* Board seen strongly backing preliminary $5 billion deal
* Companies, governments keen to end 18-month crisis
* Argentina seen paying U.S.-dollar-denominated bonds
* Shares in Repsol and major shareholders up sharply
By Carlos Ruano and Tracy Rucinski
MADRID, Nov 26 (Reuters) - Oil major Repsol looks likely tosettle an 18-month conflict with Argentina after Buenos Airesoffered $5 billion in compensation for assets it seized lastyear - less than half what the Spanish group had demanded and inbonds, not cash.
Repsol's board is expected to approve the deal onWednesday, sources close to the board said. However, details arenot yet known of the structure of the bonds offered byArgentina, which has little credibility on international marketsafter its massive default in 2002 and subsequent debtrestructuring.
President Cristina Fernandez's government seized Repsol's 51percent stake in Argentine energy group YPC last year.This infuriated Repsol and the Madrid government, and alsoraised tensions between Spain and Mexico, a major shareholder inRepsol through its state oil monopoly Pemex.
Pemex, which has close ties to YPF, had criticised RepsolChairman Antonio Brufau's handling of the dispute, which hadbecome a source of boardroom discontent over the past year.
Repsol shares surged on hopes for an end to the longstandoff that could allow the company to concentrate on itsstrategy to boost oil production through new investments.
The company has been trying to sell its 30 percent stake inSpanish utility Gas Natural, worth about $7 billion, toraise funds for exploration and production assets in NorthAmerica, but no deal has materialised yet.
Repsol had originally sought $10.5 billion from Buenos Airesand under the deal will be paid in bonds by an Argentinegovernment that is suffering a flight of dollar reserves andrisks defaulting again on its sovereign debt next year.
"(This is) not ideal from (Repsol's) perspective. It's halfwhat they wanted and I suppose they would rather have the cashnow," said Stuart Culverhouse, head of research at brokerageExotix. "What kind of bonds are they? So they suffer twice. ButArgentina simply doesn't have the cash."
One source close to the board said the settlement was drawnup by Brufau himself, under pressure from the Spanish governmentand shareholders to put an end to legal wrangling.
"The initial agreement already has the backing of Repsol'smanagement, its main shareholders and the governments, meaningthat with all probability the board will give the green light,"the source said.
Another source, close to another board member, said the mainthrust of the deal was positive for Repsol and was highlyunlikely to be rejected.
Repsol's shares climbed 4.39 percent to 19.36 euros pershare, a top gainer on a flat blue chip Spanish index,with analysts estimating that a $5 billion compensation dealwould add 2.85 euros to Repsol's shares.
Some investors were weighing the true value of Argentina'soffer, expected to be in U.S.-dollar-denominated 10-yeargovernment bonds with some kind of guarantee or collateral.
Argentina currently has a treasury bond that expires in 2017and pays an annual 7 percent coupon and trades on the secondarymarket with a discount of around 10 percent.
In other recent compensation offers, companies receivedArgentine bonds issued under Argentine law, rather thaninternational law. This meant many investment funds cannot buythem under their rules, making them less liquid and leavingfewer recourses for investors in a restructuring or default.
"We need to have more information on how Repsol wouldmonetize $5 billion in Argentina bonds," Filipe Rosa, analyst atEspirito Santo said in a note to clients.
Argentina has been at loggerheads with the global marketssince its 2002 sovereign bond default and subsequentinterventionist economic policies.
The chances of another default have risen due to a courtbattle between Argentina with dissident bondholders who refusedto take part in two debt restructurings and insist on being paidin full. Earlier this month, a federal appeals court in New Yorkrejected Argentina's request to reconsider an earlier orderrequiring that the bondholders be paid $1.33 billion.
The conflict with markets has hindered Argentina's abilityto attract foreign capital for exploring
A credible deal with Repsol is crucial for restoringconfidence in Argentina and bringing in foreign partners toinvest the billions of dollars needed to exploit its Vaca Muertashale oil and gas field, one of the biggest in the WesternHemisphere, with YPF.
Repsol is likely to sell its remaining 12 percent stake inYPF following the deal, with a market value of $1.3 billion onMonday, Espirito Santo's Rosa said.
Shares in Repsol are up 22.19 percent this year. The YPFdeal could also encourage some of Repsol's main shareholders tocash in on the share price rise by selling their stakes.
Pemex had already registered that half its 9.4 percent stakein Repsol as available for sale and could use proceeds to investin Vaca Muerta or its own offshore fields.
Repsol's second largest shareholder, indebted Spanishbuilder Sacyr, has been considered a seller at theright price. A YPF deal could bring Repsol's shares above 19.9euros each, the amount at which Sacyr carries them in its books.
Repsol's largest shareholder, banking powerhouse La Caixa,is also reducing its stake through an exchangeable bond issue,though its longer-term plans in the company remain unclear.
Sacyr's shares were 5.8 percent higher at 3.859 euros eachin Tuesday trading, while Caixabank, La Caixa's listed bankingbusiness rose 1.2 percent to 3.6 euros.
- Investment & Company Information