Over the past year or so, Eni has aggressively signed deals with several state oil companies, including Algeria, the Republic of Congo, Libya, Qatar and other nations, which reestablish or expand its access to new drilling projects both within and outside these countries.
Eni is not the only company to offer big concessions to government in exchange for oil contracts. France's Total SA (TOT) has signed new partnership deals with state-run companies and committed itself to projects far beyond pumping oil, like building high schools in Angola.
But the Eni deals have won praise from Organization of the Petroleum Exporting Countries ministers and helped Eni race ahead of other Western oil firms like Exxon Mobil Corp. (XOM) that are still plodding toward better relationships with state oil companies after testy relations the past five years.
Still, shareholder endorsement of Eni's performance hasn't been overwhelming. Despite crude oil prices hitting various records over the past 12 months, Eni's shares are down 11% over the same period at about $26.40. That compares with a 20% increase in the Dow Jones Wilshire Global Oil & Gas Index of energy companies. Eni stock is about 30% owned by the Italian government.
"I think investors are being patient," said a London-based Eni shareholder, who declined to be named. "The deals Eni has signed may promote growth, but hopefully we'll learn more about these deals with national oil companies."
Eni signed a new deal in February with Venezuela's state oil firm in February that is likely to give Eni a 40% stake in a heavy oil block, but Eni hasn't given investors a sense of the financial terms it agreed to. Most analysts say the per-barrel profit terms likely favor the Venezuelan government given its recent history of squeezing profits from foreign companies.
The deal came just after the Venezuelan government agreed to compensate Eni around $700 million for nationalizing an Eni-operated heavy oil field in 2006. Analysts say the compensation paled in comparison to the total amount Eni had invested over the years.
Add in high taxes and the high costs of pumping Venezuela's heavy oil -- which can be two to three times more expensive to develop than conventional fields -- and the recent Eni deal with South America's biggest oil producer could turn out to be a raw deal for shareholders, analysts say.
"What is the deal (with Russian natural gas company) Gazprom going to look like and can Eni make money in Libya and Venezuela?" asks Exane BNP Paribas oil analyst Irene Himona. "Some of these deals have been opaque and that creates questions. Eni needs to help investors better understand how these deals fit into the business model and shareholder value."
A lack of clarity over details of the agreements was one of the big factors that led Himona in June to downgrade Eni's stock from a "neutral" rating to "underperform," as she expects the stock to perform worse than the sector average.
In June, Eni renewed all its contracts with Libya, agreeing to take a substantial drop in profits in exchange for being allowed to drill in the North African nation another three decades.
In a 2006 partnership deal, Russia gave Eni permission to explore for hydrocarbons in Russia in exchange for Eni offering OAO Gazprom (GAZP.RS) some of its oil assets, such as a stake in a Libyan oil field.
Eni announced plans in May with the government of Congo-Brazzaville, one of the most unstable countries in Africa, to invest $3 billion over the next four years. The planned investment is almost equal to the total Eni has invested since starting operations in the country in 1968.
Standard & Poor's analyst Elena Anankina says Eni's finances are relatively healthy for now, but that its risk-profile has been increasing relative to other oil companies. Standard and Poor's recently lowered its long-term outlook on Eni by one notch, citing its high debt from an acquisition binge and the new deals it's signed in emerging markets like the Congo with shakier political and regulatory environments.
Anankina estimates that 67% of Eni's total production last year came from emerging markets and continues to grow. By contrast, BP PLC (BP) and ConocoPhillips (COP) had production exposure of 49% and 45% in 2007 in such markets last year, she said.
Eni also has production-sharing contracts with governments, such as those with Libya. These deals allow full investment cost recovery, but once achieved, a firm's share of oil output and profits can drop sharply as the state takes most of both. "Eni has gotten more exposure to these contracts than most other companies," Anankina said.
Eni chief executive Paolo Scaroni plays down the risks and says he's taking prudent steps to enhance Eni's growth prospects, even if it means ripping up old contracts for less profitable ones.
"My starting point is that the oil is not ours, it's their (nation states') oil, so I need to do whatever I can to establish some relationship with oil producing nations," Scaroni said in a recent interview.
A big challenge, he says, is achieving less-bad outcomes in today's high oil price environment. Sticking to old contracts in the face of more powerful state oil companies "is maybe not the right strategy because, at the end of the day, governments own the oil."
Eni, like other majors, has struggled to grow its oil reserve base, an important metric investors watch closely. Eni's proven reserves have fallen 7% to 6.37 billion oil-equivalent barrels since Scaroni became chief executive in mid-2005.
Despite growing unease, many analysts still rate Eni's stock with some kind of "buy" rating and most shareholders voted in June to reappoint Scaroni as chief executive and chairman. "I think the direction of the company is good," said Milan-based asset manager Gianpaolo Rivano of GestiRE, which owns around 100,000 Eni shares.