埃尼石油 (E) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Eni Conference Call on 2004 First Quarter Results and Business Trends, chaired by Mr. Vittorio Mincato, Chief Executive Officer of Eni.

[Operator Instructions].

Good afternoon, ladies and gentlemen, and welcome to this conference call and comments on 2004's first quarter results and the business trends.

Let me start with a quick overlook on the first quarter market scenario, which was marked by the euro appreciation and high oil prices. In particular, euro continued to strengthen versus the US dollar, reaching the average level of 1.25, up 16.5% compared with first quarter 2003.

Brent crude prices increased to around $32/boe, with a 1.4% increase versus the corresponding period of 2003, $31.5/boe. This trend is significantly different, taking into account the currency factor on the Brent price. In fact, in euro terms oil prices showed a decrease of 13% to €25.5/boe. Such a strong oil price scenario, in dollar terms the highest seen from the beginning of the '90s, was sustained not only by OPEX's price policy, but also by the uncertainty regarding Iraq's oil [possible] recovery as well as by the economic expansion in US and China.

In the first quarter 2004, the refining margins showed on a yearly basis a decline of 42% and 50%, in US dollar and euro terms respectively.

The reported net income amounted to €2.15b, with an increase of around 7% compared to the same period of 2003. The increase is the result of two main effects. 4.8% decline in the operating results, mainly as a consequence of the negative impact of the euro appreciation versus the US dollar, partially compensated by the higher hydrocarbon production sold (plus 11%), as well as by the good results achieved in the Gas and Power division and the slight recovery in Polimeri Europa.

This negative trend at the operating level was more than offset by more than €500m extraordinary income, related to the free tax capital gain on the share [inaudible] over of Snam Rete Gas. I remind you that in the first quarter 2003, Eni accounted extraordinary income of €200m, related to the final settlement of the litigation with Ed.

The net income excluding special items showed a decrease of 14%, to €1.6b (€1.9b in 2003), mainly as a consequence of the low operating result, higher tax rate, and the higher minorities for €35m, mainly related to the Snam Rete Gas share capital disposal.

In the first quarter 2004, the clean EPS showed a decrease of 13.8% in euros, and a 1% increase in dollar terms respectively, compared with the same period of the last year.

Turning on clean cash flow per share, we see a decrease of 11.7% in euros, and an increase of 3% in dollar terms, if compared to the corresponding period of 2003.

As far as upstream production is concerned, in the first quarter 2004 daily hydrocarbon production reached 1.628m boe, up 8.7% versus the corresponding period in 2003. Such growth is the result of the field startups and increased production in North and West Africa, Australasia and Kazakhstan, partially offset by declines of major fields in Italy and Ukraine.

This positive trend was also supported by the strong production increase achieved in Venezuela, where a year ago the overall oil industry was negatively affected by the general strike.

By adjusting the 2003 production profile in Venezuela, the hydrocarbon production increased by 6.2% in the first quarter 2004. This figure is well in line with our strategic plan.

In the second and the third quarters of 2004, our production trend on a year-on-year basis will show lower growth rates compared to the remarkable result achieved so far, due to the portfolio rationalization and the planned maintenance. In the last quarter of the year, the production - mainly thanks to the startup of the large scale projects in Libya (Wafa), Angola, [indiscernible], and Iran [for South Pars 5] - we'll be able to ramp up again, reaching a level well above 1.7m boe per day.

With regard to the Gas and Power business, overall gas volumes sold - both consolidated and associates sales - rose by around 7% in the first quarter 2004. And in particular, flat trends in Italian sales as a result of lower sales to wholesalers and to industrial customers almost completely offset by higher volumes sold to the end customers. I mean the powergen and the residential sectors buying in the same period the entire gas consumption. So we're up 4.1% versus 2003 first quarter, confirming the dynamic trend of the demand driven by the powergen sector.

International overall sales rose by 26.4%, reaching 9.1 bcm, from 7.2 bcm in first quarter 2003. Mainly as a result of the higher consolidated gas sales.

These results are clearly consistent with our growth strategy in the international gas business.

Now I would like to briefly update you on our recent deals.

In the Exploration and Production business on last February 25, the development plan of the giant field Kashagan was approved. This is an important result, which has enabled Eni to achieve a long-term profitable growth combining the high potential exploration of this region - well represented by the ongoing exploration activity in Kalamkas, Aktote and Kairan - with our capabilities and skills in developing giant projects.

In the Gas and Power sector, we made further steps to help reducing our presence in the regulated businesses. In fact, on April 1 we completed the sale of 177m ordinary shares of Snam Rete Gas, representing 9.05% of the share capital, with a cash in of €650m and a capital gain of €519m.

As far as the gas activity abroad, on March 31 we signed the final agreement for the overall reorganization of Galp Energia, in line with the restructuring plans set by the Portuguese government. Through the complete execution of the agreement, Eni will exit from the downstream oil business and gas regulated assets for the Galp Energia, and will concentrate its interests in gas activity with a final stake of 49% in Gas de Portugal.

[Indiscernible] government's agreement with Electricidade de Portugal, which it owns 51% of with GDP, will ensure the industrial cooperation between the partners. Moreover, from a financial point of view, Eni will cash in approximately €670m in the coming months. No capital gain has been accounted so far. Of course, the deal is still subject to antitrust authorities' approval.

Coming to the Petrochemical business, I would like to inform you that we shut down a small butylene plant in Porto Marghera last December. The polybutylene rubber and the [dyemative] carbonate plants in [Remna] in January and April 2004 is [possible].

On top of that, we will see the leading European PVC producer conveyed its interest for the chlorine plants based in Porto Marghera and [Semini]. In the coming weeks, the negotiations will start for the disposal of these activities.

Finally, we are proceeding ahead with the shutdown of the [indiscernible] site and the chlorine plants in Cleon.

That's all. Thank you for listening, and now I hand you over to Marco, who will analyze the first quarter results business by business.

Thank you Vittorio. Good afternoon, ladies and gentlemen. After the comments on the major trends, I'll now focus on the economic results relevant to the first quarter of 2004.

As usual, I have to remind you that any results are affected by several factors, including the seasonality in demand for natural gas and for petroleum products used in residential heating. The demand of which is highest in the first quarter of the year, which includes the coldest months, and lowest in the third quarter, which includes the warmest months. Therefore, Eni's operating income and change in net debt for the first quarter cannot be extrapolated for the full year.

Having said that, let's begin with the fact that first quarter reported operating income amounted to €3,173m, with a 4.8% decrease versus the corresponding period of 2003. Excluding special items of €35m, mainly relevant to the upstream business, the first quarter 2004 operating income totaled €3,208m, 4.6% down on a like-for-like basis.

If we add the effect of the euro position versus the US dollar, of around €380m, in the first quarter of 2004 the increase in the clean operating income on 2003 would be in the range of 7%. It's worth saying that the negative impact of the euro appreciation versus the US dollar is mainly related to the upstream business.

Let me now go into more detail for each business.

The first quarter reported operating income in E&P amounted to €1,569m, with a 9.6% decrease if compared with the corresponding period of 2003. The reduction is related to the 16.5% appreciation of the euro over the US dollar, which was partially compensated by higher hydrocarbon production sold and by lower exploration costs.

The first quarter result includes negative special items for €107m, related to asset write-downs in the USA and in the UK, partially compensated by the gain of €75m related to the asset disposal in Mauritania.

The Exploration and Production clean operating income amounted to €1,600m, with a decrease of 9.3% over the same period of 2003.

As far as the Gas and Power business is concerned, the first quarter reported operating income amounted to €1,572m, with a 2.8% increase compared with the €1,529m accounted for in the corresponding period of 2003. Increase is related to higher contribution by power generation activity, due to the increase of electricity production - so in fact this increase is doubled - and better results in the transportation activity abroad, related to higher tariffs.

These positive effects were partially mitigated by a lower result in marketing and distribution activities, lower margins in primary distribution due to a change in sales mix, and to a less favorable currency impact, were partially compensated by the higher volumes sold abroad.

Let's now turn to the R&M sector. The first quarter 2004 reported operating income totaled €103m, a 12% decrease versus the 2003 result, due to the euro appreciation versus the US dollar and the Gela refinery standstill. These negative effects were partially compensated by the high complexity of Eni refineries, and higher quantities refined in the Taranto plant.

In addition, in the first quarter 2004 we accounted for a positive contribution of the marketing activity, mainly related to higher volumes sold.

In the first quarter of 2004, the Petrochemical business - and I refer to Polimeri Europa - posted an operating income of €2m compared to the operating loss of €17m in the same period of 2003. The result was due to the increase in the unit margins related to the higher reduction in oil based feedstock prices in Europe, as compared to a lesser decline in selling prices on the main Petrochemical products.

This positive effect was partially mitigated by lower volumes sold, mainly polyethylene and base chemicals.

In the first quarter of 2004, the Oilfield Services and Engineering reported operating income amounted to €62m, substantially in line with the same period of 2003. Mainly as a result of higher contributions from the offshore construction, [indiscernible] contracts in North and West Africa, almost completely offset by the lower contribution from the onshore constructions as a consequence of the completion of certain projects in Kazakhstan and Saudi Arabia.

In the first quarter of 2004, the €81m operating loss in other activities is related to the €89m negative result of Syndial.

As far as investments are concerned, in the first quarter Eni capital expenses amounted to around €1.74b, of which €1.2b invested in E&P. It shows a decline of around 6% if compared to the same period of last year.

In the Gas and Power business, the capital expenditure increased by around 44% on a like-for-like basis, mainly as a consequence of investments in the high-pressure transportation network, the ongoing greenfield project and the construction of the scheduled power plant.

As a result, the overall investments in the first quarter of 2004 decreased by more than 66% if compared to the same period of last year, when we accounted for €3.5b as equity investments related to the acquisitions of Fortum, Union Fenosa Gas and Italgas.

Before concluding my presentation, let me comment on the net debt and the gearing.

Net debt as of March 2004 amounted to €11.3b, €2.3b lower if compared to the end of 2003, mainly as a consequence of the cash flow generated by the operating activities. Our debt-to-equity ratio increased to 0.36 as of the end of March.

It's worth saying that it is not possible to extrapolate such a level for the full year 2004, because the current gearing is highly affected by the seasonality of the natural gas demand, which reaches its peak in the first quarter of the year. In addition, as you know, at the end of the second quarter Eni will be facing a cash out of around €3b related to dividends and tax payments.

Thank you for listening, and now we are pleased to answer any questions you may have. When I say we, I mean of course Vittorio and myself, but also the three Chief Operating Officers of the business divisions - Stefano Cao, Luciano Sgubini and Mario Taraborrelli - who are here with us today.

Thank you. [Operator Instructions].

Our first question comes from Mr. Jeremy Elden. Go ahead, Jeremy.

Good afternoon, gents. A couple of questions, if I may. Firstly on the tax rate. If one excludes the special and extraordinary items you've listed, we estimate a tax rate for the quarter of 44%. Is that how you see it? And do you have any guidance for the year on tax?

And secondly, within the Gas and Power business, which once again did very well, can you give any guidance as to how much of the profit this period came from electricity generation?

Jeremy, I'll begin with the first answer, the one relevant to the tax rate. And as far as the guidance on a full year basis, we would give an indication of remaining in the range of between 40% and 42%, which has been given already in the past.

I would like also to add - but this is something which we bring on the table for consideration - I wondered if it is totally correct to speak of a tax rate deleting, not considering, special items. Because as a matter of fact, our fiscal department is working with the aim of reducing the fiscal impact also on the basis of the so-called special items. It's just an element of consideration, which I bring for your attention and I leave it open on the desk.

As far as, anyway, the Gas and Power guidance on the contribution of the electricity business, Luciano will comment.

For the first quarter of 2004, the contribution of the power generation was €58m compared with a first quarter 2003 of €5m. So the difference is €53m plus.

That's great. Marco, if I could just be clear on the tax. It's excellent that you've managed to avoid the tax on the disposals, but the 40-42% for the full year, is that the kind of range you expect to see including the impact of the disposals?

Yes. That's the overall impact, the overall tax rate on a yearly basis. It's not so meaningful to speak on a quarterly basis of tax rate.

No, I see that. Thanks very much.

Okay. Thank you for your question. Our next question is from Mr. Andrew Archer. Go ahead, Andrew.

Yes, thanks. I've got two questions, just about, again on a tax issue. I just wanted clarity on the treatment of the exceptionals. It seemed there was an announcement that went through the wires that referred to that. Is that, is it absolutely as it's stated in your original statement?

And then secondly, just on a further breakdown within Gas and Power. I wonder if you could just set out what the benefit was in terms of transportation abroad and the impact domestically you talked about, the sales mix and contract renewal changes, what those deltas were.

Listen, I'll try to address the first question again, about taxes. But I must admit, I didn't get it entirely. What you said is that we do not expect on a yearly basis any changes from what we gave as a guidance in terms of expected tax rate, between 40% and 42%. Of course, including the impact of the special items, which were commented before.

Is that clear enough?

Yes, that's fine, thanks.

Thank you.

I'll give the breakdown of the different contributions of the activities. First of all, as I said before, the contribution of powergen was plus €53m. The transportation abroad had a positive contribution of €28m. Higher volumes sold has a contribution of €58m positive, while the scenario gave a negative contribution of €71m. This negative effect, the basic reason is that in this period of time the effect of the exchange rate had a less positive contribution compared with last year, due to the effect of the time lag between the full year contract, the [indiscernible] contract.

Okay. And we have our next question from Miss Caroline Cook.

Hi, good afternoon, gentlemen. I just had a question, if I can. I'm sorry to go back to the subject of reserves, but Norsk Hydro yesterday announced that it's in discussions - or has initiated discussions - with the SEC on its bookings on Ormen Lange, because of the discrepancies that have come to light between the different numbers that have been booked by different partners. I just wondered if you could confirm whether you've entered into any similar discussions at all on Kashagan with the SEC that would affect the filing of your 20-F this year.

Caroline, this is Stefano answering. The straight answer is no, no. We have in the past couple of years entertained a number of questions from SEC but not specifically related to comparisons between bookings of different companies.

Okay. So there are no discussions with you ongoing at all about this, for the '03 booking?

No, but I would add that we would not see any problem whatsoever in discussing that. We are very open and transparent.

Okay, thank you. And one other question, just on the Chemicals performance, which has showed quite a significant improvement in what you call the Chemicals business, Q4 to Q1, whereas you've still got a very poor performance in the other chemicals businesses, which you've almost put below the line. Is that very negative performance in other chemicals entirely a clean cash performance, or are there some (if you like) closure charges, which are coming through there to keep those numbers so negative?

Yes, Caroline. The performance of Syndial is still taking out of the other business' portion of cash.

Okay. Thanks very much.

Thank you. And our next question is from Miss Irene Himona. Go ahead.

Yes, good afternoon. It's Irene Himona at Morgan Stanley. I had firstly a question on the components of Gas and Power. Looking at the year-on-year movement, transport abroad appears to be up over 40% and powergen is up seven or eight times. Can you give us some guidance about what to expect for the full year from those two divisions in particular? That was the first question.

The second question on Refining and Marketing. Leaving the currency unchanged, again can you give us some guidance as to how you see the rest of the year panning out, given that we've been through a period of exceptionally strong refining margins?

Thank you.

Well, as Marco said, Gas and Power guidelines for the full year 2004. I can say that considering the seasonality of the business, it's too early to comment on the year's trend. What I can say is that the contribution of the power generation activity, the gas sales abroad as well as the transportation abroad, the abroad I expect can contribute in a positive way on the 2004 results. I can add also that for the competitive pressure that we have on the Italian market, we can expect a reduction of the structural margin of about €130m compared with last year. However, this reduction will be completely covered by the other activities in a full year's time.

Okay.

Okay. Mario Taraborrelli speaking, I'll be answering this question about the refining margin. We expect the refining margin to be slightly lower than it is today, because the situation we have today is something unique, so to say, because of the very high prices [indiscernible], because it's positively impacting volume in the refining market. Then we expect that during this year the margin will be at the same level, more or less, as in the previous year.

Okay, thank you.

Okay. And our next question is from Mr. Colin Smith.

Afternoon, gentlemen. Two things. One - could you just confirm whether the SRG - Snam Rete Gas - disposal proceeds were netted off in the net debt number or not?

And secondly, could you just comment on how much share buyback, if any, occurred in Q1, and what the thought is on that for the rest of the year?

Yes. The first answer is yes. We cashed in the amount of the disposal of Snam Rete Gas.

As far as the share buyback is concerned, what we did in the first quarter is really negligible. It is in the range of €16m, and this was the behavior which we decided to adopt in order to comply with the guidance we gave, that the first goal for the year 2004 would have been to bring down as quickly as possible our overall debt.

I do not have any specific indication about the forthcoming months. But I would like to mention that in a couple of weeks the Annual General Meeting will be asked to confirm the authorization and to renew it for another period of 18 months, which put together with the fact that we carried out a sizeable share buyback exercise in the past should lead to the conclusion that we are not conceptually against it, we are just behaving as anticipated.

Thanks very much.

Thank you for your question. [Operator Instructions].

Okay. Our next question is from Mr. Alastair Syme.

Okay, good afternoon, gentlemen. I've got two questions. Sorry to come back on the issue of guidance from the Gas and Power for the full year 2004, but I'm a little bit confused. I think I remember rightly in the past you've talked about an EBIT erosion versus '03 of something like €300m-€350m. Can you confirm if that is right and whether that guidance still stands?

Well, if you consider the two years of 2003 and 2004, the answer is yes.

Right. So even though first quarter is very similar to first quarter 2003, we should expect reduction from hereon in? Okay.

Yes. Of the existing contracts.

Okay. My second question, just related again to Kashagan. Can you just confirm that through the early stages of development, that you're on schedule with things like development awards, that sort of thing?

Yes. Again this is Stefano Cao. I can confirm that we are progressing with the activities which we have managed to progress during the negotiations which basically are related to the development of the engineering. And since the approval of the development plan, we have awarded a number of contracts for supply of equipment for things like sulphur treatment. And we have awarded contracts for drilling as well, and we are in the process of evaluating and hopefully very soon award some of the major construction works. So since February 25 everything is fine and we are going ahead full speed.

Sorry, this is Marco speaking. I have to go back to a question which was raised by Colin before. I think I probably didn't answer properly, because the question was relevant to the cash in of the disposal of Snam Rete Gas, while the answer was aimed at the economic impact. The deal was concluded on March 29, so the positive impact at the economic level is brought into the results at March 31. And I think you mentioned the cash in, and I answered on an economic basis. While the cash in was on April 1, so it hasn't been taken into consideration on the overall debt amount.

Okay. And we'll move on to our next question, from Mr. Jonathan Copus.

Yes, hello. It's Jonathan Copus from HSBC. Just a couple of operational questions. First of all, we've seen Snam revising up its expectations in terms of rollout of CCGT capacity. I'm just wondering if there are any knock-on effects on your demand assumptions or any of your sales targets.

And then secondly, in Gas and Power again, I'm just wondering what progress you've made towards merging the commercial arms of Italgas and EniPower, and if you're seeing any benefits feeding through into the Gas and Power business.

Okay. As Marco said, the gas volume sold in the market we estimate that the total gas consumption in Italy for the year 2004 should be in the range of 77 bcm. And the main increase in the power is in the power sector, where we estimate an increase of 11% compared to last year, 2003. We estimate also an increase in the industrial sector of about 6%, while for the commercial and residential sector that amount should be stable. We can enjoy the same benefit for the low temperature as last year, 2003.

The increase of consumption in the powergen is to the startup of the new CCGT plant, and from January to April 2004 there was an increase of about 2.7 gigawatts as the capacity installed. Including also the EniPower new plants.

The exercise for the integration of the commercial activity of the Italgas to the Eni Gas and Power division is in progress, and full benefits will be possible to enjoy starting from the next year.

Okay, thanks very much.

Okay. And our next question is from Mr. Neill Morton.

Good afternoon, gentlemen. It's Neill Morton from DRKW. You seem to be running into some problems recently with various antitrust competition authorities, mainly in Italy, the competition authority asking you to sell down your Snam Rete Gas stake to zero. Secondly the antitrust investigation into gas imports into Italy. And thirdly, the Portuguese competition authority wanting to investigate the Galp deal. I wonder if you could give us a response to each of those, please.

We have an open case with the Italian authorities. But we have already made some proposals to them in order to manage the situation, and we expect to close this issue within end of May, early next month. So I think that this matter will be closed in a positive way for both parties.

As Marco said, the antitrust Portuguese authorities, I think that the deal that we negotiated with the counter-party is in line with the directive that the government defined last year. So we don't expect any specific problems with the antitrust authority in Portugal.

We have now submitted, together with the other partners - EDP and REN - all the files to antitrust authorities in Brussels, because this authority's in charge for the specific deal. And we are going to submit a file in the next days; later on there is the technical time, in order to await an answer from the authorities.

Okay, thank you.

Thank you. And our next question is from Mr. Iain Reid. Go ahead, Iain.

Good afternoon, gentlemen. Two questions. Firstly, I think you said that you're expecting production growth rates to be moderate in the second and third quarters, and pick up in the fourth. I wonder if you can give us a bit more detail on what you're looking for in terms of either growth rates or absolute production levels for those quarters.

And secondly, I wonder if you can update us on the progress of the Egyptian LNG plant and confirm or otherwise the date for the first LNG exports?

Yes, Iain. What we said is that the 8.7% growth quarter-on-quarter cannot be extrapolated to the full year. Actually, the second and third quarters in connection with the number of maintenance campaigns, which you know are normally due in that period of the year, together with some impact coming from portfolio rationalization, will reduce the growth rate on the quarter. While we expect the fourth quarter to be again a fast growing quarter, and that is obviously in connection with the coming into operation of some of the major projects - namely Libya, Iran and Angola.

So we expect the fourth quarter to be again at a very high growth rate. Overall, on the full year, year-on-year, 2004 against 2003, we expect to be slightly above the 5% growth.

Thanks very much. And the Egyptian?

Yes the LNG plant in Egypt is under construction. The work is in progress according to the schedule. We are on track and we expect to start the commissioning of the plant late November, to start the delivering of the first ships early next year.

Okay. Thank you very much.

Thank you. And our next question is from Mr. Mark Lacey.

Yes. It's just a quick question for Mr. Sgubini again. Just for the Italian gas margins, what's the full year impact? I know you've probably already said this, but what's the full impact on your gas margins for the full year contribution from the natural gas division? What do you expect that to be in euro terms? And how much of these are finally offset?

Then coming back to Alastair Syme's question, how do you get to that €300m impact deterioration from the current first quarter? Is it because of the existing long-term contracts in place?

Well, we have already anticipated some figures on the previous occasions. Now we confirm that the startup of the other activities will offset what we are going to lose in the specific Italian market. If you consider last year and this year, 2004, if we are going to lose €130m this year, last year we lost a very similar figure, so we have something between €250m-€300m. But all these figures will be almost offset with the new activities.

So how do you get to a €300m deterioration? Coming back to Alastair's--

We have a reduction in margin through the competition, the markets. It's according to our forecast.

Right. But the Group operating profit should hold up versus 2003 in theory, then? For the natural gas division, of course.

What we are going to lose for this pressure on the market. So we are going to recover it with the other activities of the sales abroad, the powergen, the transportation abroad, according to the figures that I gave to you before.

Right, okay. That's great. Thank you.

Okay. Thank you for your question, and that's all the questions we have today.

So thank you, everybody, for joining us. And you know where to find us. Thank you very much again.