MILAN: North African unrest is fuelling uncertainty about Eni’s strategy and production outlook as the Italian oil and gas company prepares to unveil its next four-year business plan.
Investors will take a close interest in the company, the biggest foreign operator in Libya which gets more than half its oil and gas from Africa and which is one of the fattest dividend yields among European oil majors.
Eni will present its 2011-2014 strategy to analysts on Thursday.
Royal Dutch Shell, which operates in many potential hot spots including Iraq, Oman, Egypt and Nigeria, will follow with its strategy presentation on March 15.
Eni’s production outlook is for growth of 2 percent a year to 2013 with Brent crude at $80 to 90 a barrel. In February it said it expected higher output in 2011, boosted by Iraq, Australia, Algeria and the United States.
Eni’s strategy of quickly developing oil and gas resources "could work but depends a lot on Africa — this now looks challenged given the unrest in North Africa," said Credit Suisse analyst Kim Fustier.
She estimates that output will fall by around 2 percent in 2011 because of unrest in Libya, where rebels are battling strongman Muammar Gaddafi.
Concern is rising that turmoil in Libya could spill over into other areas in Africa and the Middle East. Eni has key projects in Nigeria and Iraq where violence is increasing and oil infrastructure has been targeted.
"I wouldn’t like to be in the shoes of the Eni team that’s putting this plan together," said a fund manager in Milan.
ING analyst Jason Kenney said: "You don’t change your portfolio for a short-term coup and you have to go where the resources are. We saw expropriations in Venezuela and companies got burnt in Russia but they’re still doing business there."
But Kenney acknowledged Eni’s significant exposure to North Africa must be a cause of concern. "Libyan oil volumes are the most valuable barrels in the group’s portfolio," he said.
Libya accounts for almost 10 percent of Eni’s cash flow, a Milan-based analyst said.
"The production target is clearly at risk if the unrest goes on and if that happens they’ll have to cut the dividend. In any case the troubles remove potential upside to the 2011 dividend," he said.
Eni, one of Europe’s most highly geared oil companies, cut its dividend in 2009 after it breached a gearing ceiling. Its policy is to increase its dividend in line with inflation in the 34-nation Organization for Economic Cooperation and Development.
Eni’s results last year were undermined by its gas business as prices in its long-term take-or-pay gas contracts remained stubbornly higher than spot prices depressed by weak demand.
Before the North Africa crisis erupted Eni had succeeded in renegotiating its gas supply contracts with Libya. But that is now on hold given the suspension of Libyan flows.
What’s more, to offset lower gas flows from Libya, Italy has increased Russian gas imports. The fear is that Gazprom’s hand will now be strengthened in renegotiations with Eni as Italy, and Europe, once again rely on Russian gas.
According to Wood MacKenzie, most of Eni’s unbooked oil and gas resources are in West and North Africa.
"We think it is possible to sanction oily projects in West Africa… However accelerating gas production in North Africa could be a lot more difficult, especially given the current turmoil in Libya and Egypt," Credit Suisse’s Fustier said.
