One of Italy’s largest companies by market value, Eni (Milan: ENI, NYSE: E) is in the midst of a restructuring that will increase the company’s exposure to exploration and production.
Some of this effort stems from governmental fiat. The Italian Cabinet in May 2012 decreed that Eni must sell much of its 52.5 percent controlling stake in Snam (Milan: SRG), which owns and operates the nation’s largest natural gas storage and distribution network. Since taking office, Prime Minister Mario Monti’s government has focused on liberalizing the nation’s gas distribution network and freeing up Snam to invest in other European gas grids. EU regulators had criticized Eni for blocking access to some pipelines and preventing supply from flowing to areas with the highest prices.
Eni on June 15 finalized the sale of a 30 percent interest in Snam (minus one share) to Cassa Depositi e Prestiti (CDO), the postal savings bank in which the government owns a 70 percent stake. The integrated oil company will receive EUR3.43 (USD4.31) for each Snam share, which equates to EUR3.517 billion. Snam will also have to repay Eni more than EUR11 billion in debt after the split, as the Super Oil formerly raised cash to meet the distribution company’s financing needs.
During a conference call to discuss the transaction, Eni’s CEO confirmed that the company will divest its entire equity stake in Snam and noted that the firm had received a number of unsolicited inquiries from institutional investors. Reuters has reported that sovereign wealth funds from Abu Dhabi and Qatar had expressed interest in purchasing Eni’s remaining ownership stake, citing sources within the Super Oil.
The deal comes on the heels of a series of pipeline divestments to settle antitrust charges EU regulators had levied against the company and the sale of a 5 percent equity interest in Galp Energia (Lisbon: Galp), Portugal’s largest oil company, to Amorim Energia for EUR14.25 per share. Management has indicated that Eni had received unsolicited offers from financial institutions for another 18 percent to 20 percent stake in Galp Energia and expects a deal to close before year-end.
What are the implications of these divestments? Management estimates that the Snam sale would have reduced 2011 earnings before income and taxes by 12 percent but emphasized that the impact on free cash flow would be negligible. The move also enables the firm to allocate 60 percent of its budgeted capital expenditures to exploration and production, up from 50 percent in 2011.
With more than 60 major field developments expected to add about 700,000 barrels of oil equivalent production to Eni’s portfolio through 2015, management estimates that the firm’s hydrocarbon output will grow at an average annual rate of 3 percent over this period.
A series of impressive discoveries in 2011 also prompted Eni to increase its forecast for average annual production between 2015 and 2021 to 3 percent. Chief among these finds: An estimated 40 trillion cubic feet of natural gas in Area 4 of the Ravuma Basin offshore Mozambique, a block in which Eni owns a 70 percent ownership interest.
Over the next few years, management expects to invest about EUR400 million in additional well tests to further define the structure and generate a development plan that will start in 2018. This project will supply the local market and export natural gas in liquefied form. Other promising developments include two additional Yamal gas fields in Russia and the Kashagan play in Kazakhstan.
Eni’s long-term exploration plans include opportunities offshore west and east Africa, as well as a recent agreement with Rosneft (Moscow: ROSN) to explore for oil and gas in the Barents Sea and the Black Sea. Through a memorandum of understanding with China National Petroleum Corp, Eni is also evaluating shale oil and gas blocks on the Mainland.
The Italy-based energy giant’s gas and power segment (9.8 of 2011 revenue) has suffered from declining volumes because of reduced demand in Europe and price competition from liquefied natural gas. But Eni in recent years has renegotiated natural-gas supply contracts with major suppliers such as Libya’s national oil company, Sonatrach and Gazprom (Moscow: GAZP), moves that have helped to offset some of these challenges.
With the bulk of its revenue coming from exploration and production and a credible plan for output growth, Eni represents a solid bet for investors seeking growth and income. Management also recently reaffirmed the firm’s 2012 dividend and announced a share-buyback program.
However, investors should note that dividend growth may slow in coming years as the company shifts its focus to exploration and production. If you are prudent investor looking for high-dividend stocks with good growth potential, check out our free report on the top 5 companies that pay dividends.