埃尼石油 (E) 2003 Q1 法說會逐字稿

[Without the benefit of audio]

Good afternoon, ladies and gentlemen. My name is Marie. Welcome to the ENI quarter results conference call hosted by Mr. Vittorio Mincato. You will remain in listen-only mode until the question and answer session begins. If anyone requires any assistance whilst they're on the call, please key * 0 and a coordinator will be happy to assist you.

Over to you now, Mr. Mincato.

Good afternoon, ladies and gentlemen. Welcome to this conference call aimed at commenting the first quarter 2003 results.

Our reported net income was EUR2b, and increase of 45%, compared to the 2002 first quarter net profit. This result was achieved mainly thanks to growth in the operating profits of around EUR630m, as a result of several market scenarios- an increase in Upstream production; a higher [indiscernible] base and cost cutting for more than EUR100m.

Extraordinary income related to the final settlement of the litigation with Edison on the guaranteed [indiscernible] by Edison during the setting up of the EniMont joint venture (EUR200m), [lower minorities] as a consequence of the [indiscernible] around EUR8m.

The positive effects were partially offset by higher taxes for around EUR400m, mainly as a consequence of the higher taxable income. In the first quarter 2003 results, net of [inaudible] amounted to EUR1.9b which is an increase of [67%] relative to the same period of 2002.

The market scenario in the period was much more favorable from the time of the previous year. In particular, the average [crude] price passed up by the combined effects of the Iraq crisis and the national strike in Venezuela, reaching $51.5 per barrel. The [inaudible] was $3.81 per BOE, a huge increase compared with the first quarter 2002, $0.21 per BOE. However, these positive scenarios were partially offset by the strong appreciation of the euro versus the US dollar, which is, as you know, a negative factor for ENI's economic performance.

In the first quarter of the year, daily hydrocarbon production reached around 1.5m BOE, which is a 4% increase versus the first quarter of 2002. Such growth is the result of the double-digit increase in Nigerian production, the pick up of new fields in Iran, as well as the contribution of [indiscernible]. This positive trend has been partially offset by the Venezuela strike, which accounted for 35,000 BOE per day of lower production, as compared to a normalized production of [indiscernible] in 2002 before the strike.

In Venezuela, production increased 6.4% versus the first quarter of 2002. The Venezuela production rose well above 50,000 BOE, which allowed us to reach an average production of 1,565 BOE per day [indiscernible], essentially in line with our plans.

Gas volumes sold rose by 14% in the first quarter 2003. In particular, sales in Italy increased by 1% as a result of lower sales to the wholesalers, partially offset by higher volumes sold to end-customers. [indiscernible]. The national consolidated sales reached 5.-[indiscernible] with 61.4% decrease on a like-for-like basis. In other, international gas sales of 2.1 BPM are mainly related to the [indiscernible] on a per quarter basis. This trend is thoroughly consistent with our growth strategy for the international gas business.

Let me now update you on our recent deal which we have completed, the Italgas deal, with an overall cash out of around EUR2.6b. On February 2, 2003, the company [indiscernible]. We are now working on the industrial elements of the deal. First of all, the integration of the commercial arm. [indiscernible] decided to set up a new commercial business unit that will cater and manage the commercial units of Italgas, [indiscernible] which so far have been working separately. This is an important step toward the [indiscernible] of our presence in the market, [indiscernible] direct to the customer base.

This is even more important considering that Italy's gas market has been fully open since January 1, 20003, and as of May 1, 2003, the customer with a consumption higher than 1,000 kilo[indiscernible] will [indiscernible] in the Italian electric market. As to the second [indiscernible] the listing of Italgas, [indiscernible] higher flexibility [indiscernible], we are still analyzing [indiscernible] how to maximize the network synergies consistently with the concession licenses achieved.

Finally, I confirm that the deal [accretive] on both the [indiscernible] and the cash flow per share for 2003.

As far as the acquisition of [indiscernible] is concerned, the closing was finalized on March 3 with a total cash out of $975m, 256 [second value] and 719 [debt payment]. On March 15, the agreement of the acquisition of the 50% stake in Union Fenosa Gas was finalized. The closing of the deal and the cash out of EUR440m is expected to occur by June 2003, subject to the approval of both of the [indiscernible] and the European [indiscernible].

Overall investment [indiscernible] buy-back in the first quarter of 2003 was around EUR5.5b, namely EUR3.5b in equity investment related to the acquisition of [indiscernible], EUR1.7b capital expenditure which is an increase of approximately 15%. Finally, EUR219m share buy-back. Cash outflow was almost entirely offset by the strong cash generated by the operating activities, around EUR5b. At the end of March 2003, net financial debt increased only EUR500m, and the debt to equity ratio was [0.41], [indiscernible] at the end of December 2002.

I confirm a commitment to maintain the ratio below the ceiling of [0.50], taking into consideration the business [indiscernible].

Thank you for your attention. Now I hand you over to Marco.

Thank you, Vittorio. Good afternoon, ladies and gentlemen. I'll try to give the main highlights of the business trends in a nutshell. Before commenting the first quarter figures, as usual, I have to remind you that ENI's results are affected by several factors, including the seasonality in demand for natural gas and for petroleum products used in residential heating, the demand for which is highest in the first quarter of the year, which includes the coldest month, and lowest in the third quarter, which includes the warmest month. Therefore, initial operating income and change in net debt for the first quarter cannot be extrapolated for the full year.

Let's now start with the operating income on a consolidated basis. Excluding non-recurring items of EUR30m, first quarter operating income amounted to around EUR3.4b, a 24% increase over the corresponding period of the previous year. Going into a more detailed business description, the ENP operating income before non-recurring items was EUR1,765m, a 35.5% increase over the corresponding period of 2002, due to higher valuation prices denominated in US dollars following the positive oil market environment.

The EUR30m of non-recurring items were related to the write-down of mineral assets, mainly in the UK. This increase was in part offset by the 22.5% appreciation of the euro over the US dollar, the lower contribution coming from the storage activity, as well as the reduction of [inter]carbon production solely caused by the [indiscernible] position in some countries, such as the UK, Norway and [indiscernible]. And it is worth mentioning in this respect that such under-lifting position was partially offset at the very beginning of April.

The GNP business, operating income amounted to over EUR1.5b, a 7.2% increase over the corresponding period of the last year. This increase is due to, first, higher margins in the primary distribution, which resulted from the different integration activities existing between purchase and [indiscernible] prices, higher volumes sold, as well as the positive impact of the euro appreciation on the average purchase price abroad, that have more than offset the structural changes, which means [indiscernible] negotiation with the wholesalers and higher gas sales at the quarter [indiscernible].

Second, the [indiscernible] sold in the secondary distribution, following the impact of the [indiscernible] number 122 from the authorities, an increase of 0.[indiscernible]. These positive factors were in part offset by the goodwill amortization relevant to the Italgas deal (EUR22m), and the different mix of gas purchased and sold with respect to the first quarter of 2002.

In the LNM, operating income amounted to EUR117m, almost a 90% increase over the corresponding period of last year, determined by the strong improvement of the [indiscernible] market. The quarterly result also benefited from a gain on inventories of EUR29m.

The Refining activity, the quarterly result was affected by several factors which reduced the effect of a positive market environment, which were in particular lower profitability of [indiscernible] kerosene, high [indiscernible] oil and petrochemical feedstock, maintenance stop [indiscernible] refineries, the strong appreciation of the euro over the dollar. The operating income of the distribution activity accounted for a reduction over the first quarter 2002 as a consequence of the higher cost of dealer-owned service stations, partially offset by increased retail distribution margins in Italy, and higher margins in Europe.

Before commenting the operating income of the other businesses, let me underline that, starting from the first quarter 2003, [indiscernible] for reporting purposes will be included under the heading 'Other Activities' that gather all the companies, such as [indiscernible] and so on, that cannot be associated to any specific business division. As a consequence, the Petrochemicals business includes [MidiEuropa] only, which reported an operating loss of EUR17m, improving by EUR54m, for non-recurring items, thanks to the partially recovering margins, with respect to the depleted [first levels] reached in the first quarter 2002, and to lower costs.

In the oil [indiscernible] services, the EUR22m operating income reduction of [indiscernible] is mainly due to the end of the Blue Stream Project and to the increased weight of the [Epic] contract in the portfolio of activities. These negative effects were in part offset by the positive contribution of Bouygues Offshore.

The EUR31m operating loss in 'Other Activities' is mainly related to the EUR37m negative result of Signal], the former [Emichem], which is an improvement anyway if compared with the same period of last year when the operating loss was over EUR48m, mainly as a result of the ongoing rationalization process.

We are now at the end of the presentation. Thanks for your attention. As usual, together with Luciano, Stephano and the other colleagues who are here with us today, we would be pleased to answer any questions you might have.

Right Sir. Our first question comes from the line of Mr. Steve Turner. Go ahead, Sir.

Two questions. Firstly, could you update us on the progress you're making in terms of your chemicals disposals program? When are we likely to hear news on that? What's the timetable? Secondly, when would you expect to complete your studies concerning the optimization of the gas network, following the acquisition of Italgas? Thank you.

The [indiscernible] of disposal of [indiscernible] is still underway. We are [confident of completing] in the summer.

As for the second question, as perhaps you have already anticipated, we have just completed the first phase of the reorganization that has led us specifically to the commercial activity. So, now we have a specific division that is managing all of the commercial activities of Gas & Power. The second phase of the reorganization related to the assets of Italgas is still, I emphasize, still underway. There are different considerations that must be done.

First of all, the exercises related to the specific situation [indiscernible] related to the concession agreement that [indiscernible] with the different municipalities that is a very large number [indiscernible], if you require a specific analysis. Then there is also the distribution code that is still under discussion, under preparation by the authorities. So, on still these two points, we're not completed. We have to finish these two analyses before taking any decision.

Thank you very much.

Thank you, Sir. Our next question comes from the line of Mr. Rod MacClean. Go ahead, Sir.

Good afternoon, gentlemen. Can I ask just two questions. Firstly, in terms of the Gas & Power result in the quarter, I think the guidance that you had been giving us before for the full year was for an operating income of around about EUR3b, or maybe EUR3.1b. Now, you've done about 50% of that in the first quarter of this year. Could you sort of address that issue? I mean, the share of the full year number in the first quarter has typically been more like a 40% to 42% number, so I'm just wondering if the guidance for the full year still stands at that level. The second question is on Blue Stream. There were some reports recently that Turkey had stopped taking the gas through the Blue Stream Pipeline. Could you just give us an update on where we stand there, and also the sort of expected ramp-up rate in terms of throughput for 2003/2004/2005, please?

If I could answer that question, I can confirm that the estimation that we gave to you recently is confirmed. And [indiscernible] specifically, the year 2003, we expect to have a reduction in terms of margin of something like 30% to 40% less than what has been anticipated in the last quarter.

The third point related to the Blue Stream Project, we confirm that the flow has been stopped temporarily. We are negotiating with [indiscernible] to resume operations, and we expect to resume operations in May. This means that the expected volumes of gas that we [indiscernible] delivered through Turkey from the Blue Stream Pipeline in the year 2003 is in the range of 1 BCM, of which 50% will be our equity. The build-up that we estimate for the next year is in line with the previous program. This means that in the year 2004, we will be at 2 BCM and 3 BCM for the year 2005. A total 100% figure, not equity [indiscernible].

Thanks very much.

Thank you, Sir. Our next question comes from the line of Mr. Doug Levitt. Go ahead, Sir.

Hi. Good afternoon, gentlemen. A couple of questions on your Gas business, if I may. Is it possible to quantify the impact of the gas price lag effect that you talk about in your introduction? Perhaps relative to Q4, might be more appropriate. Also, is it possible to further break down the operating profit for the Gas business, giving us an idea of exactly how the gas marketing business is proceeding in the first quarter?

We didn't get exactly the first-- The second question, I understand is a breakdown of the components of the natural gas activity. But I must admit we didn't get exactly the first question.

Sorry. In your introduction, you talked about the impact of your gas price lag, improved the earnings of--

Sorry. We missed that point. The impact of the time lag [indiscernible] the first quarter is in the range of EUR120m, compared to the first quarter 2002-2004, the effect of the time lag is in the range of EUR120m. If you consider the high volume sold, this gives a contribution of another EUR100m. Later on you have to consider the change in sales and [indiscernible] mix. You know that we increase the volume of gas sold outside Italy, and this gives a negative effect of EUR65m. Later, on we have the Italgas goodwill amortization that gives another negative effect of EUR22m. On the margin, we have to consider also another negative effect that concerns the Power business, because during the first quarter of this year, one plant was stopped for maintenance and this gave another negative effect of EUR20m [indiscernible] the operating result.

The splitting of the different businesses in terms of the margin, to talk about the operating result, I will get back to you as soon as we find the answer.

Okay. Thank you.

Our next question comes from the line of Mr. Matthew Langfield. Go ahead, Sir.

Good afternoon. I think you made a comment regarding the level of operating cash flow. I think you said around EUR5b. Can you give us some more information on that number, please?

Yes. The reference was made to the cash flow in the first three months of the year. That's the order of magnitude we had. It's in line with the present scenario. That's the order of magnitude that permitted us, in spite of the impact of investments made at the end of last year, to increase the overall debt exposure by less than EUR1b.

Okay. And that's a post-tax cash flow number of EUR5b?

Next please.

Our next question comes from the line of Ms Caroline Kemp.

Good afternoon, gentlemen. Just a couple of questions. On the debt figure, which as you just pointed out did not go up very much in the first quarter of this year, are there any particular cash-outs that we should watch out for in the second quarter. Obviously, the dividend is paid. I was just wondering if there were any other flows of tax payments or something that would push the debt figure up particularly in the second quarter? Secondly, just on the gas volume number for the first quarter of the year, year-over-year there's virtually no change in primary distribution sales in Italy. We had a 20% decline in the fourth quarter. I was wondering if you could just be a bit clearer about where that difference comes from? Thank you.

I will answer the first question. No doubt, Caroline, that we are expecting in the the next couple of months -- two major components of cash-out. One is the dividend, and the cash-out is calculated. You know that we confirmed our EUR0.75 per share. And there will be also the payment of the taxes, which have been paid in anticipation already last year, of course, according to the Italian rules. But no doubt there will be a further impact in July. These are the two [indiscernible] major components we can expect in the reasonable future, but which are not a surprise.

I would like to return to the previous question that I would like to answer. The splitting between the different activities of our operating result can be the following. [indiscernible] market activity, both in primary and secondary distribution, the margin is EUR950m. As concerns the regulated activities, the number is EUR562m. As concerns transportation outside Italy, the operating result is about EUR[indiscernible]. The PowerGen is only EUR5m. So, this is the breakdown of our operating activities.

As concerns the last question, the major difference between the last quarter of 2002 and the first quarter 2003 is related to higher volumes that have been sold. For your information, we have [indiscernible] primary distribution increased the volume of 5.7 BCM, this is 31%+. As concerns the secondary distribution, the increase is 1.9 BCM, that is 52%. The difference of these volumes sold is related to the particularly warm season that we had in the previous quarter, compared to the first quarter 2003, which was a little bit lower compared to the average temperature.

This is the contribution of the volume, also the favorable scenario has affected positively because the scenario affected more positively the same price, respective to the gas price of achieving [indiscernible]. In addition, also the Gas achieved price were affected positively by the appreciation of the euro, versus the dollar. So, these are the two main issues related to the difference between last quarter and this quarter.

Okay. Are you able to tell us what your market share was in the first quarter of the year, relative to the legal thresholds? I was just wondering whether there was a big difference between getting to the 75% threshold in 2002, and then this pick-up in sales in the first quarter?

We are the same share market as last quarter.

Thank you very much.

Our next question comes from the line of Mr. Ian Reed. Go ahead, Sir.

Hi. Can I ask three questions, please. Firstly, I think you made a comment about the under-lift. There's quite a big difference a at the moment, obviously, in terms of production sold and overall production levels. Could you maybe just clarify exactly what's going on there, please? Secondly, on Kashagan, are you potentially looking at the pre-emption of the sale that BP made recently? Thirdly, I wonder whether you could update us on the expected timing of the storage regulation, as I believe that's still not completely clarified?

In terms of under-lift, you are right. In the first quarter of 2003, we had an under-lift position of approximately 5.4m barrels of oil, which compared like-for-like with the same period of last year with an over-lift position of 4m barrels. So, that is the reason for the big gap. Talking about the [indiscernible] of under-lift of [indiscernible] under-lift, there has been, for about 2.4m barrels, [recovered] in the early days in April, the number of cargos that have been shifting, parked [in the end days] of the month of March, while the others are related to the [indiscernible] of required cargo size for lifting, as well as a number of normal operation practices.

As far as the Kashagan pre-emption, you are right in this hour and days. The 50% portion of the former British Gas stake in Kashagan is subject to the possible pre-emption from the other partners of the consortium, while the other 50% will come [in view] in about 10 days' time. We are at the moment subject to the strictest confidentiality, in terms of how things are going. It will be a matter of hours, maximum days. What I'd like to make as a comment is that, as far as our position, being the operator, we cannot accept to have a lower stake than any of our partners, in other words, to be diluted.

In terms of the update for the storage [rates], the discussion of the [indiscernible] regional administration court of Lumbardi, which was due by the end of the month of May, has been postponed for a number of technical reasons. This is to the court, of course. Now, we expect it for the month of October this year.

Okay. Thank you very much. Just coming back, I've got one more question on under-lift. Would it be a good assumption, say for the second and third quarters, to assume that the production and sales volumes are going to be pretty much in line?

Well, not exactly in line. You know that the target is to be as much in line as possible at the end of the year. In the middle of the year, it's a bit more difficult to predict. So, we might be in under-lift, but we might as well be in over-lift over the period.

Okay, sirs. Thank you very much.

Our next question comes from the line of Ms. Mora Finati. Go ahead.

Yes, good evening. I have one question in [EMP]. Could you provide us with the level of technical costs in [EMP] for Q1, as to Q1 2002? And the second question on the Gas business, the Italian authorities published a document last December 2002 purporting some guidance for the level of the [indiscernible] international transportation and in marketing activities. So, I was wondering whether you feel that these suggestions could be a potential threat or a potential benefit for your margins?

I'll answer the first question. As far as the technical costs, that is a calculation which we make to the SEC standard. Quite frankly, you recently got the results for 2002, but we don't do a calculation on a quarterly basis.

Okay. Thank you anyway.

On the second point on the document that was published by the authorities, the document is related to the-- It is a consultancy document that is related to the calculation, or the cost, of the whole chain of the gas [indiscernible]. We have given to them all of the information that they requested. Discussions are going on with them, because the costs related to information on transportation is a subject that [indiscernible] within the Italian authorities' business.

Okay. And concerning marketing activities?

That is related only to the wholesale business. So, we have concentrated our presentation on the discussion related to [this side] of the market.

Thank you.

Thank you. Our next question comes from the line of Mr. Michael Hughm. Go ahead, Sir.

Good evening, gentlemen. It's Michael Hughm from MFS here. I just wanted you to comment on your CAPEX numbers going forward for the year. If I extrapolate your CAPEX, I've got a number of about EUR7b for 2003 and about EUR5b in EMP. Would that be consistent going forward for the year? Also, maybe if you would comment on your CAPEX program over the next few years. Is it still consistent with your original policy?

As regards the consistency with the regional policy, I can confirm what we said just a couple of months ago as regards the development of investments in the forthcoming months of the year 2003. We expect to have something in the range of between EUR8.5b and EUR8.8b of CAPEX, of which we expect more or less EUR5.5b to be related to ENP, EUR1.6b to Gas & Power, and EUR1b to [indiscernible]. These are approximate figures which bring you to about EUR8b.

Thank you.

Our next question comes from the line of Alistair Simon. Please go ahead.

Hi. I just wanted to come back on Matt's question about the operating cash flow. Can you confirm that EUR5b is definitely a post-tax number for the first quarter?

The operating cash flow is before tax.

Right. So, the tax will come out in June/July. Is that what you're saying? Before the end of the second quarter, or the third quarter?

But as I said before, the impact of taxes won't be-- We do not expect it to be too high because of the fact that we paid the largest portion as an advance payment at the end of last year.

Right. In terms of the EUR1.4[b] P&L tax you saw in the first quarter, how much of that is still to be paid?

You mean out of the EUR1.4[b] of this first quarter?

Yes.

It has been largely-- This is relevant to this year, expected tax rate. We are not going to pay taxes on the first quarter of this year in June. What we'll be paying will be the complement to the 2002 taxes, which have not been as early payment according to the Italian law in November last year. So, the EUR1.4[b] is the expected impact on 2003 taxes. It has nothing to do with the cash payments we should have in June/July of this year.

Okay. Thanks very much.

Ladies and gentlemen, if you wish to ask a question, key * 1. Our next question comes from the line of Neill Morton. Go ahead, Sir.

Good afternoon. I wanted to take you back to the Gas & Power Division and the issue of your time lag, the indexation of gas purchase and gas selling prices to oil and oil products. Can you perhaps say how the time lag between buying and selling has perhaps changed over time. Has perhaps the liberalization of the Italian market reduced the length of a typical indexation [indiscernible]?

No. There is no modification in the last period. So, the time lag is between six and nine months.

And is that for both gas purchases and gas sales?

Yes, between gas purchasing and the selling.

Okay. Can I just follow that up by asking, with regards to the gas sold, or the power generation, is the lag there typically much shorter? Or is it still within the six-month to nine-month range?

No. It's within this range.

That's great. Thank you.

Thank you, Sir. Our next question comes from the line of Mr. Javier Alvares. Please go ahead.

Good afternoon. This is Javier Alvares from ING. One question, if I may. I'm going back to Gas & Power. The guidance we received previously was in terms of EBIT for Gas & Power in the region of 10% less EBIT than last year (EUR3.2b last year, EUR2.9b this year). After this very good first quarter with +7%, is it still reasonable to forecast that fall of 10%, given the high weighting in the yearly results of the first quarter? Thank you?

Well, I can say that we confirm the impact [indiscernible] negative impact at the operating level with the comparable [indiscernible] expectations, partially offset by the favorable market scenario, by the higher volume of gas that we will sell. So, for this year 2003, this will be a positive effect of about 30% to 40% less than what was previously expected. It was, as you remember, EUR200m.

Thank you.

That was the last question, Sir.

Okay. Thank you, everybody, and speak to you soon. Thank you. Bye bye.

Thank you, ladies and gentlemen. This concludes your conference call for today.