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Eni to Invest $2B in Junin 5

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Italy’s Eni SpA (E - Free Report) and Venezuela's state oil company Petroleos de Venezuela, or PDVSA, entered into a $2 billion development plan for their joint venture in the Orinoco heavy oil belt, as well as an electricity generation plant.

The plan mainly calls for the development of the Junin 5 heavy oil block, located in the Faja of Orinoco. Junin 5 is operated by two companies –– PDVSA with 60% share and Eni the remaining 40% stake –– and has an estimated reserve potential of 35 billion barrels of certified oil. The project includes an early production phase of 75,000 barrels of oil per day starting in late 2013 and a full phase of 240,000 barrels a day in 2018. The plan also calls for construction of a refinery on the coast in Jose.

Under the agreement, Eni has agreed to finance PDVSA's share of development costs for Junín 5. In this context, Eni will extend up to $1.5 billion for the early production phase. The additional financing to PDVSA for a combined total of $500 million has been committed for a power station to be built in the Guiria peninsula.

The Italian company aims to invest $7 billion in Venezuela over the next seven years. Apart from the heavy oil project in Junin, Eni owns a 50% interest and operatorship in the offshore Perla field, and a 26% stake in the onshore Corocoro oil field. Perla has over 16 trillion cubic feet (Tcf) of estimated gas (2.9 billion barrels of oil equivalent).

Eni with its consolidated subsidiaries is engaged in oil and gas, electricity generation, petrochemicals, oilfield services and engineering industries. The company’s major business segments are Exploration and Production, Gas and Power, and Refining and Marketing. The company conducts major exploration and production activities for hydrocarbons in Italy, Croatia, North Africa, West Africa, the North Sea, the Gulf of Mexico, the Middle and Far East, the Caspian Sea, Australia and Latin America.

Although Eni has been experiencing a downswing in production volumes over the last few quarters, management is confident about its long-term upstream delivery potential as new fields are continuously coming online. In fact, the company expects the hydrocarbon production level to increase to more than the 2.05 million barrels of oil equivalent per day by 2014, an average annual increase of over 3% from 2011.

We are maintaining our Neutral rating on the stock and expect the company to perform in line with peers like Statoil ASA and the industry as a whole. However, the company retains a Zacks #4 Rank, which translates to a short-term Sell rating.

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