Johan Castberg And Renewable Fuels Will Open New Markets

Key Takeaways

• Eni's focus on upstream projects and transitions into renewable energy is set to enhance production capacity and diversify revenue streams.
  
• Strategic divestments and cost optimizations are strengthening Eni's balance sheet, supporting financial stability and potential earnings growth.
  
• Volatile macro conditions and geopolitical risks threaten Eni's profitability, with challenges in biofuel margins, refining losses, and dependency on successful divestments.

Catalysts

Operates as an integrated energy company in Italy, Other European Union, Rest of Europe, the United States, Asia, Africa, and internationally.

• Eni's robust portfolio of upstream projects, including major start-ups like Johan Castberg, Balder X, and Congo LNG Phase 2, along with strategic moves in Angola and Norway, indicates expected growth in production capacity, potentially boosting future revenue streams.
  
• Transition initiatives, such as Plenitude's expansion in renewable energy and Enilive's sustainable aviation fuel production, are pivotal in diversifying Eni's operations and enhancing net margins due to higher value transition business portfolios.
  
• Eni's strategic divestments and external investments in transition businesses, evidenced by significant cash inflows from selling stakes in Enilive and Plenitude, exhibit an ability to strengthen the balance sheet and maintain shareholder returns, thereby supporting earnings growth.
  
• The company's structural cost optimization initiatives and CapEx rescheduling are expected to enhance free cash flow and reduce financial risks, directly impacting net margins and financial stability.
  
• Eni's strong balance sheet and reduced leverage position it to capitalize on market volatility, allowing flexibility in capital allocation, potentially leading to strategic share buybacks, which may positively impact earnings per share (EPS).

Eni Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eni's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 5.8% in 3 years time.
• Analysts expect earnings to reach €5.3 billion (and earnings per share of €1.78) by about May 2028, up from €2.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €6.2 billion in earnings, and the most bearish expecting €3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 15.2x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 4.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.8%, as per the Simply Wall St company report.

Eni Future Earnings Per Share Growth

Risks

• The macro scenario has deteriorated and remains volatile and uncertain, posing a risk to Eni's revenue and ability to maintain profitability.
  
• Enilive's biofuel margins have deteriorated year-on-year due to an oversupply in the market, which could negatively impact net margins.
  
• Eni's refining and chemical sectors are currently loss-making, which could continue to affect earnings unless there's a significant improvement in market conditions.
  
• Eni faces geopolitical risk in regions such as Kazakhstan that could impact production levels and, consequently, revenue.
  
• Dependence on successful divestments and negotiations, such as with Vitol in West Africa, poses a risk if market conditions change or negotiations fall through, potentially impacting cash flow and earnings.

Valuation

• The analysts have a consensus price target of €15.085 for Eni based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €18.0, and the most bearish reporting a price target of just €11.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €90.3 billion, earnings will come to €5.3 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 11.8%.
  
• Given the current share price of €12.7, the analyst price target of €15.08 is 15.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.