KKR Investment Fuels Growth While Transformations And CCS Initiatives Boost Long-term Earnings Potential

Key Takeaways

• Strategic investments and partnerships will drive growth, enhance production, and improve revenue streams while confirming value creation.
  
• Restructuring and carbon capture initiatives aim to transform profitability and enhance long-term financial stability.
  
• Volatile energy markets and high tax burdens could limit Eni's revenue and earnings growth, with delays in transformation plans and uncertainties in new projects.

Catalysts

Operates as an integrated energy company worldwide.

• The investment by KKR into Enilive for a 25% stake is expected to support Eni's growth strategy, bringing new capital and confirming value creation, which should positively impact future revenue streams.
  
• Eni's upstream projects like Argo Cassiopea, Johan Castberg, and Baleine Phase 2, as well as developments in Indonesia, are expected to contribute to reaching production targets and enhancing earnings.
  
• The restructuring and transformation of Versalis, focusing on high-value downstream portfolio and circular economy initiatives, are expected to turn the currently loss-making segment profitable by 2027, improving net margins.
  
• With significant cash flow from operations and a strategic commitment to shareholder returns via increased share buybacks, Eni is poised to enhance its earnings per share (EPS).
  
• Eni's CCS initiatives, including agreements for government funding and new CO2 injection projects, are expected to build attractive future revenue streams and cash flows, enhancing long-term financial stability.

Eni Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eni's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 5.5% in 3 years time.
• Analysts expect earnings to reach €5.6 billion (and earnings per share of €1.89) by about November 2027, up from €2.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €6.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2027 earnings, down from 18.0x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 1.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.67%, as per the Simply Wall St company report.

Eni Future Earnings Per Share Growth

Risks

• Energy markets remain volatile and unpredictable, driven by factors such as geopolitics and speculative trading flows, which could negatively impact Eni's revenue and earnings.
  
• The petrochemical segment has been loss-making and is facing a challenging market outlook in Europe, with the transformation plan expected to improve EBIT only by 2027 and free cash flow breakeven by 2028, affecting overall earnings.
  
• There is an assumption of sustained improvement in execution and value from the portfolio which, if unmet, could result in lower revenue and earnings growth.
  
• The CCUS and biogas satellite plans, while having potential, face delays and uncertainties which might impact the projected cash inflows and eventual revenues.
  
• Continued high tax burdens, such as the 51% effective tax rate in Q3 due to oil price and earnings mix, could limit net margins and earnings growth if not correctly mitigated.

Valuation

• The analysts have a consensus price target of €16.5 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 €18.5, and the most bearish reporting a price target of just €13.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €103.3 billion, earnings will come to €5.6 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of €14.09, the analyst's price target of €16.5 is 14.6% 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.