The Italian government announced January 20 that it plans to force Eni SpA (NYSE:E), Italy's largest oil and gas company, to sell its 52.5% ownership stake in gas distribution network Snam Rete Gas SpA. For years, competitors have accused Eni of using its ownership stake in the pipeline operator to keep prices high. New York-based asset manager Knight Vinke believes the sale of Eni's stake in SRG is a good move that will lower debt while placing greater emphasis on its utility operation, which is more easily valued. In the end, Knight Vinke believes Eni's true value is much higher.
Sum of the Parts
Knight Vinke divides Eni into five major segments with the two largest being exploration/production and gas/power. Valuing its upstream activities using debt adjusted cash flow (DACF), the asset manager suggests the assets are worth between about $79.4 billion and $97.1 billion, using the most recent currency exchange. This valuation puts its enterprise value to DACF multiple at 5.1 times its 2012 estimate, which is less than Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP), but slightly higher than both BP (NYSE:BP) and Chevron (NYSE:CVX). Let's split the difference, giving its upstream business a value of $88.3 billion.
Its gas and power business can be divided into five parts, with its 52.5% interest in SRG currently worth $29.3 billion on the Milan Stock Exchange. What price it is ultimately able to secure for the pipeline operator is tough to predict, given the state of the European economy. Knight Vinke attaches a value of $18.8 billion for the remaining four units, and a total of $48.1 billion for the gas and power operations in their entirety.
Of the remaining three segments, its oil services and engineering business carries the most value through its 43% interest in Saipem, which provides drilling and other services to oil and gas companies offshore and on. Again splitting the difference, the segment's value is roughly $18.3 billion.
Add everything together and the asset manager reckons Eni is worth somewhere between $100.1 billion and $123.3 million after subtracting $51.8 billion in debt. Its current market cap is approximately $82.6 billion, meaning it could be undervalued by as much as 33%.
Mozambique & Libya
In October 2011, Investopedia's Eric Fox detailed Eni's giant natural gas find offshore from Mozambique. The find is estimated to be anywhere from 15 trillion to 22.5 trillion cubic feet of gas. It is likely the largest operated discovery in its history. By 2018 and $50 billion later, it anticipates the Mamba South One prospect will lead to tremendous oil and gas development in the region, with much of the production destined for regional and international markets.
In Libya, Eni expects to restore its hydrocarbon output within 12 months. Prior to the war in Libya, Eni was producing 280,000 barrels a day of oil equivalent and had the largest foreign-owned operations in North Africa. Bernstein Research suggested in a report in late October that Eni's business will get even stronger as it brings more gas from Libya. Furthermore, given its exploration success in 2011, the sell-side research firm feels Eni is undervalued compared to its peers.
In Libya, Eni expects to restore its hydrocarbon output within 12 months. Prior to the war in Libya, Eni was producing 280,000 barrels a day of oil equivalent and had the largest foreign-owned operations in North Africa. Bernstein Research suggested in a report in late October that Eni's business will get even stronger as it brings more gas from Libya. Furthermore, given its exploration success in 2011, the sell-side research firm feels Eni is undervalued compared to its peers.
Share Price
Those unsure about making an investment in Eni should consider the history of its stock. Over the last seven years, it's traded below $40 for all of three month or less than 5% of the time. Since 2008, it's been relatively range bound above and below the $50 mark. In those three years, it's averaged a dividend yield of 4.6%. In the past 10 years, its total return on the upside has averaged 22.8% annually with seven years in the black.
On the downside, it averaged a loss of 14.1% annually in three losing years. However, when you consider that almost 70% of its losses were in 2008; a year in which the S&P 500 lost 37% compared to its own loss of 29%, you have to feel pretty confident about the future movement of its share price. At least I do.
On the downside, it averaged a loss of 14.1% annually in three losing years. However, when you consider that almost 70% of its losses were in 2008; a year in which the S&P 500 lost 37% compared to its own loss of 29%, you have to feel pretty confident about the future movement of its share price. At least I do.
The Bottom Line
Whether or not Eni is worth $55 or more is immaterial in my mind. What's important here is that you have an opportunity to buy into an international business with a good dividend and excellent potential for the future. The icing on the cake will come when investors realize the mispricing in its stock. Until then, enjoy the dividend and if it should happen to fall below $40, you should look to buy.
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