Eni SpA’s (E) adjusted third quarter 2011 earnings per ADR of $1.41 (€0.50 per share) were well above the Zacks Consensus Estimate of $1.16. The quarter’s earnings were up 18.5% from $1.19 per ADR (€0.46 per share) earned in the year-earlier quarter.
Total revenue jumped 15% to €26.11 billion ($36.96 billion) in the quarter from the year-ago revenue of €22.70 billion ($29.28 billion).
The quarter’s performance was buoyed by an improved operating performance from the Exploration & Production driven by a strong oil price environment, Engineering & Construction and Refining & Marketing Divisions. However, the positives were partially mitigated by weak trends in Eni’s downstream gas business and petrochemicals.
Operational Performance
Total liquids and gas production in the quarter was 1,473 thousand barrels of oil equivalent per day (MBoe/d), down more than 13% year over year, mainly due to the interruption of operations at several Libyan fields and the termination of the GreenStream pipeline activity because of the political turmoil.
Liquids production in the quarter was 793 thousand barrels per day (MBbl/d), down 16.4% from the year-ago level of 948 MBbl/d. Natural gas production declined more than 10% to 3,773 million cubic feet per day (MMcf/d), reflecting less output from Libya, lower entitlements in the company’s production sharing contracts and lower performance in Angola and Congo.
The company’s gas sales were 17.96 billion cubic meters (Bcm), down more than 3% year over year, due to sharply lower off-takes by importers to Italy and lower marketed volumes on the domestic market.
Financials
As of September 30, 2011, the company had cash and cash equivalents of €1.54 billion ($2.09 billion) and long-term debt (including current portions) of €24.63 billion ($33.49 billion). The debt-to-capitalization ratio was approximately 29.9%.
In the reported quarter, net cash generated by operating activities amounted to €2.61 billion ($3.69 billion). Capital expenditure totaled €2.93 billion ($4.15 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 by its assets located in other parts of the globe.
Assuming an addition from the resumption of Libyan activities in the fourth quarter of 2011 compared to the plateau recorded in the third quarter, 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.
The European gas market of the company is expected to remain weak in the backdrop of sluggish demand growth, abundant supplies and ongoing competitive pressures.
Worldwide gas sales 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 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. Notably, the Italian energy major has also resumed oil production in Libya at the end of the third quarter. The company had temporarily abandoned all operations in its North African facility because of a civil war.
Recently, Eni said the gas discovery off the coast of Mozambique is 50% greater than previous announced. Hence, it now expects a total of 22.5 trillion cubic feet (Tcf) of gas in Mamba South 1, Area 4, due to the discovery of a new pool versus the prior expectation of 15 Tcf. We expect this latest discovery to hold significant value for the company, making Mozambique an essential regional liquefied natural gas producer.
However, we are concerned about Eni’s refining business as its underlying fundamentals are still weak following the 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. Eni currently holds a Zacks #4 Rank, which translates into a Sell rating.
Our long-term Neutral recommendation on the company remains unchanged at this stage.
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