BUY OR SELL-Will E.ON gas deal relieve or delay the pain?

Wed Jul 4, 2012 3:28pm BST

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* For more Reuters BUY OR SELL stories click on [BUYSELL/]

* Bulls point to earnings visibility, future negotiations

* Bears say structural risks, margin pressure remain

By Christoph Steitz

FRANKFURT, July 4 (Reuters) - E.ON (EONGn.DE) expects a new deal on gas prices with Gazprom (GAZP.MM) to add a billion euros to its profits, but some analysts see the benefits as short-term in the face of a bleak economic outlook that will depress margins in power generation.

Germany's biggest utility said on Tuesday it had agreed with Russia's top gas producer Gazprom on lower prices for long-term gas supplies, leading the group to raise its profit outlook for 2012. [ID:nL6E8I3500]

While most analysts hailed the settlement as a positive trigger, a few brokerages were not convinced of the long-term benefit of the deal, downgrading or keeping a sell rating on the stock and driving down the group's shares more than 3 percent on Wednesday.

Bearish analysts point to structural problems the company will face in the mid-term, notwithstanding the gas deal, while bulls point to the settlement as a turning point that will result in stable earnings and strengthens E.ON's position in future negotiations.

BUY

E.ON said it expected the settlement to have a positive impact of 1 billion euros ($1.26 billion) on the group's half-year results, which are scheduled for Aug. 13.

"The deal shows that E.ON will get competitive prices from all key suppliers going forward," UBS analyst Patrick Hummel said, reiterating a "buy" on E.ON's shares.

As a result of the agreement, E.ON raised its earnings forecasts for 2012, saying it now expected earnings before interest, tax, depreciation and amortisation (EBITDA) of 10.4-11.0 billion euros, compared with a previous target of 9.6-10.2 billion.

"This deal should improve the balance sheet and increase earnings visibility, positioning E.ON again to consider further dividend growth from 2013," analysts at Goldman Sachs said, keeping a "buy" rating on the stock.

E.ON is planning to keep its dividend stable in the next two years, with a targeted payout of 1.10 euros per share for both 2012 and 2013.

SELL

Citi analysts, downgrading E.ON to "sell" from "neutral", point to a weak European economy that is suffering from the ongoing debt crisis, thereby leading to stagnating power demand.

"We therefore argue that the successful renegotiation of the Gazprom contract provides short-term relief and a boost to the balance sheet," Citi analysts said, calling it the "last piece of positive news" in the next 12-18 months, when weak power demand will be the dominant issue.

This view is shared by Barclays, which kept an "underweight" rating on E.ON shares, pointing to margin pressure on the group's power generation business from 2013-2015.

E.ON so far is guiding for EBITDA of 11.6-12.3 billion euros for 2013. But according to StarMine, which weights analysts' projection based on their track record, EBITDA is seen at 11.3 billion euros.

($1 = 0.7933 euros)

(Editing by Hans-Juergen Peters)

((christoph.steitz@thomsonreuters.com)(+49 69 7565 1269)(Reuters Messaging: christoph.steitz.thomsonreuters.com@reuters.net)) Keywords: EON/GAS

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