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Investors reading the news headlines lately may wonder if there is an investment angle on Libya. There is...and it involves black gold, oil, and an oil company poised to profit from Libya's rebirth.

Libyan oil

With the death of Libyan dictator, Moammar Gaddafi, markets are euphoric about the future of Libya in general and its oil industry in particular.

But not so fast...full resumption of Libyan oil production could be years away. For example, production in Iraq did not return to pre-war levels until 2008. However, when Libya's oil industry does get back on its feet, it may offer an incredible opportunity for investors to profit.

A quick primer on the Libyan oil industry seems appropriate here since some investors may wonder why Libya is important at all. After all, the country was only the 12th largest global oil exporter , producing about 1.6 million barrels of oil before the conflict began. Global oil output is roughly 87 million barrels a day.

However, Libyan oil is some of the most desirable light “sweet” (low sulfur) crude on the planet. Its lost output, as measured by the number of barrels, has been made up for by Saudi Arabia. But the Saudi's crude oil is classified as “medium” crude and is of lower quality when it comes to refining oil into refined products.

You can't just substitute one barrel of Saudi oil for one barrel of Libyan oil. For example, it takes three barrels of Saudi oil to make as much as diesel fuel as Libyan oil.

So Libyan oil is definitely important to the world oil market.

State of the industry

Right now, Libya is pumping approximately a quarter of its pre-war level at just under 400,000 barrels a day. The International Energy Agency says it will be pumping oil at a rate of 700,000 barrels a day, about one half of the pre-war level.

Most of the 400,000 barrles is coming from a handful of oil fields in the eastern part of the country controlled by the state oil company Arabian Gulf Oil Company. These fields were under control of the rebels during the war. Thus, damage and looting to the equipment, pipelines and export terminals was relatively minimal.

The real challenge lies ahead in the oil fields located in other parts of the country.

In the central part of the country, at the Zelten and Waha fields, the wells and pipelines seem to be in decent shape. But the export terminals – Es Sider and Marsa el Brega – have been badly damaged. Little is known yet about the condition of the oil fields in the remote Murzuq desert area well south of Tripoli. This area saw heavy fighting between rebel forces and those loyal to Gaddafi.

The industry's future

But once the oil industry gets back on its feet in Libya, it presents a real investment opportunity.

For years, Libya has produced below its potential. That is due largely to lack of investment into the industry as Gaddafi diverted funds for other uses. International sanctions against the country also hurt.

Those in the industry firmly believe Libya could produce much more oil in the next two decades if the right policies are pursued, possibly doubling pre-war output.

Their belief is based on both fact – Libya has Africa's largest oil reserves, and history. In 1969, the year Gaddafi gained power, Libya produced nearly as much oil as Saudi Arabia – 3.1 million barrels vs 3.3 million barrels. .

There is another potential prize too, hidden in Libya. That prize is natural gas, which was completely ignored by the Gaddafi regime.

Libya may have just as much natural gas as does neighboring Algeria. That country exported more than 2 trillion cubic feet of liquified natural gas in 2010, while Libya only exported 349 billion cubic feet of gas. The potential there is obvious.

Libyan oil investment

Some of the world's leading oil companies have a large presence in Libya. The list includes Spain's Repsol, Italy's Eni ADR (NYSE: E), Total (NYSE: TOT) and U.S.-based Occidental Petroleum (NYSE: OXY), ConocoPhillips (NYSE: COP), Marathon (NYSE: MRO) and Hess (NYSE: HES).

Of these companies, the largest foreign investor in Libya's oil industry is Eni, which has resumed some of its oil and gas production activities in the country. It stands to gain greatly from a renaissance in Libya's oil industry.

Eni's stock is also attractive from a valuation standpoint, despite a recent rebound from the falls it endured thanks to troubles in the eurozone and specifically Italy. Italy is one the nations under threat in Europe from its large debt burden. Many investors are worried that Italy is in the “danger zone” as its 10-year bonds approach a 6.5% yield.

The company's stock is selling selling at the bottom of its 5-year valuation range based on price-to-sales, price-to-book and price-to-cash flow. Eni is also trading at just over 8 times earnings and half its annual revenue.

Investors should purchase the shares on any pullback due to concerns over Italy. Eni pays over a 6% dividend currently so investors are being paid to wait.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Invest In Libya Through Italy's Eni