Even with oil trending higher, oil and gas companies have continued to maintain a conservative outlook and companies are increasingly looking at reducing leverage or improving cash buffer. This is a good strategy considering that the global economic outlook remains sluggish and even if supply factors change, oil consumption growth can be muted.
However, with all the uncertainties, investors considering exposure to the energy sector for the next three to five years can still buy quality names in small quantities.
ENI SpA (E, Financial) is a quality name in the exploration sector. After sustained downturn and bottoming out at $25 on Feb. 11, ENI SpA has trended higher by 24% in just over one month. It is likely that the current upside will continue.
From an industry perspective, the bullish factor is a potential production freeze coming from major oil producers. While there is still no word on that, the oil price trend does suggest that there is likely to be some progress toward reducing supply in the near term. Once there is an official announcement, oil is likely to trend higher. However, geopolitical tensions among major oil producers can play spoilsport in this deal, and investors need to remain cautiously optimistic.
From a company-specific perspective, ENI SpA announced plans for 2016-19 on March 18. The following points are worth noting:
- ENI SpA expects to divest noncore assets worth €7 billion in the next four years, and this will provide significant liquidity buffer for investments and deleveraging.
- ENI SpA expects cumulating G&A savings of $2.5 billion through 2019. This implies annual savings of roughly $600 million. With ENI SpA expecting oil to remain at $65 per barrel in 2019, cost savings is critical as it can provide some boost to EBITDA margin.
- ENI SpA expects production growth of 3% on an annual basis for the next four years. I don’t see the production growth factor as a major concern. If oil trends higher meaningfully in these four years, ENI SpA has the flexibility (asset and financial) to significantly ramp up production.
- ENI SpA expects to bring down the new project's break-even price from $45 per barrel to $27 per barrel. This will help the company enhance its EBITDA margin and increase production even if oil price trends higher gradually.
Considering these points ENI is certainly attractive from a three- to five-year investment horizon. Further, it is also worth mentioning that the company expects to maintain 2015 dividend levels of €0.8 per share in 2016. If oil price recovery remains steady, dividends will sustain for ENI even for the next 24 months.
With these positives and the intent to keep the balance sheet robust, it is not surprising to see ENI command A- rating from Standard & Poor's and A3 from Moody’s. If oil continues to trend higher and if ENI is successful in closing one or more noncore asset sales in 2016, I expect the company to avoid potential downgrade.
ENI is a quality exploration stock and the company has a clear plan for the next four years that includes non-core asset sale, cost savings, conservative investment profile and focus on low breakeven assets. With these points in consideration, I am bullish on the stock from a long-term perspective. Fresh exposure can be considered at current levels.
Disclosure: No positions in the stock
