EUR 850.00 For Business Accounts Only

Morningstar | Eni's worst looks to be behind it as earnings, returns, and cash flow are set to improve.

Recent years have been unkind to Eni shareholders. In addition to a decline in oil prices, disruptions in key producing areas have taken a toll on an otherwise low-cost, high-return upstream business. Meanwhile, poor results from its downstream and gas and power business have further weighed on returns. We think the worst is behind it, with performance across all three of its key segments set to improve, lifting returns from recently depressed levels. Eni has differentiated itself from peers with an ability to consistently find and develop new reserves at low costs, especially in regions such as Africa and the Far East. The flip side to Eni’s low-cost assets, however, is greater exposure to geopolitical risks, which manifest most notably in production shutdowns in Libya. We don’t expect a meaningful change in Eni’s risk levels in the near future, with new project startups concentrated in areas with heightened political risk, such as Egypt. However, the attractive economics of those projects (break-even below $30), combined with cost-cutting that will further reduce peer-leading operating costs, should lift returns and margins during the next five years. Results in Eni’s other segments have been far worse. The downstream business has destroyed the most shareholder value with repeated losses as European refining conditions have deteriorated. We don’t expect the segment to meaningfully contribute to earnings, but we do expect Eni’s restructuring and cost-cutting efforts to keep the segment marginally profitable and generating cash flow, which would be a significant improvement relative to the recent past. Relatively high distillate yields also leave it well positioned to capitalize on IMO 2020. A turnaround is also expected to occur in the gas and power segment, where unfavorable gas supply contracts have resulted in losses in two of the past three years. Though the strategic value of owning this business (outside of the LNG trading business) is questionable, divestiture is unlikely. However, earnings turned positive last year, and we assume they will continue to grow and hit management’s 2021 EBIT target, providing a meaningful uplift to earnings and returns.