This Oil Giant is Ready to Move Forward

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Based in Rome, Eni SpA (NYSE: E) is a leading diversified oil company and the sixth-largest international oil group in the world, with a relatively cheap, yet profitable, stock. The company operates in 43 countries and produces 1.8 million barrels of oil per day. In addition, Eni is a gas and power marketer, as well as a gas pipeline operator, exploiting 53%-owned Snam Rete Gas. Eni provides a solid dividend yield of 4.86%.

Recent Moves

In first half of 2012, Eni achieved much better operating performance due to strong growth in output (up 10.8%), driven primarily by the continuing improvement of output  in Libya. 

The company has experienced remarkable exploration success thanks to new discoveries and encouraging opportunities in high-potential areas. Owing to Eni’s stakes in Snam and Galp, the company expects its balance sheet to be transformed. It might help the company to maintain consistent, long-term growth in volatile market conditions.  Eni's adjusted operating profit gained a lot from the appreciation of the dollar (US) currency against to the Euro (up 11%).

In the first half of the year, Eni's income from natural gas sales declined because of weak demand and ongoing competitive pressures. Sales on the domestic market also declined slightly due to much lower volumes being delivered to the power generation sector affected by fluctuating energy commodities markets.

However, the company also has positive trends in its business activities. In Q3 2012, Eni successfully established its operations in Zubair, Iraq. The company has increased its production to 270,000 B/D, whereas the target level stands at 1.2 million B/D at full production. Eni recently made its first significant oil discovery in Ghana, and gas discovery in Pakistan. Providing 15 % of the Eni’s performance, Libya will offset delays at large start-ups and the Elgin-Franklin platform shutdown in the North Sea, as well as the increase in the number of incidents of sabotage in Nigeria.

Future Prospects

In October 2012, Eni’s chemical division and global elastomer leader, Versalis, and one of the leading South Korean petrochemical companies, Honam Petrochemical Corporation, arranged a pivotal start-up, building an elastomeric production plant in South Korea based on Honam’s facilities and raw materials, as well as on Versalis’ proprietary technologies and engineering services. The expected elastomer production capacity of this plant is close to 200,000 tons annually, which will be marketed in Asia.

Eni vs. the Rest

Oil companies, such as Royal Dutch Shell (NYSE: RDS-A) and BP (NYSE: BP), are among Eni’s main competitors. In the table below, we compare the key stock metrics within a group of these companies.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Eni SpA</strong></p> </td> <td> <p><strong>Royal Dutch Shell</strong></p> </td> <td> <p><strong>BP PLC</strong></p> </td> </tr> <tr> <td> <p>Market Cap</p> </td> <td> <p>$80.2 bil</p> </td> <td> <p>$216.5 bil</p> </td> <td> <p>$129.5 bil</p> </td> </tr> <tr> <td> <p>Trailing P/E</p> </td> <td> <p>8.3</p> </td> <td> <p>8.1</p> </td> <td> <p>7.4</p> </td> </tr> <tr> <td> <p>P/B Ratio</p> </td> <td> <p>1.1</p> </td> <td> <p>1.2</p> </td> <td> <p>1.1</p> </td> </tr> <tr> <td> <p>Earnings Growth</p> </td> <td> <p>-8.0</p> </td> <td> <p>5.3</p> </td> <td> <p>6.4</p> </td> </tr> <tr> <td> <p>Dividend Yield</p> </td> <td> <p>4.86</p> </td> <td> <p>4.62</p> </td> <td> <p>4.85</p> </td> </tr> <tr> <td> <p>Debt/Equity</p> </td> <td> <p>0.3</p> </td> <td> <p>0.2</p> </td> <td> <p>0.4</p> </td> </tr> <tr> <td> <p>Return on Equity</p> </td> <td> <p>13.6</p> </td> <td> <p>15.2</p> </td> <td> <p>15.6</p> </td> </tr> </tbody> </table>

Eni has been performing quite well, with a trailing twelve month ROE of 13.6%. Shell and BP’s performance looks more attractive in terms of profitability. However, yield-hungry investors would certainly prefer Eni ahead of Shell or BP, due to Eni’s comparably high dividend yield. The debt philosophy of these three companies seems almost similar, but Shell clearly follows the most competitive debt policy, with the lowest debt/equity ratio.

Eni’s earnings growth rate for the last three years has become negative, which is especially disheartening when compared to the positive indicators of both Shell and BP. However, Eni's relatively higher ttm P/E ratio suggests a more promising future might be expected for Eni when compared to its rivals.


Europe is an excellent arena in which to seek out undervalued companies with strong dividend stocks and massive cash flow. My fair value estimate suggests that undervalued Eni stock currently has at least a 30% upside potential to achieve its fair value. Eni’s massive cash flow from business operations and increasing profit margins suggest it as a great buy. However, we should also bear in mind some negative factors affecting Eni; for instance, the political atmosphere in Italy is pretty complicated. While Eni is an international company with global operations, the chaos in its home country creates a political challenge.

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