Italy’s Eni: Don’t Overlook This Energy Giant

by Aaron Levitt | May 1, 2012 12:07 pm

When it comes to the major integrated energy firms, companies like Exxon Mobil (NYSE:XOM[1]), Royal Dutch Shell (NYSE:RDS-A[2], RDS-B[3]) and Chevron (NYSE:CVX[4]) often dominate investors’ perceptions. After all, these three firms are some of the largest corporations on the planet and are responsible for much of the world’s oil and natural gas output.

However, given how much investors have focused on the “standard” super-majors, a variety of the sector’s other big players have fallen through the cracks.

One such often-overlooked energy outfit is Italy’s Eni (NYSE:E[5]). Already a huge producer of hydrocarbons, the Italian giant has recently made some strategic deals that could propel it forward. These joint ventures mimic several other integrated firms’ moves into unconventional resources[6]. As global energy demand continues to skyrocket and traditional sources of crude oil dwindle, these unconventional assets will be key for an energy company’s long-term survival.

Nonetheless, unlike its peers, Eni’s shares continue to trade a discount to the company’s potential. This discount is mostly due to where it has historically produced most of its energy: the Middle East. Add this to ongoing worries over Europe’s sovereign-debt crisis, and it’s no wonder why investors ignore Eni. Yet, its recent deals highlight the Italian firm’s long-term plans to diversify. And in those plans investors can make bets on the future growth of unconventional assets at a bargain price to Eni’s peers.

A Wealth of Unconventional Ventures

Like Exxon, Eni has caught the Arctic bug[7] and has recently announced a landmark deal to explore the frozen sea. Also like Exxon, Eni is partnering with Russia’s largest oil producer[8], Rosneft (PINK:RNFTF[9]), Eni has set up a joint venture to explore two oil fields in the Barents Sea and one oil deposit in the Black Sea. The three deposits are estimated to contain a total of 36 billion barrels of oil equivalent (BOE). Eni will have a 33% stake in the venture, which calls for investment up to $125 billion. More than $2 billion will go toward exploration efforts.

The deal echoes a similar structure to Exxon-Rosneft’s recent partnership — albeit smaller in terms of reserve potential — with Eni shouldering the upfront investment costs to develop the fields. In exchange for access to the Russian deposits, Eni would bring its technology know-how in deepwater and advanced oil-recovery techniques to the region. It would also provide Rosneft with access to projects in North Africa, the U.S. and Northern Europe.

The potential is huge for Eni as well as other firms that can get a foothold into Russia’s Arctic. Although much of Rosneft’s land holdings have yet to be explored and appraised, analysts estimate that the region’s total hydrocarbon resources are around 206 billion BOE.

Like most major oil giants, Eni is facing dwindling production from its bread-and-butter fields and has great need to find new sources of supply. The Rosneft deal puts it directly in the thick of an untapped and strategically important new province. Eni already has a working relationship[10] with Russian energy firm Gazprom Neft (PINK:GZPFY[11]), and it recently started producing gas in Serbia. Eni CEO Paolo Scaroni said of the new deal that “Giant projects in Russia are key to plans to boost [Eni’s] overall output.”

As important as the Russian deals are to the Italian firm’s future success, Eni isn’t stopping there. Moving from the R in BRIC to the C, Eni recently signed a production agreement with China’s largest offshore energy producer CNOOC (NYSE:CEO[12]). Again, in exchange for technology know-how — in this case seismic surveys[13] — Eni gains access to a 1,981-square mile[14] deepwater block that has “high” exploration potential. Already, Eni is actively working in three additional blocks in the China’s South Sea.

It’s also gaining a foothold in China’s unconventional shale assets. With a recently signed memorandum of understanding [15]with Sinopec (NYSE:SHI[16]), Eni hopes to be the first oil major to capitalize on China’s 1.275 trillion cubic feet of technically recoverable shale gas. 

These deals are all in addition to Eni’s pending asset swaps with PetroChina (NYSE:PTR[17]), exploration wins in Mozambique, partnerships in Norway’s side of the Barents Sea and new bids for various shale assets in Ukraine[18]. This is clearly a future built on unconventional assets.

Buying the Italian Giant

It bears repeating that these sorts of unconventional and nontraditional sources of oil and natural gas are critical for a company to survive in the new energy reality. With legacy wells beginning to show their age, finding new sources of supply has become a paramount issue.

Eni’s potential to be a first mover in China’s vast untapped shale assets could be a monster win for the company long term, and its Russian deals put it directly into one of the future’s key producing regions. Through its various partnerships, Eni has shown that it’s much more than a company with just Libyan assets.

At the same time, much of its perceived value is currently based on those Mideast holdings. As the Libyan rebellion unfolded in 2011, Eni’s production was cut off for almost an entire year. Consequentially, its shares nosed-dived. Since then, they’ve rebounded, but still trade at discount to Eni’s major peers. For example, Exxon can be had for a current price-earnings ratio of 10.23 and forward P/E of 9.69. Eni shares can be purchased for current and forward P/Es of 8.86 and 7.77, respectively. Plus, Eni’s dividend is twice that of the industry stalwarts.

Yet, Eni is firmly defining its future by its moves into unconventional assets. CEO Scaroni highlighted the recent expansion by saying it “underpins our exploration opportunities for many years to come, further boosting our prospects for long-term growth.”

The company clearly understands that it can’t simply rest on its traditions. Investors shouldn’t either. Eni currently offers a great value in the world of unconventional resources. That bargain price is sure to evaporate over time as more people catch on.

As of this writing, Aaron Levitt doesn’t own any securities mentioned here.

  1. XOM:
  2. RDS-A:
  3. RDS-B:
  4. CVX:
  5. E:
  6. resources:
  7. caught the Arctic bug:
  8. Eni is partnering with Russia’s largest oil producer:
  9. RNFTF:
  10. working relationship:
  11. GZPFY:
  12. CEO:
  13. case seismic surveys:
  14. 1,981-square mile:
  15. memorandum of understanding :
  16. SHI:
  17. PTR:
  18. shale assets in Ukraine:

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