Italian oil company Eni SpA is increasing its access to oil reserves around the world, but questions are growing about whether the company is paying too much.
Over the past year or so, Eni has signed agreements with several state oil companies, including ones in Algeria, the Republic of Congo, Libya, and Qatar, which re-establish or expand its access to new drilling projects. On Saturday, the consortium it leads inked a deal to develop Kazakhstan's giant Kashagan oil field.
Eni is not the only company to offer big concessions to governments in exchange for oil contracts. France's Total SA has signed 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., that are still plodding toward better relationships with state oil companies after testy relations the past five years.
Shareholder endorsement of Eni's deal making hasn't been overwhelming, though. While crude oil prices have hit repeated highs over the past 12 months, Eni's shares are down 12% in Milan, closing Monday at 23.70 euros ($37.42). That compares with about a 20% increase in the Dow Jones Wilshire Global Oil & Gas Index of energy companies. Eni is about 30% owned by the Italian government.
Eni signed a new deal in February with Venezuela's state oil firm that is likely to give Eni a 40% stake in a heavy-oil block, but Eni hasn't given investors a sense of the deal's financial terms. 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 high taxes and the high costs of pumping Venezuela's heavy oil -- which can be two to three times more expensive to develop than at conventional fields -- and the pact with South America's biggest oil producer could turn out to be a raw deal for shareholders, analysts say.
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. And in 2006, Russia gave Eni permission to explore for hydrocarbons in Russia in exchange for Eni offering OAO Gazprom some of its oil assets, such as a stake in a Libyan oil field. Analysts say it is unclear how that deal will turn out.
"What is the deal with 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 factors that led Ms. Himona in June to downgrade Eni's stock to "underperform" from "neutral" as she expects the stock to perform worse than the sector average.
Eni Chief Executive Paolo Scaroni plays down the risks and says he is 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 oil, so I need to do whatever I can to establish some relationship with oil-producing nations," Mr. Scaroni said in a interview last month.
A big challenge, he says, is achieving less-bad outcomes in today's environment of high oil prices. 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 increase its oil-reserve base, an important metric investors watch closely. Eni's proven reserves have fallen 7% to 6.37 billion barrels of oil equivalent since Mr. 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 Mr. Scaroni as CEO 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.