On Sep 26, 2016, we issued an updated research report on Italy-based energy firm, Eni SpA (E - Analyst Report) .
Eni's upstream portfolio carries greater political risk than peers as it has the highest exposure to the Organization of the Petroleum Exporting Countries (OPEC) countries. Other risks faced by Eni include further disruptions in production and the inability to sell its non-core assets. We believe that any downtrend in the global economy will affect the supply-demand fundamentals of oil and gas, thereby hurting the sales prices for crude oil, natural gas and refined products.
For 2016–2019, Eni targets hydrocarbon production growth of more than 3% per year. We expect it to be difficult for the company to achieve its goal as it intends to cut upstream capital expenditure during this period by 18%.
According to OPEC, non-OPEC members will likely continue to produce more oil than expected during 2016 and 2017. Moreover, International Energy Agency (IEA) recently reported an anticipated decline in global oil demand for the same period. IEA also expects the oil market to remain oversupplied at least till the first half of 2017. Hence, the persistent weakness in crude prices amid an oversupplied commodity market might hurt the company’s upstream operations.
We are also concerned about the company’s new disposal program worth 7 billion euros. As crude continues to trade below $50, Eni is likely to struggle to sell oilfields at profitable prices. Eni’s exposure to production in the vulnerable and violence-prone regions in Nigeria poses additional risk.
However, all is not lost for the energy behemoth. Eni has entered into an agreement with the government of Montenegro to explore four offshore blocks in the country for 30 years. The deal reflects Eni’s intention to significantly strengthen its upstream portfolio. The company has been present in the country as a leading upstream player since the early 1960s. Additionally, we appreciate the company’s enhanced production from the Nooros field in Egypt. This is because the company has attained record output in just 13 months after its discovery. `
Moreover, we believe that Eni’s constant efforts to expand its upstream operations in Cyprus, Egypt, Vietnam, Indonesia, Pakistan and Kenya will go a long way in generating profitable growth in the future. Moreover, project start-ups, inputs from big projects in Algeria, Iraq, Australia, Russia as well as Egypt, along with its strategic position in non-conventional gas, are expected to augment volumes going forward. For 2016, volumes are expected to remain flat year over year.
Further, Eni’s strategic plan for 2016–2019 underscores its plans to invest mainly on high value projects with fast returns. The company also remains focused on the development of conventional projects.
Zacks Rank and Stocks to Consider
Eni currently carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Enbridge Inc. (ENB - Snapshot Report) , NGL Energy Partners LP (NGL - Snapshot Report) and Total SA (TOT - Analyst Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enbridge posted a positive earnings surprise of 19.57% in the preceding quarter.
NGL Energy Partners has a mixed earnings surprise history. The partnership posted positive earnings surprise in two of the last four quarters. It reported a positive earnings surprise of 1480.0% in the preceding quarter.
In the last reported quarter, Total SA delivered a positive earnings surprise of 20.00%. Coming to the earnings surprise history, Total beat estimates in all of the last four quarters.
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