A Super Oil That Gushes Income

04/29/2009 1:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, associate editor of Personal Finance, says an Italian oil giant is a great income investment no matter what happens with oil prices—and its shares are cheep.

Super Oils are about as close as it gets to all-weather income investments. They prosper when inflation rises and oil and gas prices are surging. And they thrive during recessions, thanks to downstream operations that maintain revenue and balance sheets that are stronger than those of most sovereign nations.

Italy-based Eni’s (NYSE: E) dividend yield of 8.5% is paid twice annually, with the next slated for May 21st for shareholders of record [on] May 15th. Last year’s earnings covered the current dividend rate by a nearly 2-to-1 margin. Shares trade for just 7.5x consensus earnings estimates for 2009, 50% of sales and 1.33x book value, the lowest valuations in years.

The greatest long-term challenge for all Super Oils is to increase production and replace reserves, which have long dwindled in their home countries. Eni has consistently done both. Overall output of oil and gas rose 3.5% last year, and the company replaced 135% of production with new reserves.

Aggressive acquisitions globally in recent years get much of the credit. So does effective drilling. Eni has engineering skills that have made it a respected partner in countries where its rivals have had troubles, such as Russia.

Earlier this month, management laid the ground work for further development in that country, inking a deal to sell its 20% stake in OAO Gazprom Neft to Gazprom (OTC: OGZPY) for US$4.2 billion in cash. It also reached a deal with China’s Sinopec to develop a broad range of upstream and downstream projects. And it’s a leading contender for new development contracts in Iraq as well.

A large part of Eni’s advantage is the unflagging support of the Italian government, which has gone to bat more than once to secure favorable agreements for the company. Government support is also a big implicit plus for the balance sheet, which draws AA marks from all three major raters.

Credit ratings are solid, and earnings, even at the most pessimistic forecasts for 2009, still cover the current dividend. Cash from the Gazprom deal alleviates any near-term financial pressures. Total debt coming due over the next two years is EUR1.039 billion, only about 1.8% of its current market capitalization.

Eni’s New York Stock Exchange-listed American Depositary Receipts (ADRs) are down roughly 18% thus far in 2009, about half due to the drop in the euro versus the US dollar. Now at half its 52-week high, this is a great time to pick up shares if you haven’t already. Buy the Eni ADRs up to US$50 (it closed at $42 Tuesday—Editor), the Italian Borse-listed shares up to Eur18.

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