Looking back on the year, 2017 should have been a fantastic year for Italian oil giant Eni (NYSE: E). Oil prices rose significantly throughout the year such that a barrel of Brent crude oil, the international benchmark price, now trades at $66. Also, the MSCI Italian Index rose 25%, an index of which Eni makes up 12%. These broader elements and some of the announcements the company made in 2017 should have made this stock incredibly attractive, but the company's shares only registered a 2.9% gain for the year.
Investors should have probably expected more this past year, so it's worth wondering if something went wrong at the company, or if perhaps investors aren't paying attention to what's going on. So, let's dig into Eni's poor stock performance to determine whether Wall Street is overlooking an opportunity.
Image source: Getty Images.
A much-improved outlook
There was a lot of unrealized promise for Eni heading into 2017. The company was sitting on two incredibly lucrative natural gas finds -- one off the coast of Mozambique, and the other in the Egyptian part of the Mediterranean Sea. Another element that was so intriguing about the situation was that Eni had abnormally high working interest in these fields; companies typically have equity partners to share the cost burden. Thus, the company had an opportunity to immediately monetize these assets by selling equity stakes for development cash and still realize the upside of these giant fields.
That is exactly what happened at the end of 2016 and throughout the year. All told, it netted more than $9 billion in proceeds from selling 40% of its Zohr project in Egypt to BP and Rosneft and 55% of its Mozambique project to PetroChina and ExxonMobil. After the sales, Eni retained a 60% stake in Zohr and 25% of Mozambique.
Image source: Eni investor presentation.
These deals were exactly what the company needed. By itself, Eni didn't have the cash flow or balance sheet strength to pull these projects off. It had already cut its dividend in 2015 to free up cash for capital spending, and it was extensively using a scrip dividend where investors get newly issued shares instead of cash. By getting partners for these projects, it got an injection of funds for its portion of the development -- and to accelerate the timetable.
On top of this success, the company had some other good news. It made a significant discovery on the Mexican side of the Gulf of Mexico that has potentially 1.4 billion barrels of oil in place. Also, the company's financials were decent as its upstream production more or less broke even, and its downstream and chemical assets performed quite well.