You may have heard by now that Eni S.p.A. just discovered the world’s largest natural gas field 80 miles off the coast of Egypt.
Our own Keith Kohl blogged two days ago:
Italian energy company Eni SpA (NYSE:E) just announced its discovery of a natural gas deposit in the deep water area of the Mediterranean along the northern coast of Egypt.
The company claims, with preliminary numbers, that it could be the world’s largest natural gas deposit found to date and could satisfy Egypt’s natural gas demand for decades.
Eni is calling it a “supergiant” field, estimating that it could hold 30 trillion cubic feet of natural gas. It’s been named the Zohr field, and it covers 60 square miles at a depth of 1,450 meters.
In comparison, the Haynesville shale field in the U.S. has 29.5 trillion cubic feet of proved gas reserves.
The obvious question to ask yourself is, what to buy?
Eni
Eni is a Big Five oil and gas company headquartered in Italy. Its primary stomping grounds are North Africa.
The company’s share price got hit hard after Libya fell apart and was hit again when the price of oil fell 60% since last year.
The company currently has a price to book of 0.66 and a forward P/E of 14 on a market capitalization of $45 billion. It also pays a 5.8% dividend. That sounds pretty good, actually.
But I don’t like the chart. The share price was up a couple of dollars on the news, but the chart is inconclusive at best and looking for another leg down at worst.
Don’t buy lower lows and lower highs…
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Gas Fire
It should be noted that while the price for natural gas in the United States is below $3, in Europe, it is trading at $6.93 (down from a high of $12.60 in 2013).
The new gas field might not make Eni a buy, but it is a game changer for Egypt’s stock market — the EGX 30 rose 3% on the news.
You see, Egypt is a major oil and gas importer. In fact, it is the largest oil and natural gas importer in Africa.
This is changing. Egypt’s current leader, El-Sisi, has staked his reputation on fixing the economy. He is confronting the daily rolling blackouts by making energy projects a priority. His government cut subsidies for food and gas in 2014, which should cut down on demand and make for a more efficient market.
Last March, authorities signed a $4.6 billion contract with Germany’s Siemens AG to build a new 4.4-gigawatt power plant in southern Egypt and generate 2 gigawatts of wind power.
Combined with other agreements signed with Siemens and General Electric, Cairo hopes to boost electricity generation by a third. The new gas discovery would be used to generate electricity but also rebuild industry.
The effects of large quantities of natural gas won’t be felt for a couple of years, but the energy minister has stated that Egypt hopes to be self-sufficient by 2020.
These discoveries always take time to play out, but it will be good to have something to look forward to. After the Arab Spring, Egypt’s GDP growth declined to 1% in 2013. In the fourth quarter of last year, based partially on falling oil and food prices, it surged to 6.8%.
The EGX Stock Market
But the stock market didn’t get the memo. Over the past year, the stock market has been cut in half based on general Middle East uncertainty, the end of tourism, the Greek debacle, and malaise in emerging markets.
There is upside, however, and it wouldn’t surprise me if Egypt’s market cap doubled by this time next year.
Parliamentary elections will finally take place starting in October, which will restore the semblance of steady government. In addition, the Suez Canal is undergoing an $8.5 billion, one-year expansion that will allow for two-way traffic and cut down on travel times. Canal revenues are expected to increase from $5 billion today to $13 billion a year by 2023.
Moody’s raised its growth forecast for Egypt to 4.5% in 2015 and 5% in 2016. I am currently looking at some undervalued ways to trade Egypt, and I am likely to pull the trigger in Crisis and Opportunity this week.
Good hunting,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
