Admittedly these aren't the best of times for energy companies, but it's even worse for those whose assets lean towards natural gas and/or politically dicey areas. Eni (NYSE:E) has never been among the most-loved major energy companies, but valuation is now starting to look quite interesting. With progress on divestitures and big discoveries off the coast of Mozambique, there's still work to do, but management has taken some solid positive steps.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Snam Divestiture Underway
Investors have known for some time now that Eni had to sell its stake in Snam, a natural gas company that processes, stores and transports natural gas in Italy. The company announced an agreement with government-controlled Cassa Deposita e Prestiti (CDP) whereby CDP will acquire just less than 30% of Snam for 3.5 billion euros, or 3.47 euros per share.

That price is a little less than some sell-side analysts had projected, but it is more than a 9% premium to Snam's closing price the day before the announcement. While there's still some uncertainty about the timing and price, Eni will be selling the rest of its stake at some point this year - either in the open market or through negotiated deals with strategic or institutional investors.

SEE: Analyzing An Acquisition Announcement

Now the question is what management will do with this cash. Share buybacks seem like a probable outcome, but management has multiple demands on this cash. Eni has a lot of upstream investment in front of it and may be a better long-term decision to put that cash back into the business.

Success in Mozambique Means Options
Eni's recent exploration success in Mozambique highlights some of those upstream options. Results from the Coral-1 well off the shore of Mozambique suggests a sizable natural gas deposit (maybe up to 10 trillion cubic feet), and the overall Mamba complex could hold 50 trillion cubic feet - a level of natural gas reserves that would vault Mozambique into the big leagues in terms of natural gas resources.

Eni has a 70% interest in the area, but it's going to take time and money to develop the opportunity. The size of the resource base could support more than half a dozen liquefied natural gas terminals, and the strength of this discovery could give the company some leverage in working with other energy companies in the area like Anadarko (NYSE:APC). At the same time, Eni may decide to sell down some of its interest and use the proceeds to develop other projects in areas like Indonesia.

SEE: How To Profit From Natural Gas

Africa Getting Better
I don't doubt that part of the valuation discount on Eni has stemmed from the fact that so much of the company's net asset value comes from African properties. This has been an issue for other companies like Apache (NYSE:APA) and Occidental (NYSE:OXY) with significant properties in countries like Egypt and Libya, and it's not an entirely unreasonable concern. It's unfair to talk about "Africa" as though all the countries are alike, but the fact remains that African countries have had more than their fair share of political turmoil and troubled relationships between resource companies and national governments.

The Bottom Line
Eni looks too cheap on the basis of its forward-looking EV/EBITDA multiple, but that's also true for other well-known energy players like Petrobras (NYSE:PBR), Statoil (NYSE:STO) and Apache, and all three arguably have a better operating performance history than Eni. Although the news from Eni has seemed more positive here as of late, the sheer number of options investors have in the energy sector means that a little comparison shopping is worth the effort.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Fundamental Analysis

    4 Predictions for Oil in 2016

    Learn four predictions for oil markets in 2016 including where prices are heading and the key fundamental factors driving the market.
  3. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  8. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  9. Economics

    Will Silver Recover in 2016? (SLV, GLD, JJC)

    The end of the silver downtrend is likely to coincide with similar recoveries in gold, iron and copper.
  10. Stock Analysis

    The Top 5 Silver Penny Stocks for 2016 (LODE,AG)

    Learn about five of the top silver penny stocks and why investors may want to consider adding them to their investment portfolios in 2016.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center