Eni SpA’s (E) second quarter 2012 adjusted earnings from continuing operations of €0.38 per share (97 cents per American Depository Receipt [ADR]) remained flat year over year.
Operating results were adversely affected by higher consolidated tax rate from continuing operations (up about 4 percentage points). This was due to higher taxable profit earned by Eni’s exploration and production units, which was partially offset by higher oil and gas volumes.
Total revenue in the quarter jumped 24.6% to €30.10 billion ($38.62 billion) from the year-ago revenue of €24.12 billion ($34.70 billion).
Total liquids and gas production in the quarter was 1,647 thousand barrels of oil equivalent per day (MBoe/d), up 10.6% year over year, mainly attributable to ongoing recovery in Libya and development as well as commissioning of new fields in Australia, Egypt and Russia.
Liquids production in the quarter was 856 thousand barrels per day (MBbl/d), up 7.9% from the year-ago level of 793 MBbl/d. Natural gas production increased 12.7% to 4,394 million cubic feet per day (MMcf/d).
The company’s gas sales were 20.15 billion cubic meters (Bcm), down 4.0% year over year, reflecting weak demand as well as mounting pressure from competitors.
As of June 30, 2012, the company had cash and cash equivalents of €4.64 billion ($5.84 billion) and long-term debt (including current portions) of €28.01 billion ($35.22 billion). The debt-to-capitalization ratio was approximately 30.58%.
In the reported quarter, net cash generated by operating activities from continuing operations amounted to €4.22 billion ($5.3 billion). Capital expenditure totaled €3.02 billion ($3.87 billion).
Eni expects international oil prices to remain strong for 2012, which will be supported by robust demand growth from China and other emerging economies. However, a certain degree of ambiguity still looms with respect to the economic slowdown, particularly in the Euro-zone, and volatile market conditions.
The company expects its 2012 oil and natural gas production to be higher than the reported 2011 level of 1.58 million barrels of oil equivalent per day (MMBoe/d) given the ramp-up in activities in Libya in an effort to attain the pre-crisis level. The production ramp up in Libya is expected to be partially offset by project reorganization at major fields, the closure of the Elgin-Franklin platform off the British section of the North Sea and liquids losses in Nigeria.
Worldwide gas sales are expected to be at par with the 2011 level. Despite experiencing lackluster demand, management seeks to boost sales volumes and market share as well as maintain and develop its retail customer base in Italy. Outside Italy, the main growth drivers will be the key markets of France, Germany/Austria, Belgium and opportunities in the global liquefied natural gas market.
Refining throughputs are expected to be lower than the 2011 level. However, retail sales of refined products in Italy and the rest of Europe are expected to weaken due to the expected reduction in demand for domestic use of fuels.
With the expected strengthening of the global economy and production ramp-up in the existing fields of Libya, we believe that Eni offers ample long-term visibility into profitability over the coming quarters. Notably, new field start-ups at certain projects in Egypt are also expected to have a positive impact. Moreover, Eni SpA has agreed to divest 30% less one share in Snam SpA to state-controlled lender Cassa Depositi e Prestiti. This move will enable Eni to fund its major exploration and production expansion ventures.
However, we are concerned about Eni’s act of reorganizing projects at major fields, the closure of the Elgin-Franklin platform off the British section of the North Sea and liquids losses in Nigeria. Further, the weak natural gas scenario worldwide, arising out of continued oversupply and low demand will likely hurt the company’s as well as other natural gas companies like Chesapeake Energy Corporation’s (CHK) performance in the near term.
Eni currently holds a Zacks #3 Rank, which translates into a Hold rating. Our long-term Neutral recommendation on the company remains unchanged at this stage.
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