Following the test on recently found gas resource in the shallow waters of the Gulf of Venezuela, Repsol YPF S.A. (REP) confirmed reserves of between 5.6 trillion and 7.8 trillion cubic feet of gas. With an estimated area of 33 square kilometers, it is the country’s largest discovery.

Repsol (32.5% interest) partners with Italy’s Eni S.p.A. (E) and Venezuela’s state-owned oil company Petroleos de Venezuela SA (35%) for future production on this resource.

While Venezuela aims to increase natural gas output to overcome the current deficit, Repsol wants to boost oil and gas production through new discoveries off the coasts of Brazil and Venezuela after four years of declining output.

However, a challenging operating and contractual environment in Venezuela may create obstacles for developing new gas reserves. Moreover, the mandate of the Venezuelan government to sell any new gas to the domestic market at subsidized prices may negatively impact the company’s earnings.

Apart from the company’s declining reserves and low reserve lives, a host of challenges (weak volumes and rising costs) will continue to weigh on valuation, limiting its upside from current levels.

Our Neutral rating remains unchanged at this stage.

Zacks Investment Research
View original at: Zacks.com News Feed

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