In signing overseas contracts, Eni is faced mainly with economic risk. In most instances, it happens that between signing the contract and when the cash starts to flow, the foreign trading partner's currency could fall or increase significantly. Therefore, if the contract adopts the foreign currency, any downward fluctuations in the overseas nation's currency pose a risk to Eni. With its operations in at least 66 countries, each with different currencies, Eni's main trade currency overseas is the US dollar (Eni: energy company | Eni, 2020). Even with this, the Fx risk for Eni is relatively high since its domestic currency is Euro. According to (Eni: energy company | Eni, 2020), Eni mostly operates by joint ventures with its partners in overseas markets. A joint venture is a strategy whereby the trading partners agree to combine resources and capabilities by buying equity shares and taking shared responsibility in management (Eni, 2020) . This strategy exposes Eni to translation risks since the value of its equities and income are poised to change at any slightest fluctuation of the exchange rates.
Covid-19 has greatly impacted the economy and the business environment. The volatility of financial markets and the dark trading occasioned by the pandemic (Ibikunle and Rzayev, 2020) has compounded the translation risks of Eni. The situation has also increased the uncertainty of the already volatile Oil and Gas markets, a situation that has resulted in substantial currency depreciation (Ibikunle and Rzayev, 2020), thereby exposing Eni to higher risks. Eni's does not take any measures to hedge the translation risks but instead lets its subsidiaries prepare the financial statements in foreign currencies (Eni: energy company | Eni, 2020). From its risk management update (Eni: energy company | Eni, 2020), the company manages the FX risks by pooling the Group companies' positions and hedging the net exposure to foreign exchange risks through various derivatives such as currency swaps, forwards, and options. Eni's risk management approach is based on a policy that seeks to minimize risk exposure arising from foreign currency movements while effectively utilizing exposures arising from commodity risk (Eni: energy company | Eni, 2020). According to its 2019 annual report (Eni Annual Report, 2019), the company's risk assessment and management process involves periodic assessments and monitoring cycles, identifying and managing contractual risks, and analyzing business opportunities underlying a risk profile long-term investment plans.
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TOTAL is a multinational energy company that deals mainly with gas and oil products. The firm was founded in 1924 with its headquarters in France and trades under the trademark Total SE and has several registered subsidiaries (Eni: energy company | Eni, 2020). Its core challenges are to satisfy a growing population's energy needs, limit the impact of climate change, and adapt to changing customer needs. The company has a worldwide presence, with its footholds in 130 countries spread across six continents, namely Africa, Asia-Pacific, Europe, Middle East, North and South America, and employs 100 000 people (Eni: energy company | Eni, 2020). As per the information on its website (Eni: energy company | Eni, 2020), Total has twenty-one foreign investment projects spread out in the following countries; United Kingdom, United Arab Emirates, China, Japan, Belgium, Russia, DRC, South Africa, Chile, South Korea, Nigeria, Qatar, United States, Australia, Angola, Saudi Arabia, and the Netherlands. These countries have different currencies. However, Total in the annual report retrieved from (Total S.A, 2020), Total has stated that its transactions are majorly in US dollars.
Just as Eni, Total faces foreign exchange risks because its main currency in international transactions is USD while its domestic currency is Euro. Movement between these currencies could adversely affect the companies’ equities, revenues, and income. As such, both companies face translational risks. Both firms trade in oil products, and both face the risks occasioned by uncertainties of ability to control unit costs in exploration, production, and marketing.
Eni and Total risk hedging strategies are similar in most aspects. Both minimize risk exposure by the use of swaps and forwards. However, the two differ slightly when it comes to minimizing short term-exposure. Total believes that short term exposure is immaterial and only focuses on managing long-term exposure (Total S.A, 2020). On the contrary, Eni considers both short-term and long-term exposure sensitive and manages the former by dual exploration technique (Eni Annual Report, 2019). Eni’s system seems more appropriate. In dismissing the risks associated with short-term financial exposure, Total asserts that the loss associated with it does not impact their revenues much. Yet Eni confesses that the Dual Exploration Model allowed it to cash in 11 billion US dollars (Eni Annual Report, 2019). Eni's risk hedging approach is more appropriate due to the uncertainties of market and currency value fluctuations.
Eni should consider undertaking hedging activities in cooperation with other independent, including competitors, financial institutions, and major energy consumers. This will not only enhance its flexibility but also encourage liquidity, (Shenkir and Wlaker, 2007) reducing risk exposure. As earlier mentioned, Eni's main international market access strategy is through a joint venture. Right there lies an opportunity for risk reduction. (Shenkir and Wlaker, 2007) States that maintaining a strong relationship with other companies is a way of reducing operational risks, which could work well for Eni. Additionally, investing further in technology will enhance the firm's risk identification process (Shenkir and Wlaker, 2007). The company should upscale the use of intranet for internal process management and encourage its members to share their best risk management practices.
There are various opportunities Eni could utilize to cut its operating costs. First, given the high number of employees, it should consider reducing employee turnover. To effectively cut costs, a company should maintain a stable employee core and eliminate any excess costs. Alternatively, Eni should consider cross-training employees as employees. The company brags about regular high-level training (Eni: energy company | Eni, 2020) and should use that opportunity to train its workforce on different skills.
That the economy has borne the brunt of Covid-19 is no doubt. The energy sector suffered the most, with prices of oil and gas commodities dropping drastically in the early days of the pandemic, according to a Commodity Markets Outlook report as cited by (The World Bank, 2020). Brent price projections fell $2.07, or 5.0%, to $39.13 a barrel. This publication quoted the World Bank Group Acting Vice President saying that the Covid-19 effects on energy prices could be permanent. The volatility of the oil and gas commodity prices was worsened by the OPEC wars between Russia and Saudi Arabia. The effects of the price wars between the two countries were immense, dropping the global market price by $11 per barrel, an equivalent of 25 percent. The uncertainties that clouded the energy market is very sensitive to foreign exchange risks. It results in the fluctuation of currencies, thus increasing the economic risk, putting the oil energy companies' values at risk. Such a short-run spike in uncertainties also greatly increases the foreign exchange risk by impacting occasioning sudden change in foreign currencies' value. This has a risk factor on international contractual agreements that are yet to be implemented since, by the time cash flow begins, the currency will have a different value from when the contract was signed.
The best-recommended way for oil and gas companies to deal with financial exchange risks is by operating with derivative financial within the framework of corporate dealing. Offer loans to subsidiaries local currencies within intra-group financing and filing financial reports of subsidiaries in the local currencies. Above all, companies should develop measures to protect themselves against such risks.
References
Eni, 2020. Financial Risks . [online] Eni.com. Available at: <https://www.eni.com/en-IT/investors/risk-management/financial-risks.html> [Accessed 31 October 2020].
Eni. (2019) . Eni Annual Report . Available at: <.https://www.eni.com/assets/documents/eng/reports/2019/Annual-Report-2019.pdf> [Accessed 31 October 2020].
Eni.com. 2020. Eni: Energy Company | Eni . [online] Available at: <https://www.eni.com/> [Accessed 31 October 2020].
Ibikunle, G. and Rzayev, K., 2020. Volatility, Dark Trading and Market Quality: Evidence from the 2020 COVID-19 Pandemic-Driven Market Volatility. SSRN Electronic Journal , [online] Available at: <https://voxeu.org/article/covid-19-volatility-and-dark-trading-financial-markets> [Accessed 31 October 2020].
Krauss, C. and Reed, S., 2020. Oil Prices Dive As Saudi Arabia Takes Aim At Russian Production . [online] Nytimes.com. Available at: <https://www.nytimes.com/2020/03/08/business/saudi-arabia-oil-prices.html> [Accessed 31 October 2020].
Shenkir, W. G., & Walker, P. L. (2007). Enterprise risk management: Tools and techniques for effective implementation. Institute of Management Accountants, 1-31. https://erm.ncsu.edu/az/erm/i/chan/m-articles/documents/IMAToolsTechniquesMay07.pdf TOTAL S.A. (2020) . Securities and government exchange. Available at: < https://www.sec.gov/Archives/edgar/data/879764/000095012304007119/y00799e20vf.htm#108 > [Accessed 31 October 2020].
World Bank. 2020. Impact Of COVID-19 On Commodity Markets Heaviest On Energy Prices; Lower Oil Demand Likely To Persist Beyond 2021 . [online] Available at: < https://www.worldbank.org/en/news/press-release/2020/10/22/impact-of-covid-19-on-commodity-markets-heaviest-on-energy-prices-lower-oil-demand-likely-to-persist-beyond-2021#:~:text=Oil%20prices%20fell%20dramatically%20in,annual%20Commodity%20Markets%20Outlook%20report .> [Accessed 31 October 2020]
