A Dream Stock in Oil & Gas Industry

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

Crude is rallying again, and the rally is expected to continue due to its strained supply and rising demand. Moreover, the rising imports of India and China should further pull up oil prices. According to a report by the International Energy Administration, crude demand is estimated to increase by 840,000 bpd in 2013. Moreover, due to rising energy demand and the need for cleaner fuels in Asia, the demand for natural gas in the region is rapidly increasing. In my opinion, this might be a good time to load up on oil and gas companies. Eni S. p. A. (NYSE: E) is the company in focus, and here are a few reasons why it would make a great investment choice.

Expanding Numbers?

Eni is an Italian multinational oil and gas company with a market capitalization in excess of $85 billion. The oil and gas major has its presence in over 85 countries, which somewhat hedges the risks presented by the European debt crisis. Due to the oversupply of oil in Europe, the company temporarily shut down its operations at its Gela, Venic,e and Taranto refineries, which led to annual cost savings of EUR 100 million. Yes, shutting down plants does not ascertain growth, but it protects the company from operational risks and losses.

In 2012, the company added 3.64 billion boe (barrels of oil equivalent) of new reserves, which are located in the Barents Sea, West Africa, and in Egypt. According to a report, Eni’s reserves are at 8 year highs and “it replaced more of its proved reserves than any other major oil company in Europe.” Since oil and gas prices are on the rise, it’s not hard to conclude that Eni stands to benefit tremendously, once it start realizing its reserves.

A Strategic Alliance

Eni and Anadarko Petroleum (NYSE: APC) made headlines when it was announced that the two will jointly develop the world’s largest LNG export plant. The Mozambique-based plant would have an annual liquefaction capacity of 50 million tonnes, and will begin exporting in 2018. The hydrocarbon rich resources in Mozambique are estimated to contain 250 trillion cubic feet of natural gas, which would be enough to meet rising Asian and African energy demand.

According to a recent report, the demand for natural gas in both India and China is estimated to double by 2017. Another report claimed that, due to rising energy demand, LNG exporting countries (Indonesia and Malaysia) could be seen importing LNG this year. Since Mozambique lies on the Eastern African shore, LNG exports to the emerging world (Asian countries) would save both shipping costs and time.

The Future of Mozambique Project

Anadarko management said that it would be selling a 10% stake in the Mozambique gas project. Its debt/equity already stands at 64% and its capital expenditures for FY13 are estimated to be around $7.6 billion. Moreover, since its cash reserves have declined by 30% over the last 4 years, I think Anadarko Petroleum is better off by divesting its stake.

However, Royal Dutch Shell (NYSE: RDS-A) is interested in buying the stake, and it could be looking to buy more than just 10%. This year, Royal Dutch Shell produced more natural gas than oil and it seems eager to take advantage of the hydrocarbon rich resources in Africa. Andy Brown, exploration chief at Royal Dutch Shell said, “East Africa is going to be a big province for LNG. We think they still need a company that can develop LNG and the associated shipping and marketing.”

Back in the day, the management of Eni stated that it plans to spend nearly $50 billion on the project. But according to the most recent filing, its cash and cash equivalents stand at $7.34 billion.  Since Eni owns a 70% stake in the Mozambique gas project, it might be looking to reap some rewards and reduce its risk exposure. This would not only allow Eni to continue its exploration activities, but also involve Royal Dutch Shell in its development. The latter is known for its expertise in LNG development, and Eni’s head of E&P said “Shell could be a wonderful partner.”


Needless to say, Eni has lots of catalysts going its way. Yet its shares trade at a forward P/E of 10.2x, indicating that it is undervalued at the CMP. Adding to the delight, its shares yield a hefty 4.78% with a payout ratio of 50.57%. Its growing reserves, cost savings, and most importantly its LNG export plant present a bright future (both short and long term) for the company. Keeping all these reasons in mind, I think Eni is going to have a dream run this decade.

PiyushArora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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