Our Neutral recommendation for Eni SpA (E) remains unchanged despite management’s growing confidence on the company’s upstream delivery potential on the back of a continuous flow of new fields coming into its board with solid strategic rationale. While Eni is looking cheap relative to its European peers and the underlying value of its assets, we continue to see better opportunities elsewhere in the sector.
However, Eni is gaining traction with the favorable outlook on its exploration and production (E&P) business segment, as was confirmed by its third quarter results. Eni is showing encouraging signs of improvement in the E&P segment. Though production volumes were flat in the third quarter, an improved margin scenario was noticed.
While the E&P segment is promising, we are cautious about the uncertainty associated with the group’s domestic gas business, as regulators continue to take an active interest in the company and the relative profitability of segments across the gas chain. Immense competition from peers such as Statoil ASA (STO) and Gazprom NEFT (GZPFY) is a threat to the company.
Third quarter profitability showed some weakness due to continued pressure on domestic markets, but the long-term fundamentals of the Gas & Power division is favorable due to the company’s initiatives toward international expansion. This will enable Eni to offset margin squeeze in the domestic business.
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