Eni Still Not Getting Much Love

By Stephen D. Simpson, CFA | June 04, 2012 AAA

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.

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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.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
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