Eni - Earnings Call - Q3 2011

Transcript

Speaker 0

Hosted by Alessandro Bernini, Chief Financial Officer. For the duration of the call, you will be in listen-only mode. However, at the end of the call, you have the opportunity to ask questions. I'm now handing you over to your hosts to begin today's conference call. Thank you.

Good afternoon, ladies and gentlemen, and welcome to our third quarter results conference call. The third quarter of 2011 was characterized by significant progress on our strategic goals. In particular, the situation in Libya is evolving positively. The Bar el Salam oil field was restarted, and we have reopened the Green Stream pipeline on October 13. Our initial volumes are small, but we expect to ramp this up over the next two months and into the first quarter of 2012, along with the restart of the large Bar el Salam offshore gas fields expected before year-end. Overall, the recovery of our activities in Libya has enabled us to slightly reduce our estimate for the negative impact of the crisis on full-year production.

We have also continued to deliver excellent exploration results, of which our recent discovery in Mozambique is the standout example, both in terms of size and because it opens up a new frontier for us in East Africa. We have made good progress on our development projects, in particular taking the FID for the Samburzkoya field in the Yamal Peninsula, putting us on track for startup in 2012. Just to give you an update on gas renegotiations, our discussion with Sonatrach has been positive, and we are close to reaching a mutually satisfactory conclusion. Our discussion with Gazprom is progressing, and we have seen evidence of an increasingly constructive dialogue. While it is difficult to be deterministic about the timing of a deal, we remain confident about the outcome. Now, let me give you a detailed overview of our Q3 results.

In the third quarter of 2011, the macro environment was mainly positive. The Brent price averaged $113 a barrel, up 48% compared to the third quarter of 2010. Meanwhile, the average European refining margin, Brent/Euro, was $2.90 per barrel, still weak compared to historical levels, but showing an 18% increase year on year. The euro/dollar exchange rate moved unfavorably compared to the corresponding period of last year, with the euro appreciating around 10% versus the dollar. Moving to our results, adjusted operating profit in the third quarter amounted to €4.6 billion, up 12% year on year. This result is due to the improved performances of the exploration and production, engineering and construction, and refining and marketing businesses, partially offset by the lower contribution of the gas and power division, which doesn't reflect any benefits from gas contract renegotiations, and the negative result of the petrochemical business.

Adjusted net profit for the third quarter was €1.8 billion, up 7% year on year, notwithstanding a higher adjusted tax rate, up by almost 7 percentage points to 57.6%. The recent upward revision of the so-called Robin tax decreased net profit by €130 million in the third quarter, of which €18 million pertaining to the first half of 2011. In the third quarter of 2011, Eni's hydrocarbon production amounted to 1,473,000 barrels of oil equivalent per day, a decrease of about 14% compared to Q3 2010. Lower production was mainly due to the ongoing instability in Libya, which reduced production by approximately 200,000 BOE per day. Furthermore, PSA and PSA entitlements were negatively affected by the sharp increase in the oil price, with an estimated impact of 37,000 BOE per day.

The increase in the oil price, however, boosted the division's adjusted operating profit, which amounted to over €3.9 billion, up 19% compared to the third quarter of last year. This positive result comes in spite of the negative impact of the U.S. dollar depreciation, amounting to around €200 million in the quarter. In gas and power, overall gas volumes sold, including Consolidated and Associated companies, totaled 17.3 bcm, roughly in line with last year. However, adjusted operating profit decreased by 20% compared to the same period of 2010 due to the sharply lower results delivered by the marketing business. It's worth reminding you that the results do not include any benefits from the renegotiation of our long-term supply contracts, although these will be retroactive once agreements are finalized.

Gas and power adjusted performer EBITDA for the third quarter of 2011 was €550 million, compared to €675 million in the third quarter of last year. International transportation results showed a 4% decrease, while the regulated businesses generated €388 million, up 5% versus the corresponding period of last year. The increase is mainly due to higher returns of new investments and efficiency actions, as well as the positive impact on the distribution business of the new tariff regime set by the Authority for Electricity and Gas. Adjusted performer EBITDA in the marketing power business was negatively impacted by increasing competitive pressure in Italy and Europe, as well as unfavorable climate and scenario effects. Furthermore, the ongoing situation in Libya reduced volumes to shippers and affected margins, owing to the substitution of recently renegotiated Libyan gas with other sources of supply not yet renegotiated.

These negatives were partially offset by the positive outcome of District Gas renegotiation of a long-term supply contract with the Netherlands. Turning now to R&M, in the third quarter of 2011, the division reported an adjusted operating profit of €26 million versus €14 million in the same period of last year. The refining business has rightly improved the results due to a better ratio of prices of the main distillates to the cost of the crude feedstock and widening the spreads of gasoline and gasoil compared to fuel oil. These positives were partially offset by rising oil-linked costs for plant utilities. Marketing activities posted a positive result, although lower than in Q3 2010 due to declining fuel consumption, a different mix of volumes sold, and increased expenses related to promotional initiatives.

In the third quarter of 2011, the petrochemical business reported an adjusted operating loss of €80 million, compared to a profit of €31 million in the third quarter of last year. The result was negatively impacted by falling product margins, with the cracking margins severely hit by higher supply costs of oil-based feedstocks, which were not fully recovered in sales prices on end markets, as well as a substantial decrease in demand. Sitem delivered an adjusted operating profit of €333 million, up 5% versus Q3 2010, mainly driven by higher results in onshore construction and offshore drilling operations. Other activities and corporate showed an aggregate loss of €146 million, compared to a loss of €93 million reported in the third quarter of 2010. Cash flow from operation was €11.2 billion in the first nine months of 2011.

Proceeds from divestments amounted to €334 million, including small non-strategic upstream assets and the sale of gas distribution activities in Brazil. The cash inflows were used to partially fund cash outflows relating to capital expenditure of €9.5 billion and dividend payments of €4.1 billion, which included the payment of the interim dividend 2011 made in the last week of September. Net financial debt as at the end of September amounted to €28.3 billion, and the ratio of net borrowings to total equity stood at 0.49. The net debt at the end of September doesn't include the cash in from the announced disposal of the international pipelines, nor the investment for the acquisition of Noon Energy and an additional stake in Elgin Franklin, which we expect by year-end.

Assuming an average Brent price of $111 per barrel for the full year 2011 and the benefit associated with the ongoing renegotiation of gas supply contracts, the debt-to-equity ratio expected at the end of 2011 will be lower than in 2010. Thank you for your attention, and now, together with Claudio Descalzi and Domenico Dispenza, I would be happy to answer any question you may have.

Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel your reservation, please press star followed by two. Thank you. First question comes from Mr. Alejandro De Michelis from Merrill Lynch. Mr. De Michelis, please.

Speaker 3

Yes, good afternoon, gentlemen. The first question is on the Mamba South discovery. Maybe you can talk to us how you see that going forward, and also in terms of size of Mamba North, should we assume that that's going to be of a similar size? As a follow-up, maybe you can tell us what you're thinking in terms of how do you think about unitization and potential development of this field?

Speaker 4

Okay, Mamba. We plan to drill additional four wells. As you said, the next well will be Mamba North. We think that Mamba North will not have the same dimension of Mamba South. Mamba South is a big discovery, more than what we expected. We think that by the end of 2012, we can increase these resources. I cannot talk now about unitization because we didn't talk to Anadarko yet. I think that part of the field has to be unitized, and part of the structure is not in the Anadarko block. It's not the case for all the blocks.

Speaker 3

You mean the deeper discovery does not overlap with Anadarko, or do you think that the upper zone does not overlap?

Speaker 4

No, no, we talk about in general. I think that the unitization, as you know, is a very sensitive issue, and I don't think that it's very wise to talk and disclose anything about unitization before talking with Anadarko, with the government. I prefer don't talk about unitization now. We are still drilling the well.

Speaker 3

Okay, that's great. Thank you.

Speaker 0

Next question is from Mr. Niti Nasharma from J.P. Morgan. Please proceed with your question, sir.

Speaker 1

Hi, good afternoon. Two questions, please, if I may. First one on gas marketing business. This is the second consecutive quarter where we've reported operating loss for this business. The reason clearly is these ongoing negotiations with Gazprom and Sonatrach. Could you please quantify what sort of financial impact culmination of these negotiations would have? If possible, a timeframe? I know you've guided towards an early resolution, but would that mean by end of Q4? The second one is in relation to the guidance that you've given on production year on year, 10% decline. That guidance is based on additional volumes from resumption in Libya. My question is, what level of production are you assuming in Q4 from Libya? Thanks.

Speaker 3

I follow GAF. We had quite a beefy month in the last one because we closed some small supply contract. We closed, I would say, in a quite good way, mainly long-term fading contract. What remains still to be agreed on are these two main contracts, which are the Sonatrach contract and the Gazprom contract. On the Sonatrach contract, I could say that I see the things developing quite well, relatively well, I would say. I expect that the conclusion could be reached within this year. For Gazprom, the situation is not exactly the same in the sense that we are still negotiating with them. There is progress, but we are not yet at a stage in which we could consider the closing quite near.

I cannot, of course, comment on the overall impact of those negotiations, but I could remind you that we said we confirmed today that if we consider apart, of course, the impact of the Libyan situation, the Libyan crisis, the result should be if the negotiation will be complete in line with what we expect, the final result would be broadly in line with those of last year.

Speaker 4

For Libya, the expected average contribution of Libya production in Q4 is about 120,000 barrels per day. The impact of the shutdown in Libya for the full year 2011 is roughly 190,000 barrels per day.

Speaker 3

Thank you.

Speaker 0

Next question comes from Mr. Jon Rigby from UBS. Please proceed with your question.

Speaker 1

Yes, thank you. Two questions. One, on gas again. Can you, are you able to estimate or give us some sort of estimate of what you think the absence of, not just gas, of Libya was, A, on your gas and power business, i.e., the absence of that cheaper gas? Also, I think you mentioned in the second quarter that it also had a negative impact on both your refining and your petrochemicals businesses with the absence of optimized feedstock. Are you able to give some sort of calculation of the economic effect there? Can you just confirm that the discovery that you're talking about in Angola, that's potentially a third pole on 15.06? Is that correct? Thank you.

Speaker 3

For the gas, I could say that we estimate a kind of around $300 million for the overall impact of the lack of Libyan gas on this year. Of course, looking to the news that they are coming, that gas is still filling the Green Stream, and we should expect closing coming quite near in the next future. I would be more opportunistic for the next year.

Speaker 1

Right.

Speaker 4

As far as the effect of Libya on the other businesses, refining, marketing, and petrochemical, let me say that the effect on the results of those business lines is negligible, is limited to a few million euros. We confirm the estimate that we have already provided in the first month of this year. In Angola, we confirm that is a very good discovery. It is mainly gas and condensate. We need additional one or two wells to define and appreciate clearly the dimension of the discovery that at this point is really big in terms of gas. I think that can become a third hub, more on the LNG sites and with some good production of condensate. I think that we will be able to be more clear about this project, I think, in 2012.

Speaker 1

Would that be something that would naturally fit into your Angola LNG 2 project that you have?

Speaker 4

Lira, for sure. As you know, we have a joint venture with Sonangol for gas for a second possible LNG. We already made some good discoveries with Sonangol. We discovered about 2, 2.5 TCF. That could be an additional gas. With Lira and with what we discovered, we can already have a possibility to develop a floating LNG or an additional train. As I told you, this issue is also connected to the joint venture that we have in Block 15.06. We cannot extrapolate more and elaborate more on this subject.

Speaker 1

Thank you.

Speaker 0

Next question comes from Mr. Ellis Design from Citigroup. Please proceed with your question, sir.

Speaker 1

Good afternoon. Could I just ask about where we're at on Iraq in terms of production levels? I don't really understand if we're still ramping up or whether investment levels have slowed.

Speaker 4

Iraq now, the average production now is about 240,000, 245,000 barrels per day. We reduce the average production in Iraq, the gross production. The reason that we said already in the first half is because we have some bottlenecking in the contracts. We are not able, we have not been able to award all the contracts we forecast in 2011. For that reason, the production is going down. We think that is just a temporary situation. We are in a transition phase, and we are confident that we can restart the ramp-up, the production ramp-up in 2012.

Speaker 1

Could you perhaps go to where you think production might average for 2012?

Speaker 4

The average production in 2012, our forecast is between 350,000 and 400,000 barrels per day.

Speaker 1

Okay.

Speaker 4

Gross production.

Speaker 0

May I go ahead, sir? Next question comes from Mr. Tapan Jotilinga from Namera International. Please proceed with your question.

Speaker 1

Yeah. Hi. Good afternoon, gentlemen. Just some follow-up questions on what we've talked about before. Just on Mozambique, is it possible just to give us any rough estimates of what you think recovery factors would be for the discovery? Secondly, just on Libya, is it right to assume that you just see a ramp-up in the condensate alongside the gas? Lastly, you are a little bit light in terms of the run rate on CapEx. Again, would it be right to assume that there's just a simple rollover in the CapEx into 2012, and we should assume a higher number for 2012? Thank you.

Speaker 4

Recovery factor for Mozambique, I think that, as I said, we are still drilling this well. We really, we had some core, and so we know the lithology. I think that for the petrophysics, for this kind of environment, the average could be between 65% and 85% or 90% of recovery factor. That is the average that we have in our statistics. As I said, that is a broad range because we are really still in the early stage. For Libya, yes, increasing the gas production, we are going to increase also the condensate. For the CapEx, I don't think that we'll have a strong increase in our CapEx in 2012 because it's just a question of commissioning and some additional maintenance program that is more OpEx than CapEx.

Speaker 1

Thank you.

Speaker 0

Next question comes from Ms. Lucy Hoskins from Bartlett's Capital. Please proceed with your question, madam.

Speaker 1

Good afternoon, gentlemen. Could I ask, in the refining and marketing business, how much would you see as that being just a normal seasonal pattern in terms of the driving season within Italy, and how much is actually the self-help measures starting to see through? Perhaps on the flip side, chemicals, perhaps it's a little lighter than we might have expected for the quarter. What's the underlying challenges there? Again, what can you do to address those issues?

Speaker 2

Yes, you are right. The positive result in the quarter of the refining and business must be considered a sort of temporary positive effect, unfortunately, because in the quarter in particular, the refining margin in the Mediterranean has expressed some improvement. At the end of the quarter and already in October, the result has slightly worsened. It can be considered only a temporary positive effect. On the other side, what is for sure will be maintained also over the next period is the efficiency that we are pursuing through a lot of initiatives that partially have been already completed and partially are still ongoing. We are dedicating a lot of our efforts to the efficiency process. Through this initiative, we have been already succeeded in obtaining significant cost saving in the refining and business.

As far as the marketing business is concerned, for sure, you know the summer season is quite important for this type of business in Italy in particular. Effectively, the margins that we have realized in the period relate to this seasonal effect. In the incoming quarters, we expect to be able to maintain more or less the same positive result in the marketing business, even if associated to lower volumes, whilst in the refining, we are a little bit negative for the future. In petrochemical business, in particular, you know that we are engaged in the production of different lines of products. Some of them are maintained, in particular, the elastomers are maintaining very good results, whilst the massive production of our petrochemical system is, unfortunately, there is a significant decrease in the demand. Accordingly, the volumes of the production have decreased significantly during the quarter.

We are also, for this segment, a little bit negative also for the last quarter of this year. However, also in the chemical business, you know that we have launched a number of initiatives, one of which is the conversion of our Port Torres industrial site into a sort into a production of green products. Of course, the production and benefits will come on stream only in the incoming years because the development will require at least one year to join the first level of production.

Speaker 0

Thank you. Next question comes from Mr. Oswald Clint from Sanford Bernstein. Please proceed with your question, sir.

Speaker 1

Yes, hi, afternoon. Thank you. Could I just get some confirmation or level of detail on the gas price that Gazprom has committed to purchasing your volumes from the Samburzkoya field? At which point in 2012 should that field start up? Is it the first half or the second half? Secondly, just on Libya, I'm just curious if you have actually restarted in any oil wells yet. I'm just curious if they're coming back online in line with your expectations. That's focused on the oil wells. Thank you.

Speaker 4

For Samburzkoya, the startup is focused for the first half of 2012. The gas price is a mixture. It's mixed between the massive price and export. Within that, they can convert in for 2016 because there is an annual increase. For Libya, yes, we start one big oil field, Bar el Salam. By the third week of November, we will restart Boui. That is the oil offshore field.

Speaker 1

Okay, thank you.

Speaker 0

Next question comes from Mr. Iain Reid from Jefferies. Please proceed with your question, sir.

Speaker 3

Hi, gentlemen. Claudio, could you update us on the status of Kashagan in terms of how far along the kind of project plan are you now? Maybe also give us some information about what the well flow rates have been when you've been testing them, and perhaps also what you think the final CapEx might be for the whole project, and if possible, any updates on any progress on phase two?

Speaker 4

The progress on the experimental phase to Kashagan commercial production, we reached 96.4%. That is a progress update mid-October. We are absolutely ahead of our schedule. That is the third month that we are ahead of schedule. We think that we can reach 98% by the end of this year. We are still on track, ahead of our schedule, to reach the production end 2012. From a production point of view, I think that there is no problem. The well has been tested, not now, before. We drill 21 wells. We have to drill 40 wells for the experimental phase. The drilling is ongoing, but it continues after the first production. Each well has a production absolutely enough to reach the first production that is 70,000 barrels per day, with a build-up on the first year to reach, at the end of 2013, beginning 2014, 370,000 barrels per day.

For the right cost development, the right cost is something that we are discussing. The project is not finished. I think that in terms of direct CapEx for the development, we are not very far from our target. That is what I can say at the moment.

Speaker 3

On phase two, anything moved on that?

Speaker 4

Phase two is not our direct responsibility. It's still under study because we needed, you know, that we stopped suspending for a while because we needed to optimize costs. I think that once we'll have reached the first production, the KCP for the first phase, we'll think about the second phase. The first phase has a lot of investment and a lot of synergy on the phase two. I don't have any doubts about the phase two. I cannot tell you now exactly the date, but I think that there is no doubt about the phase two.

Speaker 3

Okay, thanks.

Speaker 0

No more questions at the moment. Ladies and gentlemen, I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. The control room confirmed there are no more questions.

Speaker 5

Great. Thank you very much. In which case, you know we'll end the call here. If you've got any further questions, do come back to us on the investor relations number. Thank you.

Speaker 0

Ladies and gentlemen, the conference is over. Thank you for calling.