Eni S.p.A. (E 1.15%) is one of a handful of international energy majors, with massive operations throughout the oil and natural gas industry food chain. Its competitors include household names such as ExxonMobil (XOM 1.11%), and its outlook will roughly track the broader oil industry. In fact, there are some reasons to like Eni as an investment, some reasons to dislike it, but one major reason I will never buy Eni stock.
Some good things
As with other oil majors, Eni's business spans from the exploration and production of oil and natural gas to making end products such as chemicals and gasoline. In other words, it offers investors a great deal of diversification with the chemicals side of the business, for example, providing some downside protection when oil prices fall. And partly because of its location, Eni has notable exposure to emerging African markets that might interest some investors. Africa, taken as a whole, made up around 55% of the company's reserves at the end of 2016.
Image source: Getty Images.
That said, the operating environment has been difficult since around mid-2014 when oil prices started a steep decline from which they have yet to fully recover. Indeed, while the price of oil is recently trading around $50 a barrel, up notably from a low of around $30 a barrel, it remains far below the $100-plus it fetched in the first half of 2014. That helps explain why operating cash flow at Eni fell from 13.5 billion euros in 2014 to 7.7 billion euros last year. But that's not unusual. All of the oil majors have been hit by the drop in oil prices.
Eni, meanwhile, is doing the right things to adjust its business to a new normal. For example, it has reduced headcount, has trimmed capital spending, and is selling non-core assets -- the same things most of the other oil majors have been doing. There are even some notable positives at Eni, including the fact that it increased its reserves by over 13% between 2014 and 2016. For comparison, ExxonMobil's proven reserves fell more than 20% over that same span.
Some problems
So on the whole, Eni is doing about as good as could be expected in many ways. But there are a couple of problems. For example, the oil major has an impressive 8.5% dividend yield. That high yield would be a positive if Eni hadn't cut its dividend by nearly 30% in 2014, basically at the first sign of trouble in the oil market. Exxon has continued to raise its dividend each year, and Royal Dutch Shell, despite taking on a huge acquisition that required adding material debt to its balance sheet, has held the line on its dividend. It's hard to trust that buying Eni's 8.5% yield will provide you with income stability.
Eni expects cash flow to grow materially if oil prices move higher in the coming years. Image source: Eni S.p.A.
That's something income investors should think long and hard about. But that's not my biggest concern with Eni. The real reason I won't buy Eni is summed up in one line on a corporate web page titled "Shareholders": "The Italian Ministry of Economy and Finance has de facto control of Eni S.p.A. by virtue of interests held either directly or via the Cassa Depositi e Prestiti SpA (CDP)."
Essentially, the Italian government controls Eni by way of a 30% stake in the company. I have nothing against Italy. In fact, I'm part Italian. But I do have some concerns about a company that has no choice but to kowtow to politicians. It's one thing to make nice. They all do that. It's another when the government can simply tell you what to do. Exxon, which I own, doesn't face that dilemma.
Foolish final thoughts
In the end, the positives at Eni might outweigh the negatives for you. I can understand that. A big yield and growing reserves are hard to ignore. The latter hints at an improving financial outlook at Eni, which would help the company support that hefty dividend. And it's not as if the Italian government is running Eni into the ground. It's not. But for me, I can't get past the idea that the Italian government would have "de facto control" over any company in which I've invested. So I've chosen to move on to other names in the energy industry, such as Exxon.
