Eni to Quit India Hydrocarbon Biz

Italian energy behemoth Eni SpA ( E - Analyst Report ) plans to depart its oil and gas business in India, according to industry insiders. Difficulty in obtaining regulatory approvals for the related blocks prompted Eni to take this move. The company is now in talks with state-owned oil company Oil and Natural Gas Corp. Ltd (“ONGC”) for its exit.

In India, Eni holds interest in three blocks through its Indian affiliate, Eni India. The company holds a 40% operational stake in the AN-DWN-2003/2 block in the Andaman and Nicobar Islands region, while ONGC and GAIL (India) Ltd own 45% and 15% interests, respectively. The company has a participating interest of 34% in ONGC operated Mahanadi block MN-DWN-2002/1 and operates the Rajasthan block RJ-ONN-2003/1 with a 34% stake. ONGC and Cairn India Ltd possess 36% and 30% shares, respectively, in the Rajasthan block.

Following the purchase of Burren Energy Plc back in 2008, Eni also holds its position in the sector through Hindustan Oil Exploration Co., Ltd. with a 47.16% share.

However, Eni India surrendered its Rajasthan block recently as one-third of it is under a protected area classified as a desert forest. Again, in 2010, the Indian government considered postponement of the contractual commitments of Eni with regard to its Andaman and Nicobar Islands block. This was mainly on account of the block’s proximity to the rocket stage impact zone of the Indian Space Research Organization. Eni was thus unable to attain the required drilling consent from the department of space.

Although the Italian giant aims to exit its Indian oil and gas business, constant efforts to expand its upstream operations and endeavors in the Barents Sea, Angola, Indonesia and Australia will go a long way in generating profitable growth in the future.

The company expects its 2012 oil and natural gas production to be in line with the reported 2011 level of 1.58 million barrels of oil equivalent per day (MMBoe/d) on the ramp-up of activities in Libya, in an effort to attain the pre-crisis level.

The production in Libya is expected to be fully operational by the latter half of 2012. The start-up of new fields in Algeria and offshore Angola and the gas joint development in Siberia will also fuel growth.

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 - Analyst Report ) is also a threat to the company.

Eni currently holds a Zacks #3 Rank, which translates into a Hold rating. Our long-term Neutral recommendation on the company remains unchanged at this stage.