Yesterday, the Organization of the Petroleum Exporting Countries (OPEC) announced a further 2.2 million barrel a day (bbl/d) cut in production, the deepest cut ever for the organization. This was a larger move than the 2 million bbl/d decrease that most analysts had been expecting. But despite the move, crude prices tumbled under $40 a barrel intraday before rebounding slightly into the close.

There are a number of potential reasons for oil’s negative reaction to the OPEC cut. One is that some traders had hoped OPEC would make an even more aggressive move, cutting production by 3 million or more bbl/d to put a floor under prices. Others remain unconvinced that OPEC will actually manage to follow through on these cuts–with oil prices this low, producing countries are feeling the pinch of a rapid decline in revenues. Member countries have an incentive to cheat in an effort to secure additional revenues.

My view remains that traders continue to focus on oil demand rather than supply. As I pointed out in the last issue of TES, this is likely to continue until there’s some sign of at least stabilization in oil demand in the developed world. Yesterday’s move was a classic buy the rumor/sell the news reaction–traders had already priced in a 2 million bbl/d cut, and once that news was released the focus shifted immediately back to the demand side of the equation.

But what’s more interesting than the action in crude was the action in energy stocks. On a day when oil prices fell 8 percent, the S&P 500 Energy Index actually traded down just 1.6 percent, and the Philadelphia Oil Services Index (OSX) was unchanged. Both indexes were trading higher on the session until the final hour of trading. Energy stocks all but ignored the big drop in energy commodities. And although oil prices have slipped to new lows, the S&P 500 Energy Index is trading near a two-month high.

This subdued reaction suggests energy stocks may have already priced in the severe drop in energy commodity prices over the past five months. It’s not uncommon for energy stocks to lead the commodity. In fact, this has already happened this year; the S&P 500 Energy Index topped out May 21, about a month and a half before oil prices began falling.

My strategy for playing this volatile energy market remains unchanged. Focus on three key themes: stocks leveraged to natural gas rather than oil, big integrated energy firms with strong balance sheets and energy firms offering high and sustainable dividend yields.

I’ve outlined several plays on these themes over the last few issues of TES. And today, I’m adding Italian integrated oil giant Eni (Italy: ENI, NYSE: E) to the Proven Reserves Portfolio.

Eni derives close to three-quarters of its operating income from exploration and production (E&P) and just 3.8 percent from refining and marketing. Thus, Eni has more leverage to E&P than most large integrated energy firms and less exposure to refining margins. The company’s other main business is gas and power, accounting for close to 22 percent of operating income.

Eni has one of the most successful and fastest-growing E&P operations of any major integrated energy firm. In the third quarter, Eni’s production grew to 1.764 million barrels of oil equivalent per day (boe/d), up 6.3 percent over the same quarter a year ago, the fastest growth of any integrated firm in my coverage universe.

However, even that understates Eni’s growth. The company has partnered with sState-owned national oil companies (NOC) in Africa, Central Asia and elsewhere in what are known as production sharing agreements (PSA).

Under a typical PSA deal, Eni receives a portion of the production from the wells it drills; the NOC in the host country receives the remainder. However, this proportion changes depending on crude oil and natural gas prices. Because energy prices were sky-high in the third quarter, Eni’s share of production under PSA deals actually declined. The result is that if we exclude the effect of PSAs, Eni’s production actually grew 10 percent for the quarter.

And Eni has a large number of new projects scheduled to come onstream over the next three years that are poised to power further production growth. In total, Eni believes it can add 400,000 boe/d in production by 2011 through planned new project start-ups alone.

One region of particular interest for Eni: Africa. Eni is already the largest producer in Africa with a total of 921,000 boe/d of production. And Africa is the company’s most important region in terms of proven reserves accounting for just under half of the total.

Eni has big growth plans in Africa. For example, in Libya, the firm is rapidly ramping up its natural gas production. Currently, Eni exports most of the gas it produces in the country to Italy via its Green Stream pipeline connecting the Libyan port city of Mellitah to Sicily. The 520 kilometer pipeline currently has a capacity of 8 billion cubic meters per year (bcm/y), but Eni is upgrading it to handle 11 bcm/y.

In addition, Eni is constructing a liquefied natural gas (LNG) export facility that will be completed by 2011 and allow the export of an additional 5 bcm/y. Thus, Eni’s total exports of gas from Libya are set to double from 8 to 16 bcm/y between 2007 and 2015.

Eni also has extensive operations in Algeria, Egypt, Angola, Tunisia and Nigeria. All told, the firm expects to grow production by around 5.7 percent annualized between now and 2011.

Outside of Africa, Eni’s two largest areas of operation are the Caspian area and Italy. In the Caspian, Eni is part of the massive Kashagan oil project; the company has a 16.8 percent stake, exactly the same percentage stake as ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS/B), and Total (France: SP, NYSE: TOT). Eni believes it will see first production from this field in the latter part of 2012, with production eventually ramping up to 450,000 bbl/d by 2015. Ultimately, this massive field could see production of more than 1.5 million bbl/d.

Outside of its E&P operations, Eni’s Gas and Power division produces steady returns. This business involves midstream natural gas operations such as pipeline transport and storage; Eni also generates power using natural gas. Like midstream and gas distribution operations in the US, this business offers a more utility-like return on capital.

Like other integrated oil and gas companies, Eni has a low cost of production and can remain profitable even with oil and natural gas prices at current depressed levels. And, despite its defensive characteristics, Eni offers an impressive 7.5 percent yield, the highest of the large integrated oil companies.

Buy Eni under 60 with a stop loss at 33. Be sure that if you purchase the stock on the New York Stock Exchange that you purchase the symbol “E,” not “ENI.” ENI is the symbol for Enersis, a power generator in South America.