Spanish oil company Repsol has reported a 25% reduction in its proved reserves or 1.3 billion barrels of oil equivalent. The revisions relate primarily to gas reserves, the majority in Bolivia (52%) and Argentina (41%), along with smaller amounts in Venezuela. The company reports the revisions were mainly driven by changes in the applicable legal framework in Bolivia, due to the new hydrocarbon law there, and greater knowledge of certain fields in Bolivia and Argentina. The revisions are expected to result in an asset-impairment charge of less than US$60.6 million. Analysts with Deutsche Bank report that Repsol's attractiveness has been tarnished by its reserves write-down, and while they retain their recommendation of "hold" on the stock, they say there is better value elsewhere. "Repsol's 1.25-billion-barrel-of-oil-equivalent downgrade to year-end 2004 reserves included a nasty surprise that 40% of the revision relates to technical performance of its assets, most notably in Argentina," the analysts say. "We see this as material, with an impact of nearly US$3.64 per share on underlying value. Arguments that these reserves are gas, and therefore low-margin, should fall on deaf ears given the market has been expecting a relaxation of the existing caps on Argentine gas." The Deutsche Bank analysts report Repsol also faces potential for further downside risk to valuation if its capital becomes more expensive due to a credit downgrade. "Operationally, we see further potential for more negative reserves revisions, and acquisition risk has been heightened as reserves life drops to eight years," the analysts add.
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