these 100 days, and the general evolution of aggregates, allows us to raise our targets in savings:

• An original world-wide manpower reduction estimated at 1,000 to 1,500 employees will now be revised upwards to approximately 2,000, carrying out all current business activities, although growth and outsourcing will make it possible to enact a negotiated readjustment programme, avoiding traumatic measures in any of the countries involved.

• Lifting costs in Argentina, for which a level of $1.7 per barrel had been targeted from the $2.29 level of 1998, will be reduced to the lower figure of $1.6 by 2002.

• Overall refinery costs, for which an estimate of $1.95 per barrel had been set for 2002 (in comparison to $2.19 per barrel in 1998), will be cut by a further 10 cents.

• These and other lesser captions will lead to a saving in total costs of over 500 million dollars per year from 2002 onwards. This contrasts with our original target of between 300 and 350 million dollars.

The areas subject to cost cutting have already been identified and systems whereby saving may be measured are already in place. The market will receive regular information on the progress achieved in this respect.

 

8. FIRST REPSOL-YPF RESULTS

The company intends to put forward publication of its preview of income statement for the third quarter to October 25^th, in view of the interest aroused on the market by these first fully consolidated Repsol and YPF results.

It may already be stated that higher oil prices and initial improvements in management efficiency have allowed YPF to make a speedier and greater contribution to overall income than was originally foreseen, and this has more than compensated for the adverse conditions affecting refining and chemical activities, and the extreme caution in Spain and Argentina with which the rise in product prices is passed on to the consumer.

As a result of the above, the operation is expected to have a positive effect on profit per share from this third quarter onwards, and this is considerably in advance of the calendar originally contemplated.