Eni (MIL:ENI, Financial), the $53.44 billion oil and gas integrated company, reportedly has been seeking ways of doing business with renewable energy. An earlier report indicated that the Italy-based company would invest 1 billion euros ($1.165 billion) over the next three years in commitment to this strategic decision.
In May, Eni reported its first-quarter results –Â 36.8% year-over-year revenue growth to 18.53 billion euros and profits of 967 million euros (5.2%) compared to losses of 383 million euros in continuing operations a year ago.
“Eni has markedly improved its financial and operational performance in the first quarter of 2017. The group has delivered a 60% increase in adjusted net profit to 750 million euros compared with 460 million euros in the fourth quarter of 2016 when oil prices had already recovered to levels close to those experienced in this quarter.
“The operating growth is even bigger if compared with the first quarter 2016, when oil prices were at their lowest. Furthermore, the group has seen with 2.6 billion euros its strongest cash generation in seven quarters. This performance was driven by the ongoing execution of Eni strategy across all business segments on 2017 targets, which are all confirmed.
“Flagship upstream projects, such as Jangkrik in Indonesia and OCTP in Ghana, are all about to come on stream while Zohr in Egypt is progressing ahead of schedule. All this makes me confident about the full-year budget production guidance. The disposal of assets in Egypt and Mozambique, which are expected to close before the end of the year, will contribute to a further strengthening of the group’s financial position while maintaining future growth prospects.
“We expect that in 2017 organic cash generation, coupled with proceeds from disposals, will allow us to fully fund our capex and dividend requirements at an oil price well below the current level.” –Â Claudio Descalzi, CEO of Eni
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Valuations
Eni is overvalued compared to its peers in terms of earnings multiple with trailing price-earnings (P/E) figure of 162 times vs. industry median 12.5 times (GuruFocus). Despite this finding, the oil company trades below its book value at 0.87 times vs. industry median 1.1 times and price-sales (P/S) ratio 0.75 times vs. 0.86.
The company also had trailing dividend yield 5.97% with 889% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples 0.71 times and 21.2 times.
Total returns
Eni (ADR shares) has failed to generate any positive shareholder returns in the past decade with (-)0.25% (annualized) compared to the broader Standard & Poor's 500 index’s 14.77% (Morningstar). So far this year, the oil company provided (-)5.36% losses vs. the index’s 9.49%.
Eni S.p.A.
According to filings, Eni, the former Ente Nazionale Idrocarburi, a public law agency, established by Law No. 136 of Feb. 10, 1953, was transformed into a joint stock company by Law Decree No. 333 published in the Official Gazette of the Republic of Italy No. 162 of July 11, 1992.
Eni SpA with its consolidated subsidiaries engages in the exploration, development and production of hydrocarbons, in the supply and marketing of gas, LNG and power, in the refining and marketing of petroleum products, in the production and marketing of basic petrochemicals, plastics and elastomers and in commodity trading.
In 2016, the company exited the Engineering & Construction segment by divesting an interest of 12.503% in the segment parent company, Saipem. Simultaneously to that divestment Eni signed a shareholder agreement with the acquirer that established joint control over Saipem. As a result of those transactions, Eni derecognized Saipem’s assets and liabilities, revenues and expenses effective Jan. 1, 2016. The retained interest of 30.55% in Saipem has been accounted for as an equity-accounted investment from the transactions date. Eni has operations in 73 countries as of Dec. 31, 2016.
In 2016, 38% of Eni’s revenue was generated in Italy, 28% from other European Union countries, 10% in Asia and the rest in other countries,
Eni’s principal segments of operations are as follows Exploration & Production, Gas & Power, and Refining & Marketing.
Exploration & Production
Eni’s Exploration & Production segment engages in oil and natural gas exploration and field development and production, as well as LNG operations, in 44 countries, including Italy, Libya, Egypt, Norway, the United Kingdom, Angola, Congo, Nigeria, the U.S., Kazakhstan, Algeria, Australia, Venezuela, Iraq, Ghana and Mozambique.
In 2016, Eni's average daily production amounted to 1,671 KBOE/d (minus 17 KBOE/d from 2015) on an available-for-sale basis. As of Dec. 31, 2016, Eni’s total proved reserves amounted to 7,490 mmBOE (plus 600 mmBOE from 2015), which include subsidiary undertakings and Eni’s share of reserves of equity-accounted entities.
In 2016, revenue in Exploration & Production fell by 24.9% to 16.1 billion euros (21.2% of total unadjusted sales excluding corporate and other) while having delivered an operating profit of 2.6 billion euros compared to (-)959 million euros losses in 2015.
In the recent quarter, operating profit in the segment jumped to 1.63 billion euros compared to 94 million euros in the year-ago period.
Gas & Power
The Gas & Power segment engages in the supply, trading and marketing of gas, LNG and electricity, international gas transport activities and commodity trading and derivatives. This segment also includes the activity of electricity generation that is ancillary to the marketing of electricity.
In 2016, Eni’s worldwide sales of natural gas amounted to 88.93 BCM (2.1% lower year over year), of which 38.43 BCM were in Italy.
Eni produces power at a number of operated gas-fired plants in Italy with a total installed capacity of 4.7 GW (4.1% lower year over year) as of Dec. 31, 2016. In 2016, electricity sold totaled 37.05 TWh (6.2% higher from 2015).
The Gas & Power segment comprises results of Eni’s activities intended to manage commodity risk and of asset-backed trading activities. Through the trading department of the parent company (Eni) and its wholly owned subsidiary Eni Trading & Shipping SpA, the company engages in derivative activities targeting the full spectrum of energy commodities on both the physical and financial trading venues. This activity is designated to hedge part of Eni’s exposure to the commodity risk and to optimize commercial margins by entering speculative derivative transactions. Furthermore, this activity includes the result of crude oil and products supply, trading and shipping.
In 2016, revenue in Gas & Power drop 21.4% to 40.96 billion euros (54.1% of total unadjusted sales excluding corporate and other) and had operating losses of (-)391 million euros compared to (-)1.3 billion euros in 2015.
In the recent quarter, operating profit for Gas & Power improved to 214 million euros vs. 83 million euros in the same period last year.
Refining & Marketing
The Refining & Marketing segment engages in crude oil supply and refining and marketing of petroleum products in retail and wholesale markets mainly in Italy and in the rest of Europe.
In 2016, processed volumes of crude oil and other feedstock, including renewable feedstock, amounted to 24.73 mmtonnes – 6.4% lower from 2015 –Â (of which traditional refinery throughputs were 24.52 mmtonnes and green refinery throughputs were 0.21 mmtonnes) and sales of refined products were 33.41 mmtonnes –Â 5.2% lower from 2015, of which 25.6 mmtonnes in Italy.
Retail sales of refined products at Eni’s service stations amounted to 8.59 mmtonnes in Italy and in the rest of Europe.
In 2016, Eni’s retail market share in Italy through its “Eni” branded network of service stations was 24.3% compared to 24.5% in 2015.
Through its wholly owned subsidiary Versalis, the Group engages in the production and marketing of basic petrochemical products, plastics and elastomers. Activities are concentrated in Italy and in Europe. The four-year industrial plan foresees the startup of joint ventures for the production of elastomers in East Asia.
In 2016, production volumes of petrochemicals amounted to 5,646Ktonnes.
The results of Versalis have been aggregated with those of R&M, in the reportable segment “R&M and Chemicals” because the two segments exhibit similar economic characteristics.
In 2016, revenue in the Refining & Marketing (including Chemical) drop by 17% to 18.7 billion euros while operating profit rose to 723 million euros compared to (-)1.6 billion euros losses in 2015.
In the recent quarter, operating profit for the segment rose to 364 million euros vs. 48 million euros in the year-ago period.
Sales and profits
In the past three years, Eni’s revenue fell at an average 21.25%. The company also has recorded losses since fiscal year 2015.
Cash, debt and book value
As of March, Eni had 5.47 billion euros in cash and cash equivalents and 27.3 billion euros in debt with debt-equity ratio 0.51 times vs. 0.46 times in the same period last year. Overall debt rose by 3.37 billion euros year over year while equity increased by 539 million euros.
Of Eni’s 125.2 billion euros assets 2.6%Â were identified as intangible assets. The company’s book value rose 1% year over year to 53.1 billion euros.
Cash flow
In the recent quarter, Eni’s cash flow from operations rose by 10.4% year over year to 1.93 billion euros. Certainly the added profits help raise the company’s cash flow for the period, nonetheless, increases in cash outflow were observed in the following: disposal of assets, inventories, trade receivables, changes in working capital and income taxes paid.
Capital expenditures were 2.73 billion euros leaving Eni with (-)899 million euros in free cash outflow vs. (-)705 million euros in the same period last year. No dividends have been handed out yet at the quarter.
In the past three years, Eni provided 313% of its free cash flow (on average) as dividend payouts to shareholders.
In the recent quarter, the company took in 150 million euros in debt, net any issuance.
Conclusion
Eni has demonstrated strong recovery from its year-ago period operations secondary to better oil prices in the recent quarter. Operating profit figures revealed that the company has been able to squeeze more profits now compared to its year-ago period. Analysts also estimated that Eni would deliver profits in this fiscal year.
Given its global business related to oil, an investment of 1 billion euros over the next few years in renewable energy could still be considered a moderate commitment as the company averaged capital expenditures worth 2.86 billion euros in recent years.
Eni also has increased its debt year over year but kept a moderately leveraged, 0.51 debt-equity ratio balance sheet. In addition, shareholder dividends have been kept despite the drop in oil prices in recent years.
Two analysts have an average price target of $30.13 per Eni ADR share vs. today’s share price of $29.64 (at the time of writing). Applying three-year revenue decline and P/S multiple averages followed by a 25% margin indicated $16.2 per ADR share.
Meanwhile, asking a 20% margin from the company’s current book value indicated a value of $23.5 per ADR share.
In summary, Eni is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
