Integrated oil companies seem to have finally come out of the shadows. With a world economy on the rebound after the 2007/8 crisis, demand for oil began to climb again. However, as the activity slowdown affected some companies more than others, emerging market trends are expected to do so. For example, Europe has been the hardest hit region with respect to the oil & gas industry, and continues to slowly recover, in North America the gas boom reached its zenith and activities began to move offshore in the search for oil. For Eni (NYSE:E) has been a troubled road since 2008, reflected by a deep decline on its stock face value. Although performance has been somewhat stable, stock value never recovered pre-crisis levels and gurus have not been very active on the stock. Can something different be expected from this integrated oil producer?
Recycling and New Projects
Recognizing the difficult economic environment in which it operates at home, Eni has strongly pursued an expansive business strategy to offset context effects. Among the most ambitious projects envisaged by the firm is the transformation of its refinery located in Venice. The project aims to reuse the catalytic hydrodesulfurization section in the Venice refinery, reconfiguring it into a biorefinery. The firm estimates to produce around 300,000 tons per year of green diesel already in 2014.
An additional announced project by Eni is the investment of EU125 million ($172.4 million) on its Versalis plant in Mantua. Investment is to be distributed between 2014 and 2017 on the environmentally and economically sustainable plant which links the industrial areas in Porto Marghera, Ferrara and Ravenna via a pipeline. The main objective is to optimize the plants industrial processes and produce further energy savings, while another portion will be used to expand the Group’s research and development.
The business strategy for Eni has focused also on international expansion. More specifically, management has met with the new Libyan Prime Minister with the aim of maintaining and increasing current production levels in the country. The agreement is of great importance for the government since electricity provision has been a great obstacle. At the same time, the political volatility of the country implies a great risk.
Not all is shiny for Eni, however. Production in Kazakhstan has been stalled after successfully beginning production last September, due to cracks on the pipeline expected to be fixed during 2014. Losses are to be offset through earnings by new discoveries in Mozambique, Cyprus, Congo, Ghana and Pakistan.
Prospects for a Troubled Past
The comprehensive business strategy developed by Eni is marked by a 2013 to 2016 plan to enhance production and steps to control costs and recover profitability. In this line, upstream operations in Cyprus, Egypt, Vietnam, Indonesia, Pakistan and Kenya continue to see expansive efforts. Additionally, projects in Algeria, Iraq, Australia, Russia and Egypt are expected to greatly increase volumes in the near future.
Most recently, Eni signed an agreement for shared production with the Ukrainian government. The agreement entails exploration and development around the Black Sea, including the Subbotina oil discovery. Another agreement has been signed with Rosneft for exploration activities off the Russian section of the Barents Sea. Last, the firm brought online six upstream projects.
Currently trading 17.2 times its trailing earnings, Eni’s stock carried a 57% premium to the industry average. After three years of revenue and net income increments, the company has seen a downturn during 2013. During the same time, debt levels have stood stable while cash flow saw great improvements. Nonetheless, the major shareholders have seen little change in their positions, after the important reductions seen during 2012. Last, given the risks associated with the company, little confidence shown by gurus, and unfavorable pricing, it is not recommended to start a long-term investment yet.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.