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

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Savings

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  5. Unconventional Oil

    A type of petroleum that is produced or obtained through techniques ...
  6. Green collar

    A worker who is employed in an industry in the environmental ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!