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Eni's Constant Efforts to Upgrade Portfolio Hold Promise

On May 16, 2016, we issued an updated research report on Italy-based Eni SpA E.

We believe that Eni’s constant efforts to expand its upstream operations in Cyprus, Egypt, Vietnam, Indonesia, Pakistan and Kenya will go a long way in generating profitable growth in the future. Moreover, project start-ups, inputs from big projects in Algeria, Iraq, Australia, Russia as well as Egypt along with its strategic position in non-conventional gas, are expected to augment volumes going forward. For 2016, volumes are expected to remain flat year over year.

The renegotiation of long-term gas contracts and cost cuts in logistics helped Eni’s Gas and Power (G&P) business to report almost breakeven results in 2015. The new plan will further boost profits through increased focus on earlier initiatives as well as growth of the retail customer base by 20%. Per the new plan, the cumulative cash flow from operations in 2016–2019 will amount to 2.8 billion euros and earnings before interest and tax (EBIT) of 900 million euros in 2019. The structural breakeven for G&P is expected in 2017.

Per Eni’s strategic plan for 2016–2019, the company plans to invest mainly on high value projects with fast returns and on the development of conventional projects. Capital expenditure is estimated at about 37 billion euros, down 21% from the previous plan. This shows the efficiency of the company’s operations and would be highly beneficial amid the ongoing commodity price volatility.
 
However, Eni believes that a certain degree of ambiguity still looms with respect to the economic slowdown, in particular in the Eurozone. The European gas, refining and marketing, and chemicals sectors also remain highly volatile. Overall demand will likely remain weak due to the ongoing economic dormancy. Eni believes that the Gas & Power division is likely to remain stressed due to considerable competition and saturation in the Italian market.

The divestment of Eni’s assets in Germany and unusual weather conditions similar to the ones encountered in 2015 might lead to minor adversities in 2016. The company also came out with its four-year plan for 2016–19, which anticipates a fall in capital expenditure. These are likely to affect the company’s profitability going forward.

Further, Eni expects 2016 oil and natural gas production to remain flat year over year. The production in the Val d’Agri district will remain suspended till the end of the year and the decline of mature fields will also contribute to the deterioration. This is likely to be offset by new field start-ups and ramp-up of fields.

Currently, Eni carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the oil and gas sector include CVR Refining, LP CVRR, Transocean Partners LLC RIGP and Braskem S.A. BAK. All these sport a Zacks Rank #1 (Strong Buy).

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TRANSOCEAN PTN (RIGP): Free Stock Analysis Report
 
ENI SPA-ADR (E): Free Stock Analysis Report
 
BRASKEM SA (BAK): Free Stock Analysis Report
 
CVR REFINING LP (CVRR): Free Stock Analysis Report
 
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