Repsol, S.A. Company Valuation

Capital Structure, Cost of Capital, and Business Valuation – Repsol Case Study

By José Luis González Parrondo, Jorge Aparicio Villares, Pablo López Esteras, and Alberto Menchén

Introduction
This article presents a summarized analysis of Repsol’s financial structure, cost of capital, and company valuation. The study was conducted as part of a Financial Management course at Universidad Carlos III de Madrid and is based on real data, sector comparisons, and valuation methodologies used in professional practice.

Note: For clarity and readability, graphs, tables, and detailed calculations have not been included in this version. However, they are available upon request. You can contact me at pablolopezk9@gmail.com to access the full dataset and supporting materials.

1. Capital Structure
This case study analyzes five energy companies: Repsol, Iberdrola, Orsted, Sempra, and Exelon. It focuses on solvency risk, leverage levels, and potential bankruptcy costs.

Repsol shows solid financial health thanks to high energy prices, while Iberdrola benefits from its national strategic role and potential state support. Orsted is exposed to operational risks that could threaten its solvency, whereas Sempra and Exelon demonstrate stable growth and low bankruptcy risk.

Leverage ratios vary: renewable-focused firms like Iberdrola and Orsted show higher debt levels, while Repsol maintains a more conservative structure. This may be due to its continued focus on fossil fuels. Repsol still has significant debt capacity, though new financing could impact its credit rating.

2. Cost of Capital
Using five years of weekly data and regression analysis, Repsol's equity beta was estimated at 1.08—above the industry average due to higher leverage and growing exposure to renewables.

The cost of equity (rE) was calculated using the CAPM model: rE = 2.5% + 1.08 × 1.9% = 4.552%

The cost of debt (rD) was estimated based on the interest coverage ratio and resulted in: rD = 2.5% + 0.59% = 3.09%

Financial leverage (D/E) and debt-to-value (D/V) ratios were computed for Repsol and compared with its peers. Over the last four years, Repsol’s leverage has declined, showing a cautious approach to debt.

The weighted average cost of capital (WACC) was calculated as: WACC = 3.27%

3. Business Valuation
Using financial statements from Repsol and external sources, free cash flows (FCFs) were projected for 2024–2028:

• 2024: €511.31M
• 2025: €702.27M
• 2026: €887.13M
• 2027: €1,081.18M
• 2028: €1,284.88M

The terminal value was calculated assuming a conservative 1% perpetual growth rate. Discounting all future cash flows using the WACC gave a total firm value of €52.7 billion as of January 1, 2024.

Dividing the equity value by the number of shares led to an estimated fair share price of €17, compared to the actual €13.5 market price. The difference may be due to market expectations, underappreciated growth potential, or speculative behavior in the oil sector.

4. Sensitivity Analysis
The analysis tested how sensitive the valuation is to changes in assumptions:

• If growth rate drops to 0.5%, the share value falls to €9
• If growth increases to 2%, the value rises to €49
• A lower WACC (2.5%) increases value to €39
• A higher WACC (4%) reduces value to €6
• Assuming 20% yearly revenue growth leads to a share price of €33

5. Ethical Considerations
Ethics play a critical role in company valuation. Transparency and compliance are essential, especially for listed firms like Repsol. Analysts must report any undisclosed material information, avoid conflicts of interest, and reject unethical valuation requests.

Furthermore, environmental and social impact should be considered, especially in the energy sector. Ethical valuation enhances investor trust and reflects the company’s long-term sustainability.