How Is Eni Restructuring Its Business Model?
Eni’s valuation: Price-to-book value ratio
In this part, we’ll evaluate Eni’s (E) historical valuation trends. Let’s begin by looking at Eni’s price-to-book value ratio (or PBV).
Falling oil prices have led to many projects becoming unviable for Eni in the past two years. This has resulted in huge impairments affecting the book value of the company. Impairments rose steeply in 2015 to 6.9 billion euros compared to 1.5 billion euros in 2014. Thus, examining PBV can provide a glimpse at Eni’s market value versus its book value.
Eni’s PBV stood at an average of 1.0x from 4Q13 to 4Q15. In 2Q14, the ratio saw highs of 1.23x. This was followed by impairments in 4Q14, which impacted Eni’s book value. In 4Q15, Eni reported another major impairment.
However, from 4Q13 to 4Q15, the fall in Eni’s stock price was sharper compared to the fall in its book value, leading to a fall in its PBV. Currently, Eni trades at 0.93x PBV, below its historical average.
EV-to-adjusted EBITDA and price-to-cash flows
From 4Q13 to 4Q15, Eni’s EV-to-adjusted EBITDA (enterprise value to adjusted earnings before interest, tax, depreciation, and amortization) and price-to-cash flow ratio (or PCF) stood at averages of 4.2x and 4.7x, respectively. Currently, Eni trades at 5.1x EV-to-adjusted EBITDA, above its historical average. However, Eni currently trades at a PCF of 4.0x, below its historical average.
In 4Q15, Eni traded at a PCF of 4.1x. Its peers Suncor Energy (SU), Chevron (CVX), and Cenovus Energy (CVE) traded at PCFs of 7.1x, 8.2x, and 9.7x, respectively, during the same period. For global stock exposure, you could consider the Vanguard Total World Stock ETF (VT). The ETF has ExxonMobil (XOM) and BP (BP) in its portfolio.
Why does Eni trade at lower PBV and PCF?
The valuation study reveals that Eni is trading at valuations below its historical averages. This is because Eni’s stock price has fallen steeply compared to the falls in its book value and cash flow. This is likely due to the fact that Eni’s cash flow struggled to fulfill its capital expenditure requirements and dividend payments in 2015. Plus, Eni’s higher leverage has taken its toll on investor confidence.
In the next article, we’ll take a look at how Eni is positioned compared to its peers.
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