Eni Is Committed to Libya, But Where's the Payoff?

Eni SpA (NYSE: E  ) continues to insist oil production out of Libya is a "fundamental" part of its strategy, and the CEO of the Italian oil giant, Paolo Scaroni, visited with Libya's new interim Prime Minister about improving supply as a potential replacement for Russian oil.

Italy gets most of its oil from Russia at present, and it is understandable that Italy in general, and Eni in particular would be keen for alternative supplies, as the current tit-for-tat sanctions between Russia and the EU threaten to complicate acquiring oil from the east.

The Libya Problem
All of that sounds good on paper, but Libyan oil production has cratered since the 2011 NATO war. Companies like Eni have invested a fortune in modernization projects in Libya since the ouster of the Gadhafi regime, but have seen precious little return on investment.

The problems in Libya are myriad, with many cities operating outside of the control of the central government, sometimes warring with one another. Efforts to build autonomy in eastern Libya, where much of the oil wealth lies, have compounded that, and many of the oil ports are controlled by rivals of the government.

We saw one such port, Es-Sidra, selling oil to a rogue tanker called the Morning Glory, which loaded up tens of millions of dollars in Brent-specced crude and tried to head for the high seas. Libya's Navy captured it briefly before it got away, leading to the firing of Libya's last prime minister. It took a U.S. Navy operation against the Morning Glory to bring the oil back to Libya, but that's not closer to bringing it to market.

Most of Libya's problems are much less exciting than the Morning Glory fiasco, but combined they look set to keep Libyan production dramatically below pre-war levels for the foreseeable future.

Eni remains committed
It might be curious that Eni remains so vocally committed to Libya when it doesn't look like it's going to be getting that oil anytime soon. The practical matter is that there just aren't a lot of alternative opportunities for it to snatch up near Europe if it writes off Libya.

Other European companies like BP plc (NYSE: BP  ) and Royal Dutch Shell plc (NYSE: RDS-A  ) also have investments in unstable areas, and have comparable risk discounts. The big difference is that while Eni isn't getting much out of Libya, both Shell and BP are seeing production right now. When all three options can be had at the same multiples and yields, it's clear that either BP and Shell would be the better bargain, since they don't have near the Libya headache.

That's not to say Libya is never going to be a big producer again, but it could take many years, and Eni's stock simply isn't discounted enough to warrant waiting it out.

Safer options for Europe
Statoil ASA (NYSE: STO  ) is a much safer bet than any of these, however, with much of its oil coming out of the North Sea. Regional instability is a major concern for Europe's energy supply, and production in a stable place like Norway warrants a premium that will likely grow in the months to come.

Statoil's dividend yield isn't what BP's or Shell's are,  and it's floating around its 52-week high. It's not exactly cheap, but it isn't overpriced either, at about 10 times forward earnings.

It may be counter-intuitive, but I think OAO Lukoil (NASDAQOTH: LUKOY  ) also warrants serious consideration in a flight to safety for European energy investments. Russia-EU tensions remain a concern, but Lukoil's production is largely produced in stable areas like Western Siberia, and at just five times earnings, it trades at a substantial discount.

Russia has become a major energy source for the Eurozone for a reason, and barring a dramatic shift toward stability in Libya or Syria, Russia's role is likely to remain secure going forward. Politicians may hem and haw, but in the end, they're unlikely to accept major fuel shortages when Russia's production, unlike Libya's, remains active and very much on the market.

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