Eni and Italy

Eni's credit rating shows shifting oil sands

02 August 2013 | By Kevin Allison 

 

Eni's levitating credit rating shows faith in Chief Executive Paolo Scaroni's ability to navigate thorny territory. When Standard & Poor's cut Italy's rating last month, it left the state-controlled oil company trading three notches above its sovereign for the first time. A-rated Eni may fall towards its BBB-rated government, but that would more likely be due to worries about Italy than Eni's footprint in seemingly risky places like Africa.

The Italian major's shares rose 3.3 percent on Aug. 1 despite a cut to annual production guidance, driven by supply disruptions in Libya and in Nigeria. Eni said it would review its Nigerian footprint after oil theft and flooding contributed to 30,000 barrels per day of lost production in the first half. Eni has also been dealing with trouble at its engineering subsidiary, Saipem, which is the subject of an Algerian bribery probe, and with political unrest in Egypt.

Africa accounted for more than half of Eni's petroleum output last year. The presence in tricky overseas territories is set to expand as it develops big new gas finds in Mozambique, explores the Russian Arctic with Rosneft, and benefits from the start of production at the giant Kashagan oil field in Kazakhstan.

If the financial community seems sanguine, it may be because Eni's frontier presence gives it a decent growth potential. The company now expects flat output this year, but still thinks it can increase production by 3-4 per year in the medium term - not bad considering some peers are investing tens of billions of dollars a year just to stand still. Some analysts question that target, but Eni has ample liquidity. A divestment drive helped cut its financial gearing from 46 percent in 2011 to 27 percent last year.

Eni is not immune to Italian ructions. The cost of insuring Eni's debt broadly tracks that of Italian sovereign credit-default swaps – although Eni's five-year CDS cost less than half what it takes to insure comparable Italian government bonds. If worries about Italy's weak economy and fractious governance worsen, Eni's rating could fall a notch. But it won't be because of its willingness to drill for oil in tough places.