EUR 850.00 For Business Accounts Only

Morningstar | Eni Reports Strong Third Quarter as Improvement Efforts Take Hold

Eni continued its turnaround in the third quarter, growing earnings to EUR 1.4 billion from EUR 229 million the year before. The upstream segment contributed the bulk of the increase thanks to higher oil and gas prices as production growth stagnated during the quarter. A near 50% increase in realized prices offset flat production growth to increase earnings to EUR 1.4 billion from EUR 441 million a year ago. Although flat for the quarter, production has grown 3% year to date. Citing the negative impact on gas production in certain countries from exogenous factors, Eni did reduce its full-year production growth guidance to 3% from 4% but noted it would result in only a negligible effect on cash flow.

The gas and power segment proved a key element of the turnaround as restructuring efforts and growth in the LNG business take hold. Net profit swung to a EUR 30 million gain compared with a loss of 139 million last year, in what is typically a seasonally weak quarter. With prior guidance of full-year operating profit of EUR 400 million already achieved, management increased guidance to EUR 550 million. Refining and chemicals proved to be a weak spot with adjusted earnings falling to EUR 57 million from EUR 242 million a year ago as margins narrowed during the quarter and maintenance activity reduced volumes. Management, however, confirmed progress on reducing the breakeven refining margin and the target of $3/bbl for first-half 2019.

Importantly, cash flow nearly doubled to EUR 4.1 billion from EUR 2.2 billion a year ago against an only slight increase in capital spending. Capital spending guidance of EUR 7 billion remains unchanged.

We plan to incorporate the updated production and gas and power earnings guidance into our forecast but do not anticipate a change to our fair value estimate or moat rating. Overall, the results demonstrate Eni is hitting the marks in its turnaround plan and critically, growing cash flow while holding the line on capital spending.

Shares are slightly undervalued in our view, but we see more opportunity elsewhere in the sector.

For more on our integrated oil outlook, see our Sept. 4 report: "Integrated Oils: A Free Cash Flow Story."