We are downgrading Eni SpA (E) ADRs to Underperform from Neutral. Our primary concerns for the company are the lack of a clear dividend policy, a declining dividend yield trend, cyclical low returns, threat of rising competition to its core gas business and the quality of its upstream growth profile.

In its March 12 presentation of 2010–2013 strategic plans, Eni had lowered its production growth target to 2.5% from 3.5%. We believe that this growth target carries a higher degree of delivery risk as the bulk of it comes from risky projects in Iraq, Venezuela and Kazakhstan. In addition, management also hinted about a lower earnings visibility for its gas trading business.

Eni has guided to a dividend growth in line with the OECD inflation from 2011 at a $65 per barrel rate, which implies an absence of growth in 2010.

We believe that one of the key reasons for Eni’s underperformance in 2009 in the European sector was the unexpected cut in the company’s dividend and the lack of a clear dividend policy. We believe that this uncertain dividend policy will further aggravate investors’ confusion.

With an uncompelling valuation, we believe Eni’s investment case has deteriorated substantially, and we fail to spot any catalysts that would drive a near-term rebound.

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