Eni in the front row as crude oil rises and a flurry of analyst upgrades

(Il Sole 24 Ore Radiocor) - The Eni in Piazza Affari (FTSE MIB). The resumption of the oil price rally, back above USD 100 (Brent +5.5 per cent to USD 107.79, Wti to USD 106.23, +6.1 per cent) pushed the entire oil comparo with Tenaris marking, Snam Rete Gas and Saipem). But the six-legged dog's stock benefits in particular from the decision of a number of analysts to raise the target price.

JP Morgan raises its target price to EUR 28, from the previous EUR 25; Berenberg raises its target price to EUR 22 from EUR 17.50. City also raises its target price to EUR 24 from EUR 20.5 and in detail the investment house, in a very substantial report, explains that "our investment rating on Eni is Neutral. This rating reflects a balance between above-average growth ambitions for the sector and, in our view, execution capacity risks, as well as an initial valuation in line with major peers. We also believe investors should consider that Eni has a higher cost of equity than some key peers'. The target price hike is based, according to brokers, "on a DCF (Discounted Cash Flow) valuation" that is based on three macro scenarios. The first sees the price of oil, according to Citigroup's forecasts, 'at $82.1 per barrel in 2026 and $55 per barrel in the long run (in real terms, 2021 dollars)'; the second scenario contemplates 'mid-cycle refining margins from 2027' and finally the third a 'long-term euro/dollar exchange rate of 1.16'.

However, at a time of great uncertainty over the Middle East issue, the analysts identify a number of risks "to the achievement of the target price". In detail, regarding commodity prices, "Eni's earnings are sensitive to changes in oil and natural gas prices, which can fluctuate significantly due to economic and geopolitical factors. We estimate that a $1 per barrel change in oil prices impacts CFFO (Cash Flow From Operations) by approximately EUR 0.15 billion". On the currency front, 'Eni's revenues and costs aremainly exposed to the US dollar, so changes in the euro/dollar exchange rate mainly have a translation effect on earnings per share. There are also transactional effects in the gas marketing business, but these are mainly temporary differences that tend to be reflected in margins within a few quarters'. Finally, the economic context: 'Earnings in the gas marketing and oil downstream businesses are sensitive to the economic environment, particularly in Italia,' write the experts, according to whom 'our forecasts assume the continuation of the current scenario characterised by compressed margins, a possible continuation of the price war in retail and the need to renegotiate obligations in take-or-pay gas supply contracts'.

Finally, a passage on geopolitical risk: "Political changes could affect legal ownership of assets, taxation and the pace of project development in the countries where Eni operates. Particularly relevant is the fact that about 50% of Upstream's cash flow comes from Africa (half North Africa and half Sub-Saharan Africa) and about 10% from the Cis area". In conclusion, "if the impact of these risks turns out to be greater or less than our expectations, the stock could miss or exceed the indicated target price".