I recently investigated some of the biggest oil companies (by sales) to see if there still is an opportunity to identify an investment that might offer a suitable margin of safety for a value investor. Another criteria for my investigation is a solid dividend yield. My analysis is based on the financial statements of the company for the last 5 years. The focus is on identifying a trend.
Background information on Eni (E) can be found on the company website. Eni trades on two different stock exchanges and in two different currencies. As you can see in the table below, there is a difference in New York and Milan market price if we convert everything into USD. On the US market, you are trading an ADR (American Depositary Receipt). This represents a specified number of shares in a foreign corporation. In the case of Eni, the ADR represents two shares. The company's financial statements are in Euros, where required a USD figure or ADR representation will therefore be given.
Note: Market price of 01/02/2013.
As can be seen in the graph below, Eni is trading around its four year high. In Q3 2011 it hit its low of around €12.50 ($34.11 per ADR) and ever since, its market price has increased to the current price of around €18.50 ($50.48 per ADR). This is a 48% increase in about 1 ½ years time. What is also interesting to see is that it is still below its pre-crisis high of about €26.50 ($72.31 per ADR).
Note: Market price in graph is in Euros.
Looking at the income statement from the last 5 years, as shown in the tables below, we can conclude that as of 2009 the company's sales revenue is growing steady on a year to year basis. In 2011 it exceeded its pre-crisis sales revenue of €108.8 ($148.4) Billion by about 1.6%. Eni is showing a relatively steady sales revenue, where some of its rivals are showing a decline in the last quarters. If we expect the quarterly trend to continue, 2012 sales will end up significantly above that of 2011. According to the analyst consensus, it will end up around €128 ($174.6) Billion, or an increase of more than 16%. This is very impressive considering the current market conditions.
For the net income and the EPS (Earnings Per Share) it is the same story. However, here the increase is expected to be a little lower. Calculating with the Q4 analyst consensus, we expect an increase of more than 14% in income and EPS for full year 2012.
Note: All values in the tables are in Millions of Euros (except for per share items)
Eni has a very solid balance sheet, as is shown in the table below. As for the last reported quarter, it has about €5.8 ($7.9) Billion in cash and cash equivalents, or about €1.62 per share ($4.42 per ADR), on its books. As its competitors, it has been growing its cash reserves significantly for the last couple of quarters.
Equity is growing at a steady pace, on average about 4.7% per year. This is solid, but it is less impressive than the 10% of its rival Chevron (CVX) for instance, also see "Chevron: What The Numbers Say".
The shares issued have been steady for the last couple of years. The intangible assets are decreasing, but are currently still more than 10% of equity.
Note: All values in the table are in Millions.
As shown in the tables below, operating cash has been flat for the last couple of years and it is not expected to do any better in 2012. This is a worry because we have seen EPS and net income growing in the same period. There is a cash inflow in the financing activities for the last two quarters, which could indicate that the company is borrowing money, raising money by issuing stock, etc. If we go a level deeper into the cash flow statement, we see a total of €6.8 ($9.3) Billion in "Net Issuance (Retirement) of Debt" for the 9 months ending 2012-09-30. This means that the company has been issuing new bonds, also see article. This is a worry, because at the moment the company is not able to fund the investing and financing activities with its operational cash flows. So the money it has been adding to its net cash in the last quarters has been borrowed.
Note: All values in tables are in Millions of Euros
Currently Eni is paying an ADR dividend of about 4.25% per year. It is therefore one of the biggest dividend payers between the oil giants that I have investigated. Be aware that net dividend may vary based on your and the company's local tax regulations. As is shown in the tables below, dividend has decreased since 2008. The last two years it is growing again. Considering Eni's current cash position, it is not expected that dividend will grow in 2013, however, the analyst consensus thinks it will.
Book value is used to compare the company's market value to see whether it is under- or overpriced. It gives an indication of how much a company is worth if it ceased operating today, sold all its assets and paid off all its debts. Book value can also be used to compare competitors. With net book value, as shown in the table below, we don't include the intangible assets in the calculation. So, based on the current share price of €18.50 ($50.48 per ADR), we pay a premium on net book value of about 27%. Or a net Price to Book (P/B) of 1.27, below the industry average of 1.5. Compared to for instance Exxon Mobil (XOM), with a P/B of about 2.5, this is significantly lower and therefore could offer a suitable margin of safety for a value investor. Also see "Exxon Mobil: What The Numbers Say". What is also interesting is the trend in book value. Here we see that, as of 2009, it has been growing about 8% year on year. This is very impressive, considering that the stock currently is trading around the same market price level as 2009 and below its high of 2008.
Note: Book value in graph is in Euros.
The Price to Earnings (P/E) ratio is a "multiple" of year earnings, so for a P/E of 10 an investor is willing to pay $10 per $1 of earnings. P/E is calculated by dividing the share price by the EPS for a particular year. Therefore the quarters, as shown in the table, should be viewed as an indication for 2012. For the last couple of years, with exception of Q2 2012, the P/E has reduced significantly. The average P/E for 2012 is around 10, about the same as the forecast for full year 2012. It's fairly similar compared to the analyzed rivals (XOM, RDS.A, CVX, and BP).
For the financial efficiency of the company, we will look at the ratios as shown in the table below. If possible these will be compared to the industry average:
P/E = 10.3
Profit Margin = 8.1%
ROE = 19.0%
Profit margin is an indicator of a company's pricing strategies and how well it controls costs. The average profit margin for the Oil & Gas Integrated industry is 8.1%. As can be seen in the table, this is not a strong point for Eni. It is stuck at a little above 6%, which is almost 2 percentage points below the industry average.
Return on Equity (ROE) is calculated by dividing net income by equity for a full year. Therefore the quarters, as shown in the table, should be viewed as an indication for 2012. Looking at the trend allows an investor to determine the change in profitability over a given period. As shown in the table, after a dip in 2009 we can see that Eni has increased its ROE. However, this is still well below the industry average of 19%. I consider companies with a ROE between 10% and 20% to be good.
Working capital ratio measures both a company's efficiency and its short-term financial health. When it is above 1, it's an indication that the company is able to pay off its short-term debt, as is the case with Eni. If working capital ratio is high, in most cases above 2, or growing it is an indication of inefficiency. It shows that money is tied up in inventory or with creditors and cannot be used to pay off the company's obligations. In the table we see Eni's working capital growing for 1.07 to 1.29 in the last quarters. If this trend continues, this could indicate a problem with creditors.
The final ratio used is operational cash flow / sales. Here we want to see the company's ability to turn sales into cash. The higher the number the better. We see that this ratio is steady the last couple of years, with exception of the last quarter. Compared to its rivals, Eni is doing similar or a little bit better. In the past, this was really a strong point. It therefore would be interesting to see if Eni can improve on this the coming quarters.
All in all a well managed company with good efficiency ratios, however not as efficient as some of its main rivals.
Eni's current market price is about similar to that of 2009 and below that of 2008. It has, however, added to its underlying value, as was shown with the growth of its net book value. What is most impressive about Eni is its ability to grow its sales revenue when its rivals are struggling. The company also has been growing its cash and cash equivalents, but if we look closer it has done so with the issuing of new bonds. What is my biggest worry is that Eni is not able to fund its investing and financing requirements with its operational cash at the moment. This needs to improve.
Looking at the efficiency ratios, we have to conclude that these are below industry average. Eni's biggest weakness is its profit margin. Compared to its rivals, it has more difficulty in controlling its operational cost. Also ROE is currently well below the industry average of 19%. The amount of sales it is able to turn into cash is very impressive. But we identify a worrying trend with the increase in working capital, an indication that Eni could have some trouble with its creditors.
Considering the below industry average net P/B of 1.27 together with an annual ADR dividend of about 4.25%, it does however look very attractive. On both these items, Eni is about similar to the already very good Royal Dutch Shell, also see "Royal Dutch Shell: What The Numbers Say".
Considering the complete analysis, I believe that this stock could create an opportunity for a value investor. But based on its current cash flow statement and its efficiency ratios, it is much riskier than some of its analyzed rivals.