EUR 850.00 For Business Accounts Only

Morningstar | E Updated Forecasts and Estimates from 23 Apr 2019

Eni reported adjusted net profits of EUR 1.46 billion in the fourth quarter and EUR 4.6 billion for the full year, increases of 55% and 93%, respectively, compared with the comparable 2017 periods. Net operating profit amounted to EUR 10 billion and organic free cash flow rose to EUR 6.5 billion. The latter allowed Eni to cover the EUR 3 billion dividend and reduce net debt from EUR 10.9 billion in 2017 to EUR 8.3 billion in 2018, reducing leverage from 23% to 16% over the same period, and increase the annual cash dividend to EUR 0.83 per share from EUR 0.80. Assuming oil prices of $60 per barrel, we expect Eni will generate free cash flow of about EUR 7.5 billion over the next three years, sufficient to cover its capital spending and dividend. Our fair value estimate and moat rating are unchanged. The shares continue to trade at a discount as the market is not fully valuing the improvement in free cash flow, in our view.

Higher realizations and production growth of 2% year over year in 2018 (despite a 1% fall in production in the fourth quarter) led to improved operating performance in the upstream segment, where net adjusted operating profit rose from EUR 2.7 billion to EUR 5 billion for the year, an 80% year-over-year improvement. During the fourth quarter, net adjusted profit amounted to EUR 1.6 billion, a rise of nearly 42% compared with the fourth quarter of 2017. For the year, Eni replaced 124% of reserves from all sources, increasing reserve life from 10.5 years in 2017 to just over 10.6 years in 2018.

The gas and power segment more than quintupled its net adjusted operating profit, currently standing at EUR 306 million compared with EUR 52 million in 2017. The surge in operating performance is largely due to the restructuring of long-term gas supply contracts, liquefied natural gas growth, and optimization efforts that are now bearing fruit.

The refining and chemical segments were a drag on results during the year. The chemical segment contended with higher operating costs due to oil-based feedstock price increases and a sharp decline in polyethylene prices during the fourth quarter, resulting in a full-year loss of EUR 10 million. The refining and marketing segment suffered from a fall in adjusted operating earnings from EUR 531 million in 2017 to EUR 390 million due to a 26% decline in refining margins compared with 2017 and downtime due to prolonged maintenance activities. These negative trends were slightly mitigated by plant and supply optimizations and increased green throughput. The overall refining margin fell from approximately EUR 5 per barrel in 2017 to EUR 3.70 per barrel in 2018.

During the year, Eni achieved a $3/bbl break-even level for its refining segment, improving its competitive position. Furthermore, it signed an agreement with ADNOC for the acquisition of a 20% stake in ADNOC Refining, situated in Ruwais and Abu Dhabi, for $3.3 billion (net of acquired debt) to enhance Eni’s resilience in the refining sector by halving the break-even refining margin to $1.50 per barrel and expanding its footprint outside Europe.