been looking at E N I SPA ADR (NYSE:E) --You are any others have any thoughts pro or con?
Obviously not my write-up, but I
bolded
what I found to be positive and
italics for parts I would caution
ENI SpA ADR E
Thesis 11-22-2006
Although Eni faces deregulation of the Italian gas market, it still has one of the most attractive development portfolios in the oil patch.
By several metrics, Eni is the sixth-largest integrated oil company in the world. Spawned by the privatization of Italy's national oil and gas company, Eni represents an amalgamation of numerous business segments combined to form one vertically integrated European powerhouse.
While the firm still lacks the scale and cost advantages of supermajors like ExxonMobil XOM, BP BP, and Royal Dutch Shell RDS.A, Eni's smaller size and attractive portfolio of prospects offer superior production growth potential, in our opinion.
Eni is seeking to boost its stature in international energy.
Increasing emphasis on upstream oil and gas exploration and production has yielded an impressive collection of development projects in places like Libya, Algeria, Nigeria, and Angola that are set to deliver well-above-average production growth over the next several years. Eni is also leading efforts to tap the colossal Kashagan oil field under the Caspian Sea. Hailed as the most significant find in decades, this project is expected to attain a production rate of 1.2 million barrels per day.
Geopolitical factors permit Eni to operate where other Western players face greater political opposition--namely North Africa and the Middle East. With nearly half of proved reserves and production stemming from North and West Africa, Eni's geographic exposure is geared toward regions with greater growth potential, but correspondingly higher political risk. Lower exposure to mature North American and European basins means that Eni must struggle less with declining production from existing fields.
Eni still has its core gas and power-distribution businesses in Europe. Previously supported by monopoly power in Italy, these legacy businesses have been quite profitable and have helped Eni generate impressive returns on invested capital. However, as the forces of deregulation take hold, Eni is being obliged to scale down these operations and compete vigorously with other players. We expect returns to shrink as a result. To mitigate this effect, the firm has taken stakes in several gas distributors outside Italy and is planning increased gas sales to other European nations.
Despite Eni's weaker competitive position against the dominant oil giants, we believe the company will post adequate returns over the balance of the cycle. Still, we'll watch closely for signs that government influence is leading the firm in the wrong direction.
Valuation
We're raising our fair value estimate to $67 per ADR from $64. We assume benchmark oil prices of $66 in 2006, $54 in 2007, $46 in 2008, $44 in 2009, and $46 in 2010. We expect hydrocarbon production growth to average 3.2% over the next several years. This is slightly below management's forecast of 4% annual growth through 2009, but we'd like to leave some room for error, given the number of large projects coming online and the possibility of delays. Although we expect strong performance from Eni's upstream segment, we still think overall returns will inch lower over time as deregulation within the gas-distribution business erodes the firm's market power. We forecast total capital expenditures to equal roughly 37 billion euros during the next four years, slightly above management's guidance of 35.2 billion euros. Again, we're leaving room for error, as cost inflation has become a central theme for the world's major oil companies. Our fair value estimate is sensitive to our oil and gas price assumptions. All else equal, raising our future price assumptions 10% would cause our fair value estimate to increase to $74 per ADR share. Decreasing prices 10% would lower our fair value estimate to $60.
Risk
The biggest risk is a sustained fall in commodity prices. Political risks in the form of war or higher taxes as well as spills and other environmental risks are also present. The Italian government, still a large Eni shareholder, could use its voting power to promote interests that may conflict with those of individual investors.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
ENI SpA ADR 93,324 50,387
* Total SA ADR 153,547 162,809
* BG Group PLC ADR 9,900 43,323
* Repsol YPF SA 63,920 39,263
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2005
Strategy
Eni is trying to improve its standing in the international oil and gas industry by expanding outside its home turf of Italy. Eni also hopes to gain cost efficiencies and reduce commodity price exposure by staying vertically integrated instead of relying on contractors for services like drilling. To offset a reduced presence in the Italian natural-gas supply business, Eni is boosting activity in other regions and investing heavily in new power plants.
Management & Stewardship
The Italian government holds a "golden share" in Eni that gives it special veto powers for certain transactions, such as mergers. Although the government controls only 30% of the company, politicians appoint a majority of board members, as well as the chief executive. We regard this influence as less than ideal, since the Italian government could pursue interests that conflict with those of minority investors. The recent political appointment of Paolo Scaroni as chief executive raises eyebrows, despite evidence of Scaroni's business acumen, because of his lack of experience in the oil and gas sector. Scaroni replaced Vittorio Mincato, who oversaw the company's noteworthy upstream growth over the past six years. Scaroni's most recent position was as CEO of Enel EN, Italy's leading electric utility. We're concerned that Scaroni will take the company in a different direction than Mincato had envisioned, with heavier investments in the gas and power division. While gas and power operations carry lower risk than the firm's other segments, we don't think there's as great an opportunity for excess returns, given the deregulation of the Italian market. Indeed, the company is already facing scrutiny over possible abuse of its dominant market position.
Profile
Rome-based Eni explores for and produces oil and natural gas in Italy and abroad. It holds proven reserves of 6.8 billion equivalent barrels of oil and gas, produces 1.7 million barrels a day, has the ability to refine roughly 701,000 barrels a day, and has a network of 6,282 retail service stations. One of the more diversified major energy companies, Eni also has operations in oil field services, petrochemicals, natural-gas distribution, and electricity generation.
Growth
Eni's growth will come from investments in oil and gas properties, which should boost production volume. Revenue will also fluctuate along with oil and gas prices. Eni intends to expand its market share of the European gas market.
Profitability
Eni's profitability will depend on keeping upstream operating and capital costs in check, boosting refining complexity to generate wider margins, and maintaining adequate returns in the gas and power division in the face of deregulation.
Financial Health
Strong profits and a stable balance sheet have allowed Eni to return cash to shareholders. The company has meaningfully increased its dividend and has also bought back a large number of shares.
Morningstar Rating
01-10-2007
3*
Stock Price
As of 11-22-2006
$64.09
Fair Value Estimate
$67.00
Consider Buying
$51.70
Consider Selling
$83.90
Business Risk
Avg
Economic Moat
Narrow
Bulls Say
Eni's financial results have been impressive, showing healthy profitability and growth since the early 1990s. Excluding acquisitions, the company has generated free cash flow for years.
With significant operations outside oil production, including natural-gas marketing and power generation, Eni depends less on cyclical commodity prices than most others in the oil patch.
Being based physically closer to the Middle East and Africa may give Eni a slight cost and cultural advantage when bidding for emerging projects in these lucrative areas.
Being vertically integrated protects Eni from price spikes for drilling services and ensures its wells will be drilled in a timely manner.
With more than one third of its current reserves undeveloped and its emphasis on investing in exploration, Eni should be able to meet its aggressive goals to boost production over the next few years.
Bears Say
Eni's historical results should be taken with a grain of salt because much of the success before 2003 was achieved while the firm had a natural-gas monopoly in Italy--a monopoly that has since been broken by the government.
In upstream exploration and production, an area of increasing importance for Eni, the company does not yet have the scale to compete on a cost basis with the oil supermajors.
Much of Eni's exploration is taking place in regions with less stable political regimes. It's likely that Eni will come to depend more heavily on reserves in riskier parts of the world.
Although Eni has a sizable stake in the North Caspian Sea project, development of the giant Kashagan oil field is expected to be technically challenging. There is significant risk of the project running over schedule and over budget.
The Italian government still owns a significant stake in Eni and may vote its shares in ways that conflict with the interests of individual shareholders.
