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How Eni is facing the Arab revolutions March 16, 2011

Posted by mytruthaboutoil in Oil giants, Oil prices.
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The calling card of Italian oil and gas giant Eni has always been its diplomatic fluency – an ability to negotiate for exploration deals in parts of the world that have been closed off to American oil companies. Lately, however, what had been the greatest strength of Eni (ticker: E) has become a liability.

Eni has fully one-third of its production volumes generated in North Africa, including exposure to both Egypt and Libya. Protests against the Egyptian government which began in late January led to the forced resignation of Egyptian President Hosni Mubarak. And in Libya, a widespread revolt threatens to end the four-decade reign of Col. Moammar Gadhafi.

Libya – once an Italian colony – accounts for 14% of the Eni’s oil production.

It’s small wonder that the market sees risk in Eni shares.

Whereas shares of most major global energy producers have risen on the spike in energy prices in the past two weeks – Chevron (CVX), for instance, is up 8% since protests began in Libya – Eni’s shares have fallen 2%.

”The deteriorating situation in Libya is having two countervailing effects on energy stocks,” Morningstar wrote in a recent note.

First, producers with Libyan exposure are selling off, none worse than Eni. Second, the threat to production has boosted oil prices worldwide, sending Brent crude to over $115 a barrel, and West Texas Intermediate crude – commonly traded in the U.S. – to over $100 in recent trading.

But Eni’s stock selloff isn’t supported by the fundamentals, bulls say.

Morningstar, for instance, is still holding to its fair-value estimates on the company, despite the developments in Libya.

To be sure, the developments in Libya – especially the supply disruption that’s trimmed nearly half the country’s nearly 1.6 million barrels a day of output – are ”very relevant to the market,” said BofA Merrill Lynch Global Research in a recent report.

Libya is the 13th largest oil exporter in the world. It’s also a producer of the kind of light sweet blends that are easily refined into gasoline.

But investors who step up to buy Eni shares now will be getting a cheap stock: Its enterprise value to debt-adjusted cash flow – a common measure for oil stocks – is just 5.6 times for 2011. Compare that with Royal Dutch Shell at six times EV-to-DACF, or Exxon Mobil (XOM) at 8.2 times.

And they’ll be getting paid for the privilege: Eni is throwing off a dividend yield of 5.5% in 2011, easily the highest in the sector. Exxon is paying 2.3%, Chevron just 2.8%.

Fundamentally, Eni has been performing well. When it reported fourth-quarter results last month, the Italian oil giant posted adjusted income that came in 11% above consensus – ahead of its historical performance, which has seen it beat estimates by around 8% since the first quarter of 2005.

Its cash flow from its exploration and production operations, which represent about three-quarters of the company’s business, came in 8% above forecasts.

The company has several new ventures that analysts describe as intriguing – if sometimes seemingly risky. It recently landed a contract to develop Iraq’s Zubair oil field, and agreed to purchase Heritage Oil’s interest in Uganda oil assets.

Of course, investors in Eni shares aren’t trading on intriguing new projects. They are trading on worries about Libya. Those worries, however, have been overstated, at least in terms of Eni’s underperformance.

As has been the threat to Libya’s productions. For one thing, global monetary policy provides something of a cushion for any oil shocks.

Meanwhile, there’s little sign that Libya’s unrest threatens oil supply. While the chaos created by civil unrest has disrupted production briefly – nearly half of Libya’s 1.6 million barrels a day of production have been halted during the protests – the infrastructure itself remains intact. In fact, production at some of Libya’s key facilities in the eastern region of the nation resumed production this week.

While the outcome of Liby’s unrest remains uncertain, the fortunes of Eni appear more predictable.

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