Super Discovery Makes Eni Stock a Super-Buy (E)

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When it comes to the super-majors and large integrated energy stocks, names like Exxon (XOM), Chevron (CVX) and even beleaguered BP (BP) usually dominate the conversation. But the few “top” majors aren’t the only ones worthy of investors’ attention. In fact, one of the lesser-known names just made a huge discovery in the Mediterranean.

eni logoThat would be Italy’s Eni SpA (E).

As a super major, Eni is as big as they come. And it just got that much larger after the latest discovery. Yet, E stock has always been the redheaded step-child of the majors. As investors have focused on the “standard” super-majors, Eni continued to fall through the cracks.

Nonetheless, Eni’s shares continue to trade a discount to the company’s potential. And the huge recent discovery boosts that potential even further.

If you’re looking for value in the beaten-down energy sector, E stock should be on your list.

Eni Finds Trillions of Cubic Feet

While many of the super majors have had a hard time finding new sources of reserves to replace dwindling legacy fields and falling production, Eni has been killing it. CEO Claudio Descalzi calls the latest find a game changer.

In the deep waters off of Egypt’s coast, Eni hit pay-dirt with its Zohr prospect. According to early seismic information and well tests, Eni managed to find a whopping 30 trillion cubic feet of lean gas in an area less than 100 square kilometers. Lean gas contains almost 100% pure natural gas, which makes the find all the more valuable.

The Zohr discovery is the largest gas find ever made in the Mediterranean Sea and ranks as one of the largest finds in the entire world. Putting it into context, Zohr’s reserves are about one-third the size of Pennsylvania’s Marcellus shale, but contained in one-tenth of its land mass.

The beauty is that Eni SpA is the sole operator and owns 100% of the contractor operating license from the Egyptian government. More importantly, natural gas is becoming the fuel du jour as many nations are quickly turning to it as the main source of electricity generation. Various emission targets, low costs per generation and relative ease of transport has made natural gas the main driver of the energy sector going forward.

Eni has given itself a major “in” towards being one of the leading global producers of the fuel. And that positioning will result in boosted cash flows and profits when the field starts pumping natural gas. But this discovery wasn’t the company’s only foray into major natural gas discoveries.

Back in 2012, Eni also made history with one of the largest natural gas finds off of the coast of Mozambique. Along with subsequent smaller positive prospects, that find has ballooned to an estimated 70 trillion cubic feet worth of natural gas in the African nation. This follows joint venture deals in Russia, China and other African nations as well as new offshore discoveries in Libya.

All in all, Eni has managed to discover 10 billion barrels worth of oil equivalent over the past seven years and has added more than 300 million in just the first six months of this year.

The Reason For Eni’s Discount

So unlike many of its rivals, Eni SpA is actually making real gains to its production and reserve numbers. The problem for E stock is just where those discoveries are being made. Like real estate, oil and gas is all about location, location, location.

What do Libya, the Congo and Iraq have in common? Aside from being incredibly dangerous places to operate, they also happen to be Eni’s bread-and-butter. Eni has historically produced most of its energy in the Middle East and Northern Africa. It has been in Egypt and Libya since the 1960s, and in Algeria since the 1980s. Not to mention Eni’s major production and reserve holdings in the Congo and Nigeria that it has held for decades.

Basically, Eni SpA operates in all the “nasty” places in the world, prone to bouts of political violence and terrorism. This has actually come back to bite Eni in a hard way more than once. Back in 2011, when Libya was in turmoil and Muammar Gaddafi was being overthrown, Eni saw its entire Libyan oil production cut down to zero. More recently, some of its other sites in Africa have been victims of terrorism.

Getting Past Eni’s Warts

On the one hand, Eni SpA is finding the kinds of large unconventional and nontraditional sources of oil and natural gas that are critical for a major energy stock to survive in the new energy reality. Legacy wells beginning to show their age, and finding new sources of supply has become a paramount issue. Eni is doing right. On the other, Eni is plagued by the continued fear that its operations could be blasted into smithereens.

I say ignore the noise and take a plunge into E stock.

To begin with, E stock is cheaper than many of its other major integrated rivals at a forward price-to-earnings ratio of 11. This compares to XOM and CVX’s nearly 16 and ConocoPhillips (COP) forward P/E of 27. At the same time, E stock offers a best-in-class dividend yield of 6.34%. The discount and that higher payout mean investors are being adequately compensated for the location risk in its operations.

And as for that dividend, E stock was the only major to cut its payout at the beginning of the oil rout to help stave off some of the pain of lower oil and natural gas prices. Some analysts are now predicting that some of the majors — like CVX and BP — will be forced to cut their payouts now after “over-paying” during previous years.

All in all, the recent discoveries by Eni will help boost cash flows and strengthen that dividend payment. The size of the discoveries should help keep those cash flows humming along for several years. And that’s actually what you’re looking for in an energy stock.

The Bottom Line: The recent mega-natural gas find off the coast of Egypt highlights that Eni is doing everything right. And yet, E stock is pretty much ignored by investors. Now is the time to snap up this value.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/eni-e-eni-spa-xom-cvx/.

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