TOP CONTRIBUTORS

Avinash Gandhi

Amit Amin

Santiago Burgaleta

www.zacks.com

E AT A GLANCE

P/E ► 20.4 HIGH EV/EBITDA ► 5.04 AVG ROA ► 9.1% AVG ROE ► 12.1% AVG Debt to Equity ► 0.419 LOW Current Ratio ► 1.05 AVG Interest Coverage Ratio ► 35.3 AVG

 

 

 

 

 

 

Eni S.p.A. is the sixth-largest vertically integrated oil company in the world, by market cap. Aside from the usual upstream and downstream activities that most of the oil majors engage in, Eni is also a major natural gas and electric utilities company, and operates in the oilfield services industry through its stake in Saipem S.p.A.. Positioned in Italy, the company has a geopolitical advantage over many of its competitors in that it has greater access to the high-yield, albeit politically risky African and Middle Eastern reserve markets; this can been seen in the distribution of the company's reserves, as over half of them are concentrated in North and West Africa and the Caspian Sea.

Eni's reserve distribution means it is less exposed to maturing reserves and declining production, as Africa and the Middle East are regions that are relatively undeveloped by Western oil companies - they had been left alone until recent spikes in oil prices and declining production in North America and Europe made them more lucrative. These regions are, however, more prone to political risks, like nationalization, as well as violence issues, like terrorism, which are common to developing nations in these regions. Such events are a constant threat to Eni's production and profit margins. To counter problems like these, the company has been investing more stable regions like the Gulf of Mexico (winning 32 exploration licenses in March of 2008), where production is less assured but there are very few outside risks.

International oil price fluctuations make most of Eni's business rather volatile: rising oil prices are good for exploration and production, the root of most of Eni's income, but bad for refining and marketing, the segment with the largest amount of revenue. Since both play large parts in the company's business, fluctuating oil prices tend to take these segments on wild rides. Tempering such volatility, Eni's Gas and Power segment allows the company to act as a gas and electric utilities distributor, keeping a significant portion of its business independent of price fluctuations. Eni competes with companies like Exxon Mobil, Royal Dutch Shell, Chevron, LUKOIL, BP and ConocoPhillips.

Business and Financials

Rome, Italy-based Eni S.p.A. (E) is an integrated energy company operating in the oil, natural gas, electricity generation, petrochemicals, oilfield services, and engineering industries. Eni was Italy's national oil company prior to its 1995 privatization. The Italian government is still its largest shareholder, with about a 30% stake.

Eni operates in five business segments. Exploration and Production accounts for approximately 42% of the group's net capital employed, Gas and Power accounts for 35%, Refining and Marketing accounts for 12%, and Petrochemicals and Construction and Engineering account for the last 11%. Eni has upstream operations in all major hydrocarbon-producing regions of the world, including North Africa (Egypt, Libya, and Algeria), West Africa (Nigeria and Angola), the North Sea, and the Caspian Sea region.

Eni's Refining and Marketing and Petrochemicals segments are sensitive to oil prices, and well as the prices of other inputs. As these prices increase, refining margins tend to decrease.

Eni's Engineering and Construction segment is an oilfield services provider that builds and contracts rigs for and to other oil and gas exploration companies. The segment's backlog increased by €2.2 billion in 2007, driven by higher oil prices causing the market for new exploration and production equipment to grow.

Trends and Forces

Eni's Exposure to High-Yield Regions Means it is Less Prone to Production Declines

Eni's reserves are heavily concentrated in Africa and the Caspian Sea.

Most of the rest of Eni's reserves are located in Europe and Russia, but with over half of its reserves in Africa and the Caspian Sea, Eni is especially exposed to risks associated with these regions. Africa is a relatively young development region for oil and gas explorers. In the past, most of the world's oil production came from areas like North America and Europe, as well as cartel-controlled OPEC nations. Since these regions have started to mature (especially North America and Europe, areas where output is uncontrolled and publicly-traded oil companies can drill to their hearts' content), exploration in Africa and the Middle East has increased, as has the overall output of the regions. With large quantities of untapped oil reserves, these areas are ripe for the drilling, and Eni, because of its position on the Mediterranean, has a head start on their development.

Most of Eni's Reserves are in Politically Unstable Countries

The reason North Africa and the Middle East weren't hot spots of development in the past is that they are incredibly turbulent regions. Eni, though benefiting from higher productivity and lower rates of decline, faces correspondingly higher threats to its employees, equipment, and assets than many competitors who have large holdings in stable regions. Political strife, genocides, terrorism, and constantly changing political regimes leave international oil companies open to risks like violence or nationalization. For example, the company's operations in the lucrative Kashagan oil field, part of the Kazakh Caspian Sea, were threatened in late 2007. The Kazakh government asked for $7 billion from the Eni-led consortium of oil companies (including Exxon Mobil, Royal Dutch Shell, ConocoPhillips, TotalFinaElf, S.A., Inpex Holdings, and KazMunaiGas) as compensation for production delays and ecological damages^[4]. In the settlement of the dispute, Eni was forced to agree to eventually cede all of its shares in the 13 billion barrels of oil equivalent region to KazMunaiGas. The development consortium also agreed to pay $4.8 billion^[5]. Kazakhstan, like other countries that Eni tends to operate in, relies on oil exploration and production to drive its national economy. Because of this, these countries are more likely to force Eni to pay more or to cede project share to national oil companies.

Eni is Investing in More Stable, Lower-Production Regions

Because of the risks associated with African and Middle Eastern oil fields, Eni has recently been attempting to break into more reliable production markets; on March 21st the company spent $114 million to win 32 exploration licenses in the U.S. Gulf of Mexico^[6]. Though this area has seen production declines in its conventional wells, it is increasingly productive for companies willing to spend on deepwater production. Eni has a history of deepwater oil exploration in the Gulf, with a 2005 discovery of a deepwater reserve filled 20 MMboe^[7]. Thirty-two new exploration licenses should give the company plenty of chances to find new, high-yield reserves without the political risks associated with its deepwater projects in

The Italian Government has a Powerful Influence on Eni's Business

Though Eni is no longer a state-owned oil company, the Italian government owns 30% of the company's shares. Eni's shareholder ownership is severely limited by the regulations that the Italian government has placed on Eni. No shareholder other than Italy, for example, can own more than 3% of Eni's shares; any shareholder that does forfeits his/her voting rights above 3%^[8]. Furthermore, the company's By-Laws afford the Italian Minister of Economy and Finance special powers, including the right to appoint a board member without voting rights and the power to veto shareholder resolutions affecting the State's interest in Eni. This means the company cannot enter into mergers without the state's permission, it cannot move its headquarters outside Italy, and it is more likely to pursue business strategies that benefit the Italian government rather than the company's shareholders.

Eni's Utilities Businesses Diversify it Against Fluctuations in Oil Prices

Eni's Gas and Power segment makes up 31.7% of the company's revenues, and 21.9% of its operating income. These segments are far less dependent on oil prices and natural gas prices than Eni's E&P and R&M segments, as government regulation guarantees profitable utilities prices while electricity can be generated from any number of sources. Oil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international markets over $100. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing demand has led to rising prices - and to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's oil can only be differentiated from another company's oil based on price. Eni's exploration and production business sees margins increase when oil and gas prices rise, but its refining and marketing segment (which is larger than its E&P segment) sees margins decrease. R&M margins shrink with rising oil prices because refined petroleum products are also commodities. Eni cannot pass on the rising cost of inputs to customers because another refiner might come along and undercut the company's prices - classic price-competition. Eni's Gas and Power segment, however, is far less affected by commodities fluctuations, and so hedges the company against a volatile market that other oil and gas companies are heavily exposed to.

Competition

By market cap, Eni is the world's sixth largest vertically integrated oil and gas company.

• The oil majors and nationals - Exxon Mobil, Chevron, RDS. BP, ConocoPhillips, TotalFinaElf,S.A., LUKOIL - these are Eni's main competitors. All are vertically integrated oil companies that explore, extract, and refine petroleum products. Supplying their own oil allows them to keep margins down, while their immense size allows them to keep capital expenditures high to expand refining capacity and increase exploration and production globally.
• Valero - The largest independent refiner in the U.S., Valero has a total of 17 refineries with a capacity of 3.1 million BPD, and over 5,800 retail stations around the country^[9].
• Sunoco - The second largest independent refiner in the U.S., Sunoco has a capacity of 950,000 BPD, with 5 refineries and almost 4,700 retail stations.

(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates

(1) Latest data is for 2007

Notes

1. ↑ E 2007 Annual Report
2. ↑ E 2007 Annual Report
3. ↑ E 2007 Annual Report, Page 18
4. ↑ Bloomberg News: "KazMunaiGaz May Raise Stake in Kashagan to Equal Eni (Update2)"
5. ↑ Petroleum Economist: "Kazakhstan: Eni loses at Kashagan"
6. ↑ Reuters: "Eni says wins 32 Gulf of Mexico oil licenses"
7. ↑ BNET: "Eni Makes Deepwater Gulf of Mexico Oil Discovery"
8. ↑ E 2007 Annual Report, Page 106
9. ↑ VLO 4th Quarter and FY 2007 Earnings Release
10. ↑ COP 2008 10-K, Item 8,Page 149
11. ↑ COP 2008 10-K, Item 8,Page 152
12. ↑ ^{12.0 12.1} RDS’A 2008 20-F, Supplementary Information, Crude oil and natural gas liquids
13. ↑ ^{13.0 13.1} XOM 2008 10-K, Item 1, Page6
14. ↑ ^{14.0 14.1} CVX 10-K 2009, Item 1, Page 7
15. ↑ ^{15.0 15.1} BP 2008 20-F, Item 1, Page 16
16. ↑ Lukoil Investor Relations – Fact Book 2008, Page 11
17. ↑ ^{17.0 17.1 17.2 17.3} ENI S.p.A. – Fact Book 2007, Page 11
18. ↑ ^{18.0 18.1} TOT 2008 20-F, Item 4, Page 10
19. ↑ COP 2008 10-K, Item 8, Page 151
20. ↑ ^{20.0 20.1} RDS’A 2008 20-F, Supplementary Information, Natural gas
21. ↑ Lukoil Investor Relations – Fact Book 2008, Page 12
22. ↑ ^{22.0 22.1} COP 2008 10-K, Item 6, Page 42
23. ↑ ^{23.0 23.1} XOM, 2008 10-K, Item 6, Page 36
24. ↑ ^{24.0 24.1} CVX 2008 10-K, Item 1, Page 5
25. ↑ ^{25.0 25.1} BP 2008 20-F, Item 1, Page 14
26. ↑ Lukoil Investor Relations – Fact Book 2008, Page 13
27. ↑ ^{27.0 27.1} TOT 2008 20-F, Item 4, Page 12
28. ↑ Lukoil Investor Relations – Fact Book 2008, Page 14
29. ↑ E 2007 Annual Report
30. ↑ SUN 2008 10-K, Item 7, Page 35
31. ↑ ^{31.0 31.1} CVX 10-K 2009, Item 1, Page 24
32. ↑ VLO 2008 10-K, Item 1, Page 3
33. ↑ ^{33.0 33.1} XOM 2008 10-K, Item 6, Page 43
34. ↑ RDS’A 2008 20-F, Results, Refining Data
35. ↑ Sinopec Investor Relations, Operational Statistics for 2008
36. ↑ WNR 2008 10-K, Item 7, Page 34
37. ↑ ^{37.0 37.1} COP 2008 10-K, Item 1, Page 16
38. ↑ ^{38.0 38.1} BP 2008 20-F, Item 1, Page 29
39. ↑ Lukoil Investor Relations – Fact Book 2008, Page 15
40. ↑ Conversion factor is 1 BPD = 50 tonnes per year
41. ↑ ^{41.0 41.1 41.2} TOT 2008 20-F, Item 4, Page 36
42. ↑ SUN 2008 10-K, Item 1, Page 1
43. ↑ ^{43.0 43.1} VLO 10-K 2008, Item 1, Page 1
44. ↑ RDS’A 2008 20-F, Results, Manufacturing
45. ↑ Sinopec Refining Overview
46. ↑ WNR 2008 10-K, Item 1, Page 19
47. ↑ Lukoil Investor Relations – Fact Book 2008, Page 16
48. ↑ SUN 2008 10-K, Item 1, Page7
49. ↑ CVX 10-K 2008, Item 1, Page 25
50. ↑ CVX 10-K 2008, Item 1, Page 26
51. ↑ XOM 2008 10-K, Item 2, Page 25
52. ↑ RDS’A 2008 20-F, Results, Marketing
53. ↑ Sinopec 2008 Annual Report, Business Review and Prospects, Page 20
54. ↑ WNR 2008 10-K, Item 1, Page 3
55. ↑ COP 2008 10-K, Item 1, Page 18
56. ↑ BP 2008 20-F, Item 1, Page 30
57. ↑ Lukoil Investor Relations – Fact Book 2008, Page 60