We are maintaining our Hold recommendation on Repsol YPF S.A. (REP) ADRs following the quarterly results, which benefited from higher commodity prices and improved refined product mix. We also like the company's recent exploratory successes and the move to reduce its Argentine exposure.

However, we continue believe that the challenges facing the company will continue to weigh on valuation, limiting its upside from current levels. This is characterized by declining reserves, weak volumes, very low reserve lives, and rising costs. The company's proved reserves declined nearly 28% in the last two year

Argentina remains a difficult market to operate in. The company's growing pipeline of projects outside the country is expected to lower its exposure to that market in the long run. The management is targeting stable production growth, driven by the company's pipeline of development projects in Trinidad and Tobago, Libya, Bolivia, Venezuela and Ecuador. In recent times, the company has made major gas finds in Peru and Bolivia.

But Repsol's measure to reduce its exposure to the volatile Argentine market remains a long-term strategic goal and is not expected to result in a significant reduction in the country any time soon. The outlook for Bolivia also remains extremely troubling. These are compounded by Repsol's relatively weak growth prospects and low credibility.

Repsol ADRs continue to lag the group, highlighting the structural and fundamental problems in the company's business and asset portfolio. As such, we see limited valuation upside from the current level.