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We reaffirmed our Neutral recommendation on Eni SpA (E - Analyst Report) on Jan 7, 2013, based on its increasing production volume. The ongoing recovery in Libya as well as development and commissioning of new fields are the key drivers of this volume growth.

However, the European gas market remains shrouded in uncertainty. Sluggish demand, supply glut and competitive pressures in Europe are expected to weigh on the stock.

Why Maintained?

The Italian oil major’s outlook for the upcoming months is favorable, given its 2012–2015 strategic plans to enhance production and implement steps to control costs and increase profitability. The company remains upbeat on its production growth target, expecting it to increase more than 3% annually, up from the previous 2% until 2021.  

Eni’s constant efforts to expand its upstream operations in Egypt, Vietnam, Indonesia, Pakistan, Kenya along with project start-ups, inputs from big projects in Iraq, Australia, Russia and Egypt, as well as its strategic position in non-conventional gas, are expected to augment volumes going forward. This is evident from the group's total liquids and gas production, which grew 16% year over year during the third quarter.

Eni’s recent deal with Anadarko Petroleum Corporation (APC - Analyst Report) for the development of natural gas reservoirs offshore Mozambique opens up a new market and will assist it to further explore the West Africa Transform Margin.

However, we are concerned about Eni’s act of reorganizing projects in major fields, the closure of the Elgin-Franklin platform off the British section of the North Sea and liquids loss in Nigeria. Eni's upstream portfolio also carries greater political risk than its peers, since it has the broadest exposure to the Organization of the Petroleum Exporting Countries (OPEC).  

Eni’s stock showed no momentum over the last 30 days for the fourth quarter of 2012 and for full-year 2012. The Zacks Consensus Estimates for the fourth quarter and the full-year 2012 is currently pegged at $1.06 and $5.19 per share, reflecting a year-over-year decrease of 6.2% and 3.1%, respectively.

Other Stocks to Consider

While we prefer to remain on the sidelines for Eni, there are other stocks in the sector that appear more attractive. These include Royal Dutch Shell plc and Total SA (TOT - Analyst Report).

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