OREANDA-NEWS. Repsol's plan to sell assets and cut spending is overall credit positive and should help reduce the oil group's relatively high leverage faster than we had previously expected, Fitch Ratings says.

The updated strategy also underlines the financial flexibility management has in shaping financial policy of the recently enlarged group, which is positive for the credit profile, especially in the more volatile oil price environment.

Repsol's acquisition of Talisman earlier this year strengthened its business profile by creating a larger and more geographically diversified upstream business. This reduced the company's historical reliance on Latin America and sharply increased the share of production from OECD countries. But the company's leverage remains stretched for its 'BBB'/Stable rating. We had expected funds from operations adjusted net leverage to be about 3.2x in 2016 and only to fall back below the 3x level normally considered appropriate for the BBB rating level in 2017.

This forecast included an assumption of EUR1bn of divestments by the end of 2016. But the group's strategic update includes a significantly more aggressive divestment plan, with a total target of EUR6.2bn, including EUR3.1bn by the end of 2017. If this can be achieved, Repsol should be able to get leverage back below 3x more quickly than we had expected - assuming Fitch's oil price deck of USD65/bbl in 2016, USD75/bbl in 2017 and USD80/bbl long-term.

Planned cost cuts are also positive and should eventually create some flexibility for Repsol at its current rating. Execution will be key to reach the ambitious targets, particularly the EUR1.5bn a year of opex savings by 2018.

The group expects to be able to maintain a reserve replacement ratio of at least 100%. But this too could prove optimistic given the reduction in exploration spending, which will fall from USD8.8 per barrel of oil produced in 2014 to USD3.9/bbl next year and to USD3.2/bbl in 2017-2020.

A failure to replace reserves as they are extracted would eventually lead to weaker production in the long-term. Repsol expects that non-conventional resources, such as shale, will play a significant role in reaching the reserve replacement target.