Libya turmoil looms over Eni as shares slump
With 12% of the company's output coming from Libya, shares in Eni slumped. But the outlook for Italy's national champion is not as bad as it seems
In a case of terrible timing, Eni unveiled its 2011-14 strategic plan just as it was declared that one of its crucial producing countries, Libya, had descended into civil war.
Despite the difficult backdrop, the Italian firm's headline March announcement was an optimistic forecast, pegging annual production growth at over 3% in the 2011-2014 period, higher than the 2.5% envisaged under the 2010-13 plan. Eni now predicts output will hit more than 2.05m barrels of oil equivalent a day (boe/d) in 2014, markedly up from 1.81m boe/d last year.
The increase will be achieved through investment of €53.3bn ($74.3bn) over the period, with 70% of that to be spent upstream. "About 80% of the production due to come on stream over the plan period will be from big projects, in particular from Venezuela, Russia, the Arctic region and Angola," said chief executive Paolo Scaroni.
Scaroni was forced to address the issue of Eni's operations in Libya – accounting for 12% of the company's total production – which were being shut in as civil war engulfed the North African country. "The suspension of some of our output in Libya, if it remains temporary, will not significantly affect the production-growth target," Scaroni said. "Investments planned in Libya over the period are limited; no big projects are expected to start-up in the next four years."
The key word, of course, is temporary; Scaroni admitted that if Libyan output is interrupted by more than a few months, Eni's production targets would suffer. Sharing that concern, investors sold down Eni's shares by another 1% to close at €17.59 – the stock has fallen by almost 6% since unrest in Libya began in mid-February.
On the same day as the strategic plan was launched, ratings agency Standard & Poor's (S&P) said Eni is one of the companies most exposed to the volatile North Africa region, with over 30% of its production coming from Libya, Egypt and Algeria – all of which have experienced civil unrest since the start of the year. "Two-thirds of Libya's oil and gas production may be affected," S&P said.
But many analysts believe the sell-off of Eni's stock has been overdone and agree with the company's view that while the political situation in North Africa and the Middle East is volatile, such volatility is part and parcel of the oil business – resources are often in unstable countries and regions.
Kim Fustier of Credit Suisse laid out several reasons why the problems in Libya might not prove as damaging as Eni's share-price slump would suggest. The investment bank says that although 12% of the firm's production (243,000 boe/d in 2010, around 50:50 oil and gas) is significant, Libya's high taxes translate into low cash flow per barrel. "We estimate Libya will contribute only about 4% of Eni's cash flow in 2011," she wrote.
Credit Suisse added that even if the worst came to pass and Eni was forced to write off its entire cash-flow contribution from Libya and Algeria, it would still break even on a cash basis after dividends. But few believe outright nationalisation of assets is a likely outcome from the unrest in Libya – the country is too dependent on export revenues from oil and gas, and on foreign companies to produce them.
The violence in Libya has also masked good news elsewhere for Eni. On the day the strategic plan was announced, Mærsk Oil confirmed as significant the Culzean structure in the UK North Sea, in which Eni holds a 16.95% interest. "Production tests show Culzean has the potential to be one of the most promising [high-pressure, high-temperature] discoveries in the UK sector in recent years," said Mærsk.
Two weeks earlier, Eni announced the successful Perla-4 appraisal well in the Cardon IV Block offshore Venezuela. It said the well confirmed La Perla as "a super-giant gas discovery", upgrading estimates of reserves in place to nearly 0.5 trillion cubic metres (cm). Eni and Spain's Repsol each have a 50% stake in the block, although these will drop to 32.5% if, as expected, state-owned PdV exercises its right to take a 35% stake during the development phase.
Eni is also sounding more upbeat about its gas business, which, because it has an above-average exposure to the market, was the main drag on the company's results in 2010. Last year, gas sales fell by 6.4% from 2009, even as net profit for the year increased by 44.7% to €6.32bn. "Eni's profits were mainly a function of external factors including currency fluctuations and high oil prices; gas and power operations were disappointing," said IHS Global Insight.
Gas business under pressure
The gas business and prices have been hit by a variety of factors, such as increased domestic market competition – anti-monopoly regulations require Eni to limit its hold on Italian gas markets; oversupply arising from the start up of the Adriatic LNG (liquefied natural gas) import terminal; and subdued economic recovery, limiting demand. But Eni expects the gloom to lift: "Growth in European consumption, as well as a rapid rise in demand from emerging markets ... will absorb the oversupply in Europe," it claimed.
Perhaps putting most pressure on Eni's domestic gas revenues were prices for long-term take-or-pay contracts, which remained persistently higher in 2010 than prices in the spot market, which had been hammered down by weak demand. But the company has been making progress, renegotiating its supply contracts with Libya before the crisis erupted – although imports through the Greenstream pipeline were suspended at the end of February.
Eni could, paradoxically, benefit from the cut-off in Libyan exports, argues Thierry Bros, Société Générale's senior European gas analyst. He estimates that under its take-or-pay obligation to Gazprom, Eni would have paid for about 5bn cm of undelivered Russian gas this year because of the availability of cheaper spot LNG imports. But "if the closure [of Greenstream] lasts for six months, Eni could avoid having to honour any Russian take-or-pay obligations in 2011," he said.
For investors, events in North Africa will continue to place a degree of uncertainty on Eni's business. But perhaps the biggest imponderable in the medium term will come from closer to home. In February, the European Commission sent a warning to the Italian government that it must modify, within the next two months, the law that grants the state special powers in certain companies in which it holds a stake, including Eni (54.25%).
The Commission said it could send the case to the European Court of Justice if Italy does not bring its laws in line with EU rules, which consider such "golden shares" as restricting the free movement of capital within the bloc.