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Once again we are promised that ENI SpA (E) is on target to deliver the highest upstream production growth from amongst the majors over the next 6-7 years. Claudio Descalzi (COO E&P) promises us greater than 400 kboe/d by 2011. Kashagan, we are told, will be on stream just after that in 2012. Let's put that into perspective. The project was initally scheduled to come on stream in 2008, then 2009. Now: we are told all is okay, following a complex reconfiguration of this challenging offshore project. With total reserves of greater than 14 billion boe, the project is not to be sniffed at. Neither are the 12 projected start ups in Africa and another ten in the rest of the world. That's the bull case for the stock.

So then why has the ADR fallen 33% YTD? Why is the stock pice of ENI SpA likely to become 'more' not 'less' volatile?

The answer to both questions is that the rosy picture presumes a high oil price. We know that ENI targets CAGR pro forma production growth of 3.6% based on USD 90 bl. Trouble is, internal production projections are priced off USD 65 bl. Well, the price today is USD 68.5 bl. No wonder the stock has fallen to a single digit P/E ratio. At these levels the stock will prove to be very sensitive to the oil price direction. Probably more so than all other majors. That volatility is the price of prospecting in risky and difficult to access sites.

Third quarter results are due out on October 31st. The company is expected to grow earnings by 28% and output by 5%, based on the legacy of the high oil price. These are demanding estimates which will only serve to focus the market on the more demanding fourth quarter.

Disclosure: No stock owned by Daniel Broby or Danfonds.

Source: ENI SpA's Growth Promise Depends on High Oil Price