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Eni Beats on Upstream Upshot

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Eni SpA’s (E - Free Report) fourth quarter 2012 adjusted earnings from continuing operations of $1.09 per American Depository Receipt/ADR (€0.42 per share) surpassed the Zacks Consensus Estimate of $1.06. The outperformance was mainly backed by solid operating performance from the Exploration & Production division and positive results out from the ongoing production recovery in Libya.

However, earnings decreased 6.0% from the year-earlier adjusted profit level of $1.16 per ADR (€0.43 per share). This was mainly due to an increased consolidated tax rate (up about 11 percentage points) owing to higher taxable profit earned by Eni in countries with higher taxation.

Total revenue in the quarter jumped 9.9% to €32.6 billion ($42.2 billion) from the year-ago revenue of €29.6 billion ($40.0 billion).

Operational Performance

Total liquids and gas production in the quarter was 1,738 thousand barrels of oil equivalent per day (MBoe/d), up 3.6% year over year, mainly attributable to the ongoing recovery in Libya and development as well as commissioning of new fields in Russia. Increased production in Iraq also aided the growth. However, the shut down of production in the United Kingdom, force majeure actions in Nigeria and mature field declines restricted the quarter’s production growth.

Liquids production was 912 thousand barrels per day (MBbl/d), up 1.8% from the year-ago level of 896 MBbl/d. Natural gas production increased 5.5% year over year to 4,584 million cubic feet per day (MMcf/d).

Gas sales were 25.08 billion cubic meters (Bcm), down 1.5% from the year-ago quarter, reflecting weak sales in the European markets.

In 2012, total oil and gas production was 1,692 MBoe/d, reflecting an increase of 7.0% from the year-ago level of 1,581 MBoe/d.

The Italian energy major made a record number of discoveries during 2012 and added resources of 3.64 billion barrels of oil equivalent (BBoe). At the end of 2012, Eni’s proved reserves were an eight-year record high at 7.17 BBoe and the organic reserve replacement ratio was 147%.


As of Dec 31, 2012, the company had cash and cash equivalents of €7.83 billion and long-term debt (including current portions) of €22.24 billion. The debt-to-capitalization ratio was approximately 26.2%.

In the reported quarter, net cash generated by operating activities from continuing operations amounted to €2.17 billion. Capital expenditure totaled €3.89 billion in the fourth quarter (up 15.0% year over year) and €12.76 billion (up 7.2%) for 2012.

Company Outlook

Eni believes that a certain degree of ambiguity still looms with respect to the economic slowdown, particularly in the Euro Zone, and volatile market conditions. It expects the condition to continue in the European gas, refining and marketing of fuels and chemicals sectors. Overall demand will likely remain weak due to the ongoing economic dormancy.

The company expects 2013 oil and natural gas production to be higher than the 2012 level given the commissioning of major projects like Kashagan in Kazakhstan, Angola liquefied natural gas and the gas assets in Algeria. This is expected to be accompanied with stepped up production at the fields commissioned last year.

Worldwide gas sales are expected to be at par with the 2012 level. Despite experiencing lackluster demand, management seeks to boost sales volumes and market share as well as maintain and develop its retail customer base.

For 2013, refining throughputs are expected to remain at the 2012 level of 30.01 million tons. However, retail volumes in the domestic market are expected to weaken due to the expected reduction in demand for the domestic use of fuels.

We believe Eni’s constant efforts to expand its upstream operations in Egypt, Vietnam, Indonesia, Pakistan and Kenya are expected to augment volumes going forward. Again, project start-ups, inputs from big ventures in Iraq, Australia, Russia and Egypt, as well as its strategic position in non-conventional gas are also expected to contribute to volume expansion.

Zacks Rank

Eni currently carries a Zacks Rank #4, which translates into a Sell rating. There are other stocks in the oil and gas industry that appear more attractive. These include Total SA (TOT - Free Report) , Penn Virginia Corporation and Breitburn Energy Partners L.P. that hold a Zacks Rank #2 (Buy) and are expected to perform better.

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