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What Are the Roles of Debt and Dividends in Eni’s Cash Flow?

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Eni’s cash flow from operations, investing, and financing

In 2015, Eni’s (E) cash flow from operations stood at 12 billion euros, falling from 15 billion euros in 2014. Eni’s cash outflow from investing stood at 11 billion euros in 2015, a rise over 9 billion euros in 2014.

Eni’s cash flow from financing activities mainly consisted of changing debt levels and shareholder returns in the form of dividend payments. Eni’s dividend yield currently stands at 6.1%. Eni’s peer ExxonMobil’s (XOM) dividend yield stands at 3.5%.

Comparatively, BP (BP) and Royal Dutch Shell (RDS.A) have higher dividend yields of 8.1% and 8.0%, respectively. For exposure to high-dividend stocks, you can consider the iShares Core High Dividend ETF (HDV). The ETF has ~20% exposure to energy sector stocks.

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Analyzing Eni’s cash flow strategy

In 2015, Eni generated 12 billion euros in cash from operations, but it had a cash outflow of 14 billion euros in the form of investments (mainly capital expenditure) and 3.5 billion euros in the form of dividend payments, amounting to a total of 17.5 billion euros in cash outflow.

How did Eni make up the difference?

Due to lower cash flow from operations, Eni had to resort to asset sales and the issuance of fresh debt to make up for the difference of 5.5 billion euros in cash flows. Eni executed divestments to the tune of 3 billion euros in 2015. In the same year, it raised 2 billion euros worth of additional debt. The remaining cash was drawn from its cash reserves.

How long can this strategy be maintained?

If oil prices remain subdued for an extended period, Eni cannot perpetually raise debt to fund its capital expenditure and dividends. Going forward, higher production could improve Eni’s cash flow from operations, but the degree of improvement will mainly depend on the level of oil prices.

If oil prices remain low, Eni’s cash flow from operations will feel the pressure. If cash flows don’t improve, Eni will likely not be able to maintain its current levels of capital expenditure and dividends.

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