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Eni Asset Sales Hit Trouble Due to Oil Rout

Posted by December 3, 2014

Plans by Italian oil major Eni for major asset sales to help fund exploration and its dividend payments have hit problems due to diving oil and gas prices, sources say.

State-controlled Eni has already sold assets worth 5 billion euros to finance the generally more profitable business of finding oil and gas, while radically slimming down its troubled refining operations.

CEO Claudio Descalzi still needs to raise $7.4 billion under an 11 billion euro programme lasting until 2017. The firm has pinned its hopes on selling minority stakes in its Mozambique gas field, and non-core assets such as its 43 percent holding in oil services contractor Saipem.

But with Brent crude prices down by over a third since June and global gas by a half, finding buyers at the right price for both has become difficult.

A source with knowledge of the matter said Eni had been slow to realise that buyers of liquefied natural gas (LNGLF) (LNG) would no longer accept high prices linked to the value of oil, as they had before the current market rout.

With economic growth also slowing among major LNG customers, notably in Asia, potential top-tier investors have become reluctant to take on the risk of buying a stake in Eni's Mozambique LNG export project. "Given the downward oil and LNG price trends and slowing demand growth, this is not the best time to blow your brains out on Mozambique," the source said.

Global LNG demand is expected to double by around 2035 but prices for long-term supply contracts are falling from historic highs as new producers crowd the market and oil prices plunge.

Eni, which has one of the best oil and gas discovery rates among its peers, has a policy of selling minority stakes in its fields to raise funds for their development and finding new ones. It wants to sell a 10-15 percent stake in its giant Rovuma gas field in Mozambique after offloading 20 percent to China's CNPC last year for around $4 billion.

Eni is now in talks with China Huadian Corp., among others, two sources said, but these have dragged on for around a year with little sign of progress.

Eni may also sell stakes in fields in Congo and Indonesia to boost free cash flow. This could offset delays and spiralling costs in oil field projects such as Kashagan in Kazakhstan's zone of the Caspian Sea and Goliat off the northern coast of Norway.

But with global energy markets so weak, it may need to be patient. "At these kind of prices Eni won't get its disposals away so fast or at the value they wanted. Managing cash will be key," said Jason Kenney, oil analyst at Santander.

Divvying Up
OPEC's decision last week not to cut production to prop up prices has wiped billions off oil majors' value.

Eni shares have fallen 17.7 percent since Descalzi updated its business plan on July 31 - underperforming the European oil and gas index which has lost 14.7 percent - despite a stock buyback programme that began at the start of this year.

Such losses leave dividend payouts as the only solace for existing shareholders. Eni's 7 percent dividend yield is above the 5.6 percent average of its peers, but uncertainty is growing over whether it can keep up such a level.

"A slowdown in asset disposals (by Eni) would create a shortage of cash flow needed to cover part of the dividend and buyback," Mediobanca Securities said in a report in October.

Eni, which relies on high-risk African operations for over half its output, has estimated that every $1 fall in Brent equals a 100 million euro drop in free cash flow.

Tumbling prices have prompted energy companies to slow spending on exploration and production, hurting oil services groups. This is complicating Eni's efforts to sell its stake in Saipem, which said it may lose 1.25 billion euros in revenue in 2015 due to Russia's apparent cancellation of the South Stream gas pipeline project.

Selling Saipem would raise around 2 billion euros and wipe 5 billion euros of debt off Eni's balance sheet, giving it greater financial flexibility that could support dividends.

But a source close to the matter said the weakness of Saipem shares was a drag. They are worth just third of their 2013 value after two profit warnings, an over-stretched balance sheet and a series of setbacks including South Stream, with which Russia had hoped to bypass Ukraine in exporting gas to Europe.

"There was an offer from a Chinese operator, thrown out for strategic reasons, and a couple of others that fell short of the mark. Sovereign funds have expressed interest but the oil price has thrown a spanner in the works," the source said.

By Stephen Jewkes and Oleg Vukmanovic

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