The Corner analysis | Eurostoxx50: ENI

Company Overview ENI is one of the ten largest oil companies in the world by market capitalization (€63.805 billion). Its main divisions are: (i) Upstream (exploration and production, accounting for 26.5% of sales’11 and 79% of EBIT’11), (ii) Downstream (refining, 46.7% of sales’11, EBIT’11 negative), with a refining capacity of 0.708 M bbl / d and a network of 5,986 stations, (iii) Gas & Energy (31.6% of sales’11 and 9.9% of EBIT ’11), regrouping its gas distribution businesses (88.8 bcm of gas in 2011) and electricity (39.5 TWh of electricity sales 2011, +16.4%) mainly in Italy, (iv) Petrochemicals (6.5% of sales’11 with negative EBIT in 2011), (v) Engineering (11.3% of EBIT’11 sales’11 and 7.6%), originating from the listed subsidiary Saipem (43 % ENI), which has a portfolio of projects worth €20.417 billion (1.75 x sales’11). 

Strategy and prospects of the company In the latest revision of its strategic plan last March, the company reiterated its goal of producing more than 3% minimum by 2015, assuming a higher crude price. In addition, increased its goal of long-term growth (2015-2021) to 3% (vs a previous 2%). Moreover, the company provided more guidance on Capex for the period 2012-2015 (€59.6 billion vs. €53.3 billion above), showing new opportunities for the division of Upstream. It revised the cost reduction target up to €15 billion 2014 (2.5% of EBIT for the period) and expected asset sales in that period amount to €2 billion (3% cap).

We think 2012 is still a challenging year for ENI because of Europe’s economic environment, especially in Italy. However, we believe that these factors have adversely affected the energy demand and that Upstream and Petrochemicals divisions will be offset by an increase in oil prices and increased production.

Besides, the company said it aims to reduce the leverage on shareholders’ equity from 0.5 x to end of 2011 (1x DN / EBITDA ’11) to levels below 0.4 x 2014. Regarding the shareholder pay, ENI has noted that the dividend growthwill remain linked to expectations of inflation in the OECD. We recall that in 2011 ENI increased its dividend by 4.5%, and that the company believes that this level is sustainable.

Last results On April 27 ENI presented its final results 1Q’12, which were above consensus estimates. Positively noted the results of its Gas & Power division (+57% vs. 1T’11 EBIT) driven by the renegotiation of contracts gasistas (emphasizing the import contracts with Russia’s Gazprom). For its part, the Upstream division (79% of EBIT’11) benefited from improved price realization, while production levels were virtually flat. Engineering and Construction, meanwhile, showed a solid performance (+9.4% vs 1Q’11). Finally, Refining and Chemicals division showed poor results (in line with the 4Q’11), impacted by weak economic environment and high oil prices.

Conclusion Despite the good performance of the share price compared to the index (+4.75% +1.38% YTD vs. Stoxx 600 Index Energy), ENI is trading at more attractive rates than those in its sector (7.27 x PER’12 vs 7.51 x PER’12 sector) and we still think it has potential for appreciation.

In addition to this, given the high dividend yield of the company, higher than its peers’ (6.37% vs. 4.88% yield sector), we would take advantage of possible cuts in the share price to invest in the value at long term, taking into account additional factors that could act as a catalyst for the share: (i) full restoration of production in Libya (ENI expected to increase production in Libya to 230-340 kboe / d in 2012 (vs. 110 kboe / d in 2011) and further explorations in Mozambique and Norway. We believe that full restoration of production in Libya will allow the company to increase its volumes in the division of Upstream and revenue in the Gas & Power division. (ii) sale of the stake in Galp ENI has (had a 33% and March 29 sold 5%), (iii) Disruption of Snam (52.5% ENI), to be completed by September 2013 (as consequence of the Italian Government forcing greater competition in the market).

The sale of these shares would enable the company to reduce leverage (currently 1x DN / EBITDA to levels of 0.2 x DN / EBITDA) and maintain the dividend.

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