Eni SpA’s (E) adjusted second quarter 2011 earnings per ADR of $1.15 (40 Euro cents per share) came in nowhere near the Zacks Consensus Estimate of $1.42. The quarter’s earnings were nearly 2% below $1.17 per ADR (46 Euro cents per share) earned in the year-earlier quarter.
Total revenue jumped nearly 8% to €24.95 billion ($35.89 billion) in the quarter from the year-ago revenue of €23.15 billion ($31.64 billion).
The quarterly performance was affected by sales losses to shippers, which import Libyan gas due to the unavailability of the raw material, lower seasonal sales, lower margins on power generation and negative scenario impacts.
Operational Performance
Total liquids and gas production in the quarter was 1,489 thousand barrels of oil equivalent per day (MBoe/d), down more than 15% year over year, mainly due to the termination of operations at several Libya fields and Green Stream pipeline activity because of the political turmoil.
Liquids production in the quarter was 793 thousand barrels per day (MBbl/d), down 19% from the year-ago level of 980 MBbl/d. Natural gas productions declined more than 10% to 3,867 million cubic feet per day (MMcf/d), reflecting less output from Libya.
The company’s gas sales were 21.00 billion cubic meters (Bcm), up more than 9.0% year over year, attributable mainly to better business in Europe and the domestic market.
Financials
As of June 30, 2011, the company had cash and cash equivalents of €1.47 billion ($2.12 billion) and long-term debt (including current portions) of €23.24 billion ($33.44 billion). The debt-to-capitalization ratio was approximately 29.4%.
In the reported quarter, net cash generated by operating activities amounted to €4.41 billion ($6.34 billion). Capital expenditure totaled €3.74 billion ($5.38 billion).
Company Guidance
Eni expects oil prices to remain strong for the rest of the year while a certain degree of ambiguity still looms with respect to macroeconomic factors like the political unrest in Libya. The company expects the decline in volumes of oil and natural gas in Libya to be partially offset by better production performance of the company’s assets located in other parts of the globe. Assuming the actual production level at 50 MBoe/d in Libya for the remainder of 2011, management forecasts a 10 percentage point reduction in the expected production for the full year at a constant pricing scenario. The company’s growth strategy has been to ramp up fields that began production in 2010, starting new fields in the U.S, Australia, Egypt, Italy and Algeria and carry out production optimization, particularly in Nigeria, Norway, Egypt, Angola and the United Kingdom.
Gas sales of the company are expected to grow from the 2010 level in spite of sales losses to Italian importers due to the low availability of gas from Libya. Management plans to drive volume growth in Italy, leveraging client additions in power generation, industrial and wholesale segments, regaining significant market share, and capitalizing on organic growth in key European markets.
Refining throughputs are expected to decrease from the 2010 level. The Venice refinery will be affected the most due to Libyan oil supply difficulty, partially offset by higher volumes at Sannazzaro and Taranto refineries and the exercise of higher efficiency actions.
Outlook
With the expected strengthening of the global economic scenario along with production ramp up in the existing fields of Nigeria, Norway, Egypt, Angola and the United Kingdom, we believe that Eni offers ample long-term visibility into profitability in the coming quarters.
However, we are concerned about Eni’s refining business as its underlying fundamentals are still weak and political disturbances in the Middle East that could suppress production. Immense competition from peers such as Statoil ASA (STO) is also a threat to the company.
Our long-term Neutral recommendation remains unchanged at this stage. Eni currently holds a Zacks #4 Rank, which translates into a Sell rating.
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