Why ENI (and many others) Need to Split Up

abarrelfullabarrelfull wrote on 11 Jul 2014 14:03
Tags: eni italy refinery

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ENI is one of the largest oil companies in Europe and by far the biggest refiner in Italy. Outside of Italy, they own shares in Galp, which has two refineries in Portugal, and small shares in 3 German refineries. Recently they announced a deal to dispose of their shares in 2 Czech refineries.

So they are big, and predominantly focues on their own home market, which has proved to be a major problem:

State-controlled Eni, which has five wholly owned refineries in Italy and one half-owned plant, posted an adjusted net loss of 232 million euros last year in its refining and marketing division. Italian consumption of refined products fell from 72 million tons a year in 2006 to 53 million tons a year in 2013.

They have the dominant position in a market that has shrunk drastically. No wonder they are losing money.

They also have a mixed bag of assets, to say the least. The Porto Marghera Venice Refinery has already been given the bullet. It is to be converted into a biofuel facility, with the Porto Marghera Venice Green Refinery Project. Low complexity and a capacity of only 70,000 bpd, made that inevitable.

The Gela Refinery and the Leghorn Livorno Refinery are in a similar quandary. The 84,000 bpd Livorno Refinery was put up for sale back in 2009 and completely failed to find a buyer, whilst the 100,000 bpd Gela Refinery, is reportedly not currently working.

The remaining three assets, JV owned Milazzo Refinery, the recently upgraded Sannazzaro de Burgondi Refinery and the Taranto Refinery are probably ok longer term, given their better complexity, and the shareholdings in foreign assets can probably be disposed of.

Which brings me to my recommendation, to ENI and others in similar positions. You need to split the company into upstream and downstream. With projects in places like Mozambique and Angola that look far more exciting than substandard downstream, its just a waste of management time.

Restructuring would be much easier as an independent downstream firm, there is no need to prolong the pain. Marathon made the plunge, and they haven't looked back since.

There is no longer any logic in vertical integration, and its time the sector realised this.

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