Eni: Exploration Unit Continues Growth Story

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About: Eni S.p.A. (E)
by: Power Hedge
Summary

Eni is somewhat underfollowed by American investors but it boasts some of the greatest growth potential of the European energy giants.

The company recently discovered a massive field in the Block 15/06 in Angola, adding to its resource wealth in the block.

The company also discovered yet another gas field in the Eastern Mediterranean.

These two finds will likely be developed and thus help to drive the 3.5% growth that the company plans to deliver over the next few years.

The stock might be slightly overvalued based on current earnings estimates, so conservative investors should wait for a pullback.

Italian energy giant Eni S.p.A. (E) has had quite a good week so far as its exploration unit made two large discoveries. This is the continuation of a very successful few years in this regard and certainly bodes well for the company's future. This is because exploration is a vital, if sometimes underappreciated, activity for an energy company as it replaces the resources that are removed from the ground during production operations and provides it with new resources that can be utilized to drive growth. Eni was already well-positioned to deliver very strong growth over the coming years and these discoveries therefore serve to strengthen that position.

Agogo Prospect in Angola

The first discovery that Eni announced this week comes out of Angola, a very oil-rich nation located on the west coast of Sub-Saharan Africa.

Source: Wikipedia

The discovery in question is located at the Agogo prospect, located in venerable Block 15/06. This block is likely to be familiar to followers of the company and indeed I have discussed it myself in my previous articles on the company, such as this one. The discovery is the third major discovery that Eni has made in Block 15/06, following Kalimba and Afoxé. As these two previous discoveries were quite resource-rich, the discovery at Agogo all but ensures that Eni and its partners will be developing this block at some point.

This latest discovery at Agogo was truly massive. The Agogo-1 NFW well, which proved the discovery, found a single oil column of about 203 metres with 120 metres of net pay of high quality oil contained in a sub-salt diapirs setting in Lower Miocene sandstones with excellent petrophysical properties. Based on the data, Eni has estimated that this discovery contains between 450 and 650 million barrels of light oil in place and it admits that this might be a low estimate. If this number is correct, then this would be one of the largest oil discoveries in recent years and certainly qualifies as "high-impact" (a high-impact discovery is one containing more than 100 million barrels of oil in place).

One important thing to note here is that the Agogo discovery is located in a deepwater environment and therefore requires the use of an ultra-deepwater rig to exploit as well as develop. The well that discovered this massive find was drilled in 1636 metres (5,500 ft.) of water by the Poseidon. The Poseidon is an ultra-deepwater drillship that was formerly owned by Ocean Rig but was acquired by Transocean (RIG) through its acquisition of the former company. It is uncertain though which rigs will be used to ultimately develop this find as Eni only contracted the Poseidon to drill four wells.

Speaking of timetables, we do not yet have one for this discovery. However, Eni has stated that it intends to fast track the development of these resources and will likely attempt to share infrastructure between Agogo and its other discoveries in the area. Eni already has two FPSOs in the block (N'Goma in West Hub and Olombendo in East Hub), so it seems likely that the company will utilize these as well for efficiency purposes.

Nour Prospect in Egypt

The second discovery announced by Eni this week was the Nour gas discovery located off of the coast of Egypt in the Eastern Mediterranean. This is an area that a great deal of natural gas has been discovered in over the past several years, including the massive Leviathan field in Israel and Eni's own Zohr field, also in Egypt. The newest discovery was drilled by the Scarabeo-9 semisubmersible in a water depth of 295 metres (995 ft.) and so does not require the use of an expensive or sophisticated ultra-deepwater rig. This fact might help Eni save some money on the eventual development of this field.

Eni reports that the Nour-1 New Field Wildcat well, which led to the gas discovery, found 33 metres of gross sandstone pay with good petrophysical properties and an estimated gas column of ninety metres in the Tineh formation of Oligocene age. While it is certainly promising, we do not yet have enough information to derive an estimate of its overall size. When we consider the very large natural gas deposits in the general area, it is reasonable to assume that the Nour prospect itself has sufficient natural gas to make the development of it a profitable endeavor. This is even more true when we consider that Eni should be able to share infrastructure with some of its other projects in the area and thus reduce its development costs and improve overall total returns.

Eni's Growth Prospects

Eni is somewhat underfollowed by American investors, which is unfortunate because it boasts some of the greatest prospects for growth of any of the European majors. We saw this begin to play out during 2018. Indeed, during the fourth quarter of 2018, Eni managed to increase its revenues by 14.2% compared to the year-ago quarter. This was done in spite of the near 40% decline in oil prices that we saw during the quarter. It is worth noting though that the company's hydrocarbon production was slightly lower during the fourth quarter than in the equivalent quarter of the previous year due to various short-term events but the full year numbers do show notable production growth over 2017 levels.

Source: Eni S.p.A.

This is a growth streak that Eni should be able to continue over the next few years. This is at least partly due to the exploration success that the company has been enjoying and that has been illustrated by the two examples discussed earlier in this article. Eni expects to be able to grow its production at a 3.5% annual rate between now and the end of 2021, delivered by start-ups of new projects as well as the continued ramp-ups of those projects that have not yet reached full capacity. This should result in cash flow of $18 per boe at $60 Brent, which should provide us with some confidence that the company should be able to grow itself profitably even if the overall market environment remains weak.

Valuation

As we can clearly see, there is a very valid thesis for including Eni in your investment portfolio. However, as is always the case, it is vital to ensure that we do not overpay for Eni or any other asset in our portfolio. This is because overpaying for any asset is a surefire way to ensure that we generate sub-optimal returns from that asset. In the case of an energy company, one metric that we can use to value it is the price-to-earnings growth ratio. At its core, this is simply a way of adjusting the more familiar price-to-earnings ratio to take a company's earnings growth into account. As a general rule, a PEG ratio of 1.0 or greater may be an indication that a stock is slightly overvalued at its current level and vice versa. According to Zacks Investment Research, Eni is expected to grow its earnings at an 11.52% rate over the next three to five years. This would give the stock a PEG ratio of 1.04 at the current level, which may indicate that the stock is slightly overvalued today. However, if we see an improvement in Brent oil prices or if Zacks' estimate is even slightly too low, then it is easy to see how this could result in an undervalued stock presently. Otherwise, it may be smart to wait for a pullback in the price before buying in.

Conclusion

In conclusion, this past week has seen Eni's exploration program continue to deliver on its recent impressive performance with two new discoveries. These two discoveries will serve to contribute to the company's strong growth prospects. This will help to drive the company's earnings upward. Unfortunately, the shares might be overvalued at the present level so it could be smart to wait for a pullback.

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