This is not the first time I write about Eni SpA (ADR) (NYSE:E), Italy’s energy champion. I have been positive in the name for a few years now and I have owned its debt since early 2012. Not surprisingly, its management, led by CEO Paolo Scaroni, is delivering great results. Some time ago, I did learn that happiness equals reality minus expectations. No matter how high my expectations were, I am a happy man when I think of my Eni debt positions. This is the reason why I am seriously considering to add the company to my equity portfolio if it goes below $45. Since August 2011 low, the stock is up by around 25% but I think there is more upside coming ahead. Let’s review what has been going on with Eni.
A great year for Eni
Most energy companies did have a terrible year in 2012 with flat or declining production and rising capital expenditure. This was not Eni’s case and, most importantly, good results have not been a result of good luck. They were a result of great management. Eni’s production was 7% higher than in 2011 (at 1.7 million barrels of oil equivalent a day), the company lowered its leverage ratio by half (to 25%) while the company reached to achieve a $25 billion operating profit. Those news belong to the past but there is more to come. 2013 shall be another relevant year for Eni and I expect the company to keep on growing production in new high margin areas (such as Russia and Iraq) while the consolidation process keeps on going at home. By mid 2013, E is set to receive the proceeds from the sale of a chunk of its stake in Snam (Italy’s gas distribution network). I expect most of those proceeds (over $4.5 billion) to be used in a new share buy back program that is set to be announced in the company’s March 2013 strategy update. In that strategy update I would also expect two other announcements: a 5% increase in Eni’s dividend per share and a further reduction in Eni’s stake in Galp, the Portuguese oil company. All those changes should keep on having positive effects on Eni’s results and, hence, in its share price.
Eni’s relative valuation is attractive
Having already bought some shares in BP plc (ADR) (NYSE:BP) I am now ready to buy E shares. Clearly the reasons are different. My British Petroleum investment is set to go well only if this company gets to close favorably its dispute with the US government over the Macodo spill while E is just a growth story where I would not expect sudden surprises. The only point in common is that both companies pay a respectable cash dividend yield. Eni, selling at $47.3, is paying a 5.88% yield while British (now selling at $42) pays 5.15%. On the valuation side, both companies trade at similar multiples. Eni trades at 2013 4.9x EV/EBITDAX and 9x P/E while British Petroleum also trades at 2013 4.9x EV/EBITDAX and 8.5x P/E. There is another European oil major that trades at a reasonable price: Royal Dutch Shell plc (ADR) (NYSE:RDS.A). After falling strongly in the last two weeks, Shell trades at 2013 4.6 EV/EBITDAX and 7.7x P/E. That said, and even if the company is a great free cash flow machine, it lacks Eni’s growing dividend yield or British’s upside potential.