The Gadhafi-Berlusconi Trade

With the world focused on the chaos erupting in Libya and Moammar Gadhafi’s intent to fight the uprisings until his “last drop of blood”, what’s garnering less headline attention is Italy’s outsized exposure to the North African nation. It is this exposure, especially to oil and gas vis-à-vis its partially state-owned energy concern ENI, that has helped to drag down the country’s equity market and ENI stock since late last week. We think the implications behind Italy’s exposure to Libya (and vice versa) are considerable, which we quantify below.

By the Numbers

 

Libya:

  • Produces roughly 1.8 million barrels per day (bpd) of oil, down from peak production of 3 million bpd in 1960
  • The world’s 12th largest net exporter of oil at 1.5 million bpd. (~95% of the country’s export earnings come from the hydrocarbon industry)
  • The largest proven oil reserves in Africa at 44 Billion barrels, followed by Nigeria 37.2 bb and Algeria 12.2 bb
  • 54 Trillion cubic feet (tcf) of natural gas reserves, the 4th largest in Africa behind Nigeria (185.3 tcf); Algeria (159.0 tcf); and Egypt (58.5 tcf)

ENI:

  • ENI is the largest oil consumer in Libya
  • Italy’s consumption of Libyan oil (via ENI) accounts for ~ 24% of local consumption
  • Italy is Libya’s largest export market at 365,742 bpd in 2010, or 29% of total exports, followed by France at 14%, China 13%; Germany 11%; and Spain 10% according to the EIA
  • ENI has committed $25 billion of investment in Libya over the next decade

Market Performance:

  • ENI is down -6.3% since 2/18
  • FTSE MIB (Italy’s broad equity market) is down -5.2% since 2/18
  • Etf EWI, in which ENI composes 18.3%, is down -5.3% since 2/18

 

Broader Implications for Italy and Berlusconi

  1. Despite calls from Italy’s Industrial Minister Paolo Romani that the country isn’t in danger of running out of natural gas we think Italy’s energy reliance on Libya is compelling.  On Tuesday ENI suspended its Greenstream pipeline that supplies ~ 10% of Italy’s natural gas needs. And while Romani cited that commercial stockpiles of 134 billion cubic feet of gas can be tapped if needed, and the country can increase import supply lines from Algeria, Norway and Russia, we take the view that a.) there’s significant probability that production will be completely severed/no one will be manning the equipment and, b.) increasing alternate supply lines is never as easy as flipping a switch, and would be expensive given this time of the year.
  2. Despite a phone call that Berlusconi gave to Gadhafi yesterday, urging him to avoid bloodshed, Berlusconi is viewed as buddy-buddy with Gadhafi, which reflects poorly on his already tarnished leadership. (Berlusconi stands trial beginning on April 6th for allegedly having sex with an underage belly dancer). Allegedly, Berlusconi shut down Rome’s largest park in June 2009 to allow Gadhafi and his entourage of all-female bodyguards to set up camp.
  3. Uncertainty abounds ENI’s footprint in Libya and conversely Libya’s investments with Italian companies, including: Fiat, UniCredit, or the Jeventus soccer club.
  4. We can’t substantiate the numbers, but just today in parliament Italy’s Foreign Minister Franco Frattini said that Italian companies stand to lose 4 Billion EUR in infrastructure projects.
  5. Italy could be one country to see a mass exodus of refugees to its shores. Officials in Brussels believe as many as 750K could attempt to cross the Mediterranean, but Libyan estimates put the figure as high as 2 Million (of a population of ~6.4 Million Libyans).  Italy already faced an influx of over 5K Tunisian refugees following the country’s regime change.  Clearly, policing an influx of these proportions would be a huge tax on the Italian state.  

Much like with the uprising in Tunisia and Egypt, we cannot solve for the unknowns that will transpire in the coming days. What’s clear is that share prices from energy companies in Libya, including companies such as Total, OMV and Repsol, will be taking a hit as these companies move to shut down production. In particular, we view Italy’s outsized energy exposure (via ENI) to Libya as a critical force weighting to the downside of its equity market, or the etf EWI with its heft ENI weighting. We’ve long been critical of the Italy’s excessive debt leverage and have been short Italy via the etf EWI at times over the last 6 months in the Hedgeye Virtual Portfolio. Now, we see even more short-term downside pressure for Italy’s FTSE MIB given the country’s exposure to the precarious state of Libya.   

As we show in the chart below, the FTSE MIB is trading between a rock and a hard place. It is trading above its TREND line of support at 21,193, but recently broke through what was its TRADE line of support, and is now resistance, at 22,709.

Matthew Hedrick
Analyst

The Gadhafi-Berlusconi Trade - mib