After reducing their dividends throughout the severe Covid-19 inspired downturn of 2020, one year later Eni (NYSE:E) had already completely reinstated their former dividends but disappointingly, at the time there were no reasons to expect more growth to follow, as my previous article discussed. Since more than half a year has subsequently elapsed, it feels timely to provide a refreshed analysis that when looking ahead, now thankfully sees a very high 10% shareholder yield with even higher shareholder returns on the horizon thanks to their new revised policy, thereby boosting their current high dividend yield of 6.65% at the current Euro to USD exchange rate.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
Thanks to the strong oil price recovery during 2021, it was only natural to see their cash flow performance follow in tandem with their operating cash flow ending the year at €12.851b and thus easily beating their result of €4.822b during 2020 that obviously suffered on the back of the severe downturn. When turning to the start of 2022 and thanks to oil and gas prices rallying even higher following the otherwise horrific Russian invasion of Ukraine, their operating cash flow surged even higher year-on-year to €3.098b during the first quarter and thus more than twice its previous result of €1.376b during the first quarter of 2021. Whilst both sets of results were weighed down by working capital builds, even if removed, their underlying operating cash flow for the first quarter of 2022 of €5.703b was still slightly more than double their previous equivalent result of €2.567b during the first quarter of 2021.
When looking ahead into the remainder of 2022, these very strong oil prices have seen management issue guidance for their operating cash flow of €16b with Brent oil prices averaging $90 per barrel, as per slide seven of their first quarter of 2022 results presentation. When combined with their accompanying guidance for capital expenditure of €8b, it leaves €8b of estimated free cash flow and thus plenty to fund their shareholder returns, which have once again been revised by another new policy, as the graph included below displays.
This marks the third time since reducing their dividends back in 2020 that their shareholder returns policy has been revised and once again, it continues linking their dividends and share buybacks to the prevailing oil price. If nothing else, their updated shareholder returns policy simplifies expectations with $90 Brent oil prices indicating dividends of €0.88 per share plus a further €0.31 per share of buybacks, which makes for a total of €1.19 per share. This would ultimately cost €4.212b given their latest outstanding share count of 3,539,800,000, thereby leaving circa €3.8b of excess free cash flow retained for deleveraging and ensuring their dividend coverage remains very strong.
Whilst already a sizeable portion of free cash flow, following the sanctions levied against Russia in retaliation for their war against Ukraine, oil and gas prices have rallied with the former now often trading north of $100 per barrel. Even though the future remains uncertain, this pivotal geopolitical shock tightens an already tight market and thus it seems that circa $100 per barrel oil prices for 2022 and possibly 2023 are now the baseline outlook. This obviously stands to materially boost their cash flow performance with their free cash flow lifted by €140m for each additional $1 per barrel that Brent oil prices increase, as per slide ten of their previously linked first quarter of 2022 results presentation.
If Brent oil prices average $100 per barrel during 2022, thereby $10 per barrel higher than their guidance, it would see an additional €1.4b of free cash flow of which 30% or €420m would be directed towards share buybacks, as per the bottom of their new shareholder returns policy graph include above. Apart from boosting their shareholder returns to reach an impressive circa €4.6b, it would also see a further €980m retained for deleveraging and when combined with their existing amount, makes for a total of circa €4.8b. Despite still retaining a significant portion of free cash flow, given their current market capitalization of approximately $50b or €48b at the current USD to Euro exchange rate, this would still see a very high shareholder yield of circa 10%.
Although higher gas prices and stronger refining margins also stand to lift their results higher, these are not as large contributors as oil prices and thus were excluded to provide a margin of safety. Even though this is already very desirable, when looking ahead, the effects to their financial position from their retained free cash flow actually make relatively higher shareholder returns likely on the horizon.
When casting an eye to their capital structure, it shows that their net debt decreased noticeably during the first quarter of 2022 to land at €16.444b. Apart from being down materially in such a short length of time versus its previous level of €19.54b at the end of 2021, it also represents the lowest level in recent history since at least the end of 2018, although this comparison is being skewed by foreign currency impacts and asset movements. If also including their financial assets held for trading and financial receivables held for non-operating purposes as management does within their analysis, their net debt would only be €8.623b and thus down slightly versus the €8.987b where it ended 2021, as per page twenty-four of their first quarter of 2022 results announcement.
When looking ahead, their prospects to retain approximately €4.8b of free cash flow for deleveraging means that their net debt will continue plunging, regardless of whether or not their financial assets and receivables are included. In the case of the former, it would see their net debt slightly more than halved, which would push their leverage down dramatically and open the door for yet another new shareholder returns policy with relatively higher returns per prevailing oil price.
Thanks to their very strong operating conditions, unsurprisingly, their leverage plunged to the lowest level in years. This now sees their net debt-to-EBITDA at 0.52 and their net debt-to-operating cash flow also down to only 0.72, which both sit well beneath the threshold of 1.00 for the very low territory despite utilizing the higher of their two previously discussed net debt calculations.
Since they stand to potentially halve their net debt within the next twelve months, it means that even if oil and gas prices revert lower in future years, their leverage would not necessarily increase dramatically nor become problematic. To provide an example, even if they were to once again endure the now infamously severe downturn of 2020 after seeing their current net debt of €16.444b has been reduced by €4.8b, their net debt-to-EBITDA and net debt-to-operating cash flow would increase to 1.91 and 2.41 respectively, thereby still only sitting across the top of the low territory and bottom of the moderate territory. Since neither would be even remotely concerning, especially following a hypothetical severe downturn, it makes seeing another new shareholder returns policy very likely in the coming year, which would return relatively more free cash flow per prevailing oil price.
It was also quite unsurprising to see their liquidity is still strong with their current and cash ratios at 1.23 and 0.22 respectively. Given their prospects to retain a very significant amount of excess free cash flow, this should not change when looking ahead into the foreseeable future. Furthermore, as a very large company, even if a sudden downturn were to strike, there are no reasons to expect any issues sourcing liquidity to refinance debt maturities or fund other general purposes, even if central banks tighten monetary policy.
Whilst their very strong financial performance is almost entirely down to the fortunes of these very strong oil and gas prices, it was nevertheless positive to see management revising their shareholder returns policy relatively higher and thus lining up prospects for a very high 10% shareholder yield. If looking further afield, the significant portion of retained free cash flow stands to deleverage their already healthy financial position, thereby also lining up prospects for relatively higher shareholder returns on the horizon and thus it should be no surprise that I believe maintaining my buy rating is appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from Eni’s SEC filings, all calculated figures were performed by the author.