Italian oil major Eni , under new chief executive Claudio Descalzi, has been restructuring its loss-making downstream businesses, which has foundered since 2009 as European demand for refined products fell amid excess capacity, notes WSJ.
Despite the tumbling oil price, Eni’s results last week showed progress. Refining and marketing logged a rare quarter of profit. Eni’s gas and power business, where it has renegotiated loss-making supply contracts, narrowed operating losses sharply compared to a year before. Eni’s operating cash flow, before working capital changes, was €10.3 billion for the first nine months of the year, up 25%.
But Eni is still some way off living within its means. The company invested a total of about €8.9 billion in the first nine months, leaving it short of covering about €4.3 billion in dividends and share buybacks. While investors are pressing oil companies to cover their outgoings with operating cash flow, Eni uses assets sales to bridge the gap: Divestments brought in €3.2 billion.
This is partly by design. All oil majors shuffle their portfolios. But the Italian company, which has had substantial success in exploration, argues that its sales of stakes in its finds are almost operational in nature, rather than ad hoc.
That may be stretching it. Eni’s extraordinary good form in exploration continues: last week it announced a discovery in offshore Congo that might contain one billion barrels of oil equivalent. This gives the company a base of relatively low-cost options for growing production, but that represents a cash drain in the near term until projects are developed.
In the meantime, disposals have become harder: Chinese buyers have pulled back from bidding, according to bankers, even as the majors have put more assets up for sale.
The falling oil price will also hurt valuations, even if it may draw out opportunistic buyers. Meanwhile, given heightened focus on cost control, buyers are wary of big, complicated projects requiring billions in investment. Eni’s latest sale of a discovery was actually last year: it shed a 20% stake to China National Petroleum Corp. in its vast offshore gas holdings in Mozambique, where the Italian company is trying to sell another stake. More recently, it has sold non-core assets, like its stake in Portugal’s Galp ; it is considering selling its stake in oil services company Saipem.
A $20 fall in the oil price knocks roughly €2 billion off Eni’s annual cash flows. So if flogging assets is tougher, Eni will need more drastic restructuring of its downstream business, a politically-fraught process. Balancing the books will otherwise rest on raising production, the bulk of which isn’t likely to come before 2016.
Eni’s dividend yield of 6.7% looks attractive relative to its peers. Given the company’s reliance on the vagaries of the M&A market, though, investors should think of that as a lack-of-control premium.