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Before going deeper into the Q3 expectations, it is important to report the latest company development. Plenitude, Eni’s (NYSE:E) subsidiary active in renewable energy generation, which is planning for IPO in 2023, is also aiming for inorganic growth. According to rumors, Eni is in advance negotiation with PLT Energia, an old acquaintance of Euronext (the Italian stock exchange), where it was delisted three years ago. PLT Energia’s installed capacity is close to 300 megawatts of wind farms in operation, with a planned capacity expansion in Italy and also in Spain.
The company is not only strengthening its renewable energy perimeter but is also announced the acquisition of two more gas fields in North Africa. This new acquisition has a strong rationale and further offsets the Russian gas European dependency. This transaction is subject to regulators’ approval; however, since 1981, Eni has been present in Algeria and we are forecasting an easy green light from the competent authorities.
Why are we positive?
Macroeconomic environment deterioration is disrupting two years of strong positive earnings revisions within the sector. Despite this, here at the Lab, we remain constructive for three reasons: 1) strong balance sheets as European oils have taken advantage of strong cash generation to strengthen their balance sheet, 2) resilient cash flows and capital discipline – we think the oil industry will continue to generate a 15% free cash flow in 2023 and 3) under-investment with lack of supply, assuming a structural decline in production in most non-OPEC countries and several OPEC countries.
Eni’s business is becoming increasingly high-yielding, driven by the successes of the exploration team, divestments, and a strong pipeline of start-up projects. Its variable dividend policy complemented by share buybacks is attractive to shareholders and offers an estimated return of around 13.5% in total in 2022.
As already mentioned, concerning the valuation, we know that the Italian oil player is undervalued versus its closest EU comps. This is not a new piece of news, it has always been. More specifics, the company has a higher dividend yield and is currently trading at a lower EV/EBITDA, FCF yield, and P/E ratio.
Our Q3 estimates and conclusion
Ahead of the three months accounts plan to report on the 28th of October, we have great expectations for Eni. We are forecasting an adj. EBIT at almost $4.9 billion compared to the $2.49 billion achieved in the same period last year. As for adj. net profit, our expectations set the numbers at $3.2 billion, more than twice versus the corresponding period of 2021. Growth will be driven by the best scenario for the oil price environment (Brent is up 36%), higher refining margins, and dollar strengthening. Looking at the P&L, we are including in our calculation a higher tax rate (including the extraordinary taxes of $340 million for the oil companies), $2.3 billion in CAPEX, the interim dividend payment of €0.22, buyback program (€1.5 billion) and the Saipem capital increase (€170 million). On a sequential basis, here at the Lab, we are reducing the peak reached in the second quarter of 2022 but we still expect strong growth on an annual basis in Eni’s main financial indicators. Finally, the net financial position should be around €11.5 billion.
Looking at the latest company disclosure on the buyback, Eni repurchased a total value of €147 million between the 10-14 of October. Since the start of the program, the company has bought nearly 130 million of its own shares (equal to 3.66% of its share capital), for a total amount of approximately €1.5 billion. We have always been pessimistic about Eni but it is now time to revert our sentiment. One of the greatest Eni advantages has always been its Exploration teams and this imbalance between oil demand & supply could be a key catalyst for the Italian oil player. Despite a discount in Eni’s dividend policy (and a country risk already priced in, the Italian Government is the principal company’s shareholder), Eni is trading at a P/E multiple of 3x versus the sector average of 7x. For the above reason, we increased our rating from neutral to buy with a target price of €16 per share.
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