EUR 850.00 For Business Accounts Only

Morningstar | New Morningstar Analyst Report for Eni SpA

Recent years have been unkind to Eni shareholders. Oil-price declines and 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. Thanks to a recent period of exploration success, the company is now entering a period of steady production growth. Management is targeting production CAGR of 3.5% that should extend to 2025, which compares favorably to peers. Furthermore, the attractive economics of those projects (break-even below $25, according to the company), combined with cost-cutting that will further reduce peer-leading operating costs, should lift returns and cash flow during the next five years. The downstream business has destroyed the most shareholder value with repeated losses, until recently when European refining conditions improved. We expect steadier performance going forward, but even if conditions deteriorate, Eni’s restructuring, cost-cutting efforts, and addition of low-cost Middle East refining capacity should steadily reduce the segment's break-even margin during the next five years and keep it profitable and generating cash flow, which would be a significant improvement. Relatively high distillate yields also leave it well positioned to capitalize on IMO 2020. The gas and power segment previously suffered from unfavorable gas supply contracts that resulted in losses in three out of five years from 2013 to 2017. However, management has orchestrated a turnaround that culminated in strong profits last year. Though the strategic value of owning this business (outside of the LNG trading business) is questionable, divestiture is unlikely. That said, we expect continued improvement and growth that will provide an uplift to earnings and returns.