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Why Shares of Oil Giant Eni Fell 33% in 2020

By Reuben Gregg Brewer - Jan 4, 2021 at 11:03AM

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It was a terrible, no-good year for oil stocks in 2020, and Italy's Eni couldn't avoid the pain.

What happened

Shares of Italian integrated energy major Eni ( E 2.25% ) fell a dramatic 33% in 2020, according to data from S&P Global Market Intelligence. That said, it was an eventful year, and the final result doesn't do justice to the full 12-month span that featured two dips that took the shares down 50% or more.

So what

Coming into 2020, the oil and natural gas sector faced a market that was slightly oversupplied thanks to the decadelong expansion of onshore U.S. oil drilling. OPEC had been working to offset U.S. production growth by curtailing its output. But then OPEC and partner Russia got into a dispute about the cuts and both reopened the spigots. Unfortunately that spat came at about the same time that the coronavirus caused countries around the world to essentially shut down vast swaths of their economies. 

Oil rigs with the sun setting in the background.

Image source: Getty Images.

A massive decline in demand at the same time that production was increasing led to a massive drop in oil prices. OPEC and Russia quickly made up, but the damage was done. Worse, excess oil found its way into storage, creating an overhang on the market that will need to be worked off before energy prices can mount a sustained recovery.

Oil company stocks, like Eni, plunged. And with the lingering impact of the coronavirus still presenting headwinds, the year saw only modest improvement in the supply/demand environment. Oil prices have moved up and down with news out of OPEC and various industry groups, global supply-and-demand updates, and individual company news. What didn't happen was a substantial oil price recovery, so financial results out of industry giants like Eni remained weak throughout the year.   

Now what

Eni is likely to muddle through this rough patch. However, the company and investors aren't going unscathed. The notable stock decline and an over 70% reduction in the dividend are clear indications of the ongoing pain. And while vaccine news has been upbeat, there's still a long way to go before supply and demand start to balance out.

Add in a heavy debt load (Eni's debt-to-equity ratio is a weighty 0.75 times), and most investors looking to the energy patch for out-of-favor bargains would probably be better off with a financially stronger peer like Chevron.   

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Eni S.p.A. Stock Quote
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