Saturday, February 13, 2021

SNAM - Italian Gas Transmission

 Italy imports most of its gas:

Which comes through 5 pipelines:

The gas pipelines inside Italy are all owned by SNAM, an ENI spin-off.  They provide infrastructure so Italians can enjoy a stable and diversified supply of gas.  For example, the TAG pipeline (on the right of the map) has just been completed - it was built to address previous problems obtaining transport capacity during peak seasons.

Long term gas usage is expected to decline in the future due to higher energy efficiency and higher renewables.  But they still plan to use gas in 2040:

Source: Italian National Trend Scenario - Jan 20201

In 2019, 76% of SNAM's revenue was from gas transmission, with the remainder from storage.  A negligible amount was from re-gasification.  

The numbers

Predictable revenues and high margins:

The main factor affecting business is regulation.  Regulatory review for gas transportation is every 4 years, the current one ends in 2023.  A real rate-of-return of 5.3% is predicted (p17).  

Their long term growth is expected to be 1% (I lost the reference).


Debt is 13bn, or just under 6X EBIDTA.  A bit high, but OK considering the debt.  EBIDTA covers interest payments 16 times.

Most of their debts is through bonds.  Maturities are well spread out over the next 15 years.  We can see the effects of the Eurozone crisis on the bonds issued in 2012 and 2013.  Since then, rates have gone down to 1% or lower.  Money for nothing:

Three quarters of their debt is fixed rate.

SNAM has a higher credit rating than Italy.


This type of company has little business risk.  The risks are 'black swan' events.

Biggest risk is Italy leaving the Eurozone.  Although its fallen off the radar, I think it will return.  The effects would be:

  • SNAM's revenues convert to lira, which means a drop of lets say 30%.  Their bonds remain denominated in Euros (no one is receiving sub-1% interest for lira bond - holders will expect it to remain in Euros).
  • New debt (bonds being rolled over) in lira cost more.  Maybe 5%.  

If that happened, I estimate they'd still be making 1.3bn in EBITDA a year in 'newly depreciated' Lira -  or 1bn current-day Euros.  After (unchanged) interest, it would be over 850m..  Thats an FFO (before tax) of 0.25 current-day Euros per share.  The stock price would probably drop around 35%.

The second risk is regulatory change.


Gas deposits in the Mediterranean (eg: Israel's Leviathan) could make Italy a transshipment hub for Gas.  Through TAG.

The gas pipes may be used to transport hydrogen.  They have already tested 5% and 10% hydrogen mix as part of a trial.  Italy may become a hub for hydrogen produced int he hot regions of North Africa.  I don't care about ESG hype, but its interesting that they've done trials in the real world.  And the ESG funds may lap it up.


In 2019, 70%of earnings were paid out as dividends.  In 2018 it was 76%.  This is decent, though probably not much room for upside.


Steady, boring company, more like a bond.  It's a nice 5% earner in a yield starved world.    With the Sword of Damocles (Eurozone breakup) constantly hanging over its head (although the fallout from this risk is quantifiable).   If I bought it, I would limit it to 5% of my portfolio.

Or wait till Italy leaves the EU.


Martin said...

Spanish Enagas is also cheap but has bought more into their US minority business.

BlackCat said...

Thanks. I think SNAM is fairly valued, not compelling but I could buy it if I had spare money.

I've not had time to look at Energas. Chose SNAM first because I think Italy is less risky than Spain. Their Tallgrass is a play on US shale oil surviving?

KRLS said...

Spot on for Spain. It has a crony regime (like Italy), but they did not clean up after 40 years of fascism. This is a big no-no: it lead to 45 yrs of same regime disguised (same elites, cosmetic make-ups only). And of course, the rightful reason for Catalan national minority to opt out.

Anonymous said...

@snam recently it has inserted rules regarding green gas in the Statute. It has launched SNAM4MOBILITY, a start-up that will install 300 methane points in IP distributors (API Energia), has bought 30% of ITM power listed in the UK which has seen its value increase by over 300 times, a leading company in ELECTROLYSIS, HAS ALREADY WITH SUCCESSFUL THE INSERTION OF 10% OF HYDROGEN IN THE GAS NETWORK WHICH IS THE FIRST IN EUROPE, HAS AN EARNING PRICE OF 14, COMPARED TO THE EUROPEAN SECTOR WHICH HAS P / E OF 28, AND ITS COMPETITOR FLUXYS HAS A P / E OF 29.