Eni - Cars Aren't The Only Thing Italians Excel At

| About: ENI S.p.A. (E)
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Summary

Eni has had an incredibly difficult time since the start of the oil crash. The company has been forced to cut its dividend and its present stock price remains low.

However, Eni continues to cut costs and increase production. As a result, the company's cash flow remains very strong and will increase further as oil prices recover.

At the same time, Eni is showing its commitment to further exploration. The company's stake in its Zohr discovery can be valued at $5.6 billion and should bring additional earnings.

Eni (E) is an Italian multinational oil and gas company headquartered in Rome. With a $60 billion market cap, Eni is considered one of the global oil and gas super majors. Despite being a super major, Eni has had a difficult time since the start of the oil crash. However, the company's impressive assets compared with the company's respectable dividend yield make the company, as we will see, an impressive investment.

Introduction

Eni was created in Italy in 1953, or 64 years ago by the Italian government. Even today, 30% of the company is held by the Italian government with the People's Bank of China owning another 2%. The remainder of the company is publicly traded. As a result of its large size, Eni is in the top 100 of the Fortune Global 500, or one of the largest 100 companies in the world. This size, along with the major government stake, gives the company significant power.

Eni - Oil and Gas People

Eni has had a difficult time since the start of the crash. The company's stock price peaked before the start of the crash in mid-2015 at more than $55 per share. From that point, the company's stock price rapidly fell to a February 2016 low of just under $25 per share, a drop of more than 50%. Since then the company's stock price has briefly recovered to a present price of just under $33 per share. However, the company still has significant room to recover.

On top of this, Eni has an impressive dividend of more than 5%. This combination of dividends combined with the company's low stock price show how the company has room to expand.

Eni Strategy

Now that we have an introduction to Eni and the company's recent stock price performance, let's continue by discussing Eni's recent strategy.

Eni Strategy - Eni Investor Presentation

Eni has been focused on profitable growth and has transformed into a fully integrated oil and gas company. The company has been focused on enhancing its upstream resources and has transformed into a fully upstream company while improving its cost efficiency. From the start of the crash, Eni has increased its upstream capabilities while saving cash.

At the same time, the company has been selling valuable assets to provide itself with additional cash. This shows how Eni is becoming a pure-play oil and gas company, one that should see increased future earnings. However, despite this profitable growth over the past two years, Eni's stock price continues to remain noticeably below its pre-crash prices.

This shows how Eni is undervalued at the present time.

Eni Earnings Growth - Eni Investor Presentation

This provides a picture of Eni at the present time. The company's transformation, including selling assets it was no long using, has provided itself with a respectful $10.5 billion in cash. At the same time, the company's reorganization will save it $750 million on an annual basis. This is massive for a company with a market cap of just $60 billion and shows the strength of its reorganization.

These actions will provide Eni with significant additional cash on an annual basis. At the same time, Eni's very respectful dividend yield of more than 5% costs the company $6.5 billion on an annual basis. That means these savings alone are enough to cover almost 12% of Eni's entire dividend. That should help the company on its quest of bringing its dividend back to its previous level.

Eni Mid-Downstream Cash Flow Growth - Eni Investor Presentation

This shows the improvement in Eni's cash flow as a result of its mid-downstream restructuring process. Before the crash, the company's mid-downstream business was actually earning a negative cash flow. However, in 2015, the company's mid-downstream cash flow increased to an astounding $3.1 billion and for 2016, it is supposed to be $2 billion.

As a result, the company's mid-downstream earnings have been increasing. This will provide the company with significant cash flow in the future.

Eni Upstream Improvements

Now that we have a detailed overview of Eni's strategy including a discussion of how the company has turned into a pure oil and gas company and a discussion of how the company's mid-downstream business has turned into a downstream cash flow king, it is now time to continue by discussing the company's upstream improvements.

Eni Upstream Growth - Eni Investor Presentation

As we can see, in the upstream sector, the primary source of Eni's long-term profits, we can see that the company has had some amazing accomplishments. At 2013, at the start of the crash, Eni's upstream production was just over 1.6 million barrels per day. Over the past 3 years, the company's upstream production has grown by 15% to almost 2 million barrels per day.

However, the company's operating cash flow has dropped significantly from $11.5 billion to $5 billion, or a drop of more than 50%. This is a result of oil prices dropping from $109 / barrel all the way down to $43 per barrel. However, given that Eni is a $60 billion company, the company's cash flow continues to remain incredibly strong.

Assuming oil prices went back up to $109 per barrel, the company's cash flow would increase to a very impressive $16 billion.

This increase in Eni's cash flow, is partly as a result of the company's increasing efficiency which has helped the company's cash flow per barrel. The company's cash flow per barrel has increased by a very impressive 20% from $25 per barrel to $30 per barrel. Should Eni manage to increase its cash flow even further this should help the company's earnings grow even faster.

Eni New Upstream Projects - Eni Investor Presentation

At the same time, Eni has been building out its portfolio for the long run. The company's new project breakeven has decreased from $45 per barrel before the crash to $27.5 per barrel since then. On top of this, the company has cut OPEX and Development spending cutting technical costs by an astounding 30% and decreasing technical costs to less than $20 per barrel.

This shows overall how Eni has been rapidly cutting its costs improving the company's cash flow. This helps show how the company is a strong investment at the present time.

Eni Future Growth Strategy

So far, we have discussed Eni's overall strategy to becoming a pure oil and gas company. On top of this, we have discussed how the company how the company has improved its upstream assets significantly, improving its own cash flow. These cash flow improvements should allow the company to handle a drawn out crash. Now we will conclude by discussing Eni's exploration strategy.

Eni Exploration Strategy - Eni Investor Presentation

Eni has discovered cumulative resources of an astounding 13 billion barrels of oil over the past 8 years. The majority of these reserves are under study, however, the company has produced more than 2 billion of these barrels and has another 2 billion under disposal. At the same time, another 1 billion barrels is under final investment decision.

This shows how Eni has been consistently discovering more oil than it produces. In any given year, Eni produces roughly 0.6 billion barrels of oil. The company's discoveries over the past 8 years, as a result, have been at almost 3 times the company's rate of consuming oil. This leaves Eni room to either sell the more valuable portions of its assets or to increase production.

Eni Zohr Project - Eni Investor Presentation

At the same time, Eni is ultra-fast tracking its recent Zohr natural gas discovery, one of its largest discoveries in years located in the Mediterranean. The company originally discovered the asset in August 2015 and completed the final investment decision in February 2016. It plans on an accelerated start up and ramp to plateau starting in late 2017, a plan that should provide the company with significant future cash flow.

The value of the company's Zohr discovery can be seen in the value placed on the project by recent stake sales. British Petroleum (NYSE: BP) purchased a 10% stake in the field for $375 million plus an agreement to repay Eni for its past expenditures. At the same time, Rosneft (OTCPK:RNFTF) purchased a 30% stake for $1.13 billion plus paying $450 million for past costs.

Rosneft itself has valued the acquisition at $2.8 billion. This is the largest gas discovery in the Mediterranean, which could contain up to 30 trillion cubic feet of natural gas, roughly $75 billion at current market prices. That means that Eni's remaining stake in the project can be valued at roughly $5.6 billion. And Eni is excited to increase its cash flow from this acquisition.

Conclusion

Eni has had a harder time than most other oil and gas super majors since the start of the crash. However, the company continues to pay investors a very respectable dividend of more than 5% and its present market cap of $60 billion still make it a powerful company. At the same time, the company's recent discoveries, like its Zohr natural gas discovery in the Mediterranean show its value.

Eni is currently focused on increasing its efficiency and future earnings. The company has cut its costs significantly and improved its cash flow per barrel. That means even at lower prices, the company's mid-downstream and upstream earnings continue to remain incredibly strong. As the company increases its upstream production, this should continue to support its future earnings and dividend.

As we can see, Eni's impressive assets and increasing dividend make the company a strong investment at the present time.

Disclosure: I am/we are long E, BP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.