Repsol is the cheapest energy large cap

Dare I say, legal risk in Peru is "priced in"?

Dear Reader,

I believe that I have identified another European large cap that is “just too cheap”: Repsol, a Spanish integrated energy company. I currently own a ~2.5% position and I am considering maxing out to 5%.

Disclaimer: All of the numbers below are proprietary to my process and completely arbitrary — possibly even made up entirely. Furthermore, I know almost nothing about the business or technical details of oil and gas exploration, production, or refining. If you rely on on the numbers below or my analysis at all whatsoever, you are a moron.

Quick Stats:

• Price to Book: .51

• CY2025 P/E consensus: 4.9; CY25-26 low estimate P/E avg: 5.4

• Trailing dividend: 8.9%

• 5-year share count CAGR: -2.9%

• Net Financial Debt to Market Cap: 15%

• Working Capital to Market Cap: 28%

Peer Comparison:

• D&A: High D&A can be argued either way — on one hand, more capital intensive businesses are generally perceived as “lower quality” (sometimes justifiably, sometimes not); on the other, management typically has a lot of discretion and could be incentivized to understate depreciation to appease investors. In this case, my understanding is that Repsol does own sub-par, gassy acreage in the United States in particular. That said, they seem to be depreciating as such and I personally find comfort in that.

• TTM growth capex: Adjusted for valuation, Repsol has invested more into growth (i.e., beyond D&A) than all of its peers. Resource/cyclical capex often has a lag before the associated income is online.

• Capital allocation: Repsol pays a fat dividend with a substantial buyback program

• Forward multiple: Repsol trades at the highest Scalpavelli-adjusted earnings of all peers by a significant margin, rivaled only by Petrobras.

Pretty cheap, unless we’re missing something big.

Like Associated British Foods, I am unable to convince anyone to buy this stock and have received similar, blanketed pushback:

• What’s the catalyst?

  • The Spanish windfall tax (1.2%) just expired.

  • Catalysts are oft-sought by investors, for good reason. I would like to introduce the concept of a negative catalyst — a negative development whose cessation enables mean-reversion. In this case: blanket selling of Europe and year-end tax loss selling. Admittedly, these negative catalysts are pretty soft versus an index exclusion or dividend cut.

• European energy companies are cheap for a reason

  • This dismissive attitude from valuation-insensitive not-buyers is a tell that many investors are refusing to even look into this company — and that’s bullish, if you ask me.

More specifically, investors have expressed the following concerns:

• You’re mostly just betting on refining margins

  • In the TTM, Upstream booked an operating profit of $2.9bb versus $2.7bb in the Industrial segment and $800mm in the Customer segment (gas stations, electricity generation). The business appears to be fairly well-diversified.

• Management has capital allocation issues

  • Perhaps someone more knowledgeable than myself can weigh in on exactly how bad management’s investments are, but they would certainly need to be egregious to justify the present valuation. It’s not like bar is super high when comparing versus peers, either.

    

• Legal risk

  • Repsol is currently in court with Peru over a terrible oil spill. Peru is seeking upwards of $5.5bb. This is the best explanation for the stock’s current price, in my opinion, as the risk here is a sum equivalent to management’s buyback expectations over the next few years. I have no opinion on how this lawsuit is likely to progress.

This stock seems to be pricing in the worst, at least as far as the current energy pricing environment is concerned. Management’s capital plan assumes $70 Brent, $3.5 HH, and $6/bbl refining margins.

I have nothing else to add. Have at it, and make sure to reach out to Scalpavelli if you think I’ve got this one terribly wrong.