埃尼石油 (E) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to your ENI Second Quarter Results Conference Call. My name is John and I'll be your coordinator for today's conference. [OPERATOR INSTRUCTIONS]. I'll now hand you over to your host to start the call.

Hi, good afternoon to everybody. Jadran speaking. Before handing you over to Marco Mangiagalli, I would like to say that today the comment on the 2005 Second Quarter Results, will be very much focused on the financials. Following that detailed comments and questions on the 2005 core business, I think that the right and appropriate time will be on September 21, when Mr. Scaroni and the management team will meet the financial community. And now I give the floor to Marco Mangiagalli.

Thank you Jadran. Good afternoon ladies and gentlemen. And welcome you this conference. Today we are reporting another robust set of financial results, thanks to ENI's consolidating performance in the quarter is net, and the [indiscernible] scenario.

Oil price recorded new [indiscernible] highs averaging $51.6 per barrel, 46% up compared to the same period of last year, and reaching a peak of more than $58 per barrel at the end of June. It sustained our demand growth in both U.S. and China as well as a limited south-coast production capacity from OPEC and non OPEC countries were the key drivers for oil price increase to record levels.

Refining margins enjoyed a significant uplift on a yearly basis, as the demand growth for [indiscernible] product continued to pressurize the global refining capacity. In particular, compared to the same period of 2004, the average European refining margin was close to $7 per barrel, 29% up compared to last year's level. This strong market trend was slightly offset by the 5% depreciation of the euro versus the dollar.

As usual, I would like to remind you that ENI's results are affected by several factors, including the seasonality in demand for natural gas and for petroleum products, European residential heating, the demand of which is highest in the first quarter of the year, that includes the coldest months, and the lowest in the third quarter, which includes the warmest months.

Therefore, ENI's operating profit and change in net debt in the first 6 months, cannot be extrapolated for the full year. Furthermore, let me remind you that starting from 2005, we adopted new distribution of adjusted results, attributable to both specialized items and the impact inventory valuation. Having said that, let's now comment on the results.

In the second quarter, the net profit reported, in compliance with International Financial Reporting Standards, amounted €1.898b with an increase of 39.1%, if compared to the same period of 2004. Excluding special items and inventory gains, the adjusted net profit totaled €2b, with an increase of 48.5%. Such an increase is the outcome of a 45% growth in the operating result, mainly as a consequence of the strong performance in the upstream and R&M, as well as the good performance achieved in the gas and power business and petrochemicals. And income growth from investments for about €90m, mainly related to a higher contribution of European gas and power activity, in marketing [indiscernible] and gas transportation.

These positive effects were partially offset by higher financial charges, mainly related to fair valuation of derivatives on financial instruments. Higher taxes for around €550m related to the higher taxable income. In the first half of 2005, the reported and adjusted net profit amounted to €4.343b and to €4.406b respectively. Increase for the same period 2004 was of 29.1% on a reported basis, and of around 46.2% on an adjusted one.

In the second quarter of 2005, reported and adjusted EPS paid, on an average number of shares, of €3.76b showed in euro terms an increase of 39.5% and of 48.9% respectively, compared with the same period of last year. If we switch to dollar terms, the increase for the reported and adjusted EPS is of 46% and 56% respectively. As to the cash flow per share [indiscernible], we can see an increase of around 29% on a reported basis, and of more than 32% on an adjusted basis. Dollar terms increase is around 35% and around 39% respectively.

Leveraging on the positive market scenario and solid investor performance, the second quarter reported operating profit amounted to €3.654b, with a 41.3% increase versus the corresponding period of 2004. Excluding net negative special items of €420m and inventory gains of €302m, mainly related to R&M, the second quarter 2005 adjusted operating profit totaled €3.772b, 44.5% up on a like-for-like basis.

If we add the effect of the euro appreciation versus the U.S. dollar of more than €150m during the second quarter of 2005, of which around €75m related to the translation effect, the increase in the adjusted operating profit of 2004 [indiscernible] 51%. It is worth saying that the negative impact of the euro appreciation versus the dollar is mainly related to the upstream business.

The adjusted operating profit of the first 6 months of 2005, totaled €8.057b, up 40.3% versus the same period of 2004. Once again, if we add the effect of the euro appreciation versus the U.S. dollar of around €300m in the first half of 2005, the increase in the adjusted operating profit on 2004 would be 46%.

Let me now go into more detail for each business. In the upstream sector, ENI reached a strong production stream concerning the positive trend recorded in the past. In the second quarter of 2005, hydrocarbon production totaled 1,725m units per day, an increase of 6.2% versus the corresponding period in 2004. This cooperative is even better than the one accounted for in the first quarter. A remarkable result if you consider that it has been achieved in a market scenario characterized by new record in oil price.

Before the impact of the higher price on the PSA and buyback contract the production growth rate is above 10%.

The second quarter 2005 production growth is entirely organic. And this has been achieved thanks to the ramp up of fields in Libya Wafa, Iran South Pars 4 and 5, Algeria ROM, Angola Kizomba and Kazakhstan Karachaganak, partially offset by the decline of mature steel in the UK and Italy. And asset rationalization in the period 25,000 units per day.

In the first half of 2005, hydrocarbon production reached 1,714m units per day, up 5.5% versus the first half of 2004. Before the impact of a higher price on the PSA and buyback contracts increase in the production is of 9.4%. This trend is keeping well in line with the production target growth rate of the year.

The second quarter reported operating profit in the E&P amounted to €2.751b, with a 49.3% increase compared with the corresponding period of 2004. The result includes a net negative special item, €428m mainly related to asset write down. On an adjusted basis, the operating profit amounted to €2.889b showing a robust increase of 54% on a like-for-like basis. In dollar terms the adjusted operating profit is up 51.4%.

The strong operating profit is mainly related to higher hydrocarbon realization prices denominated in dollars, following the positive oil market scenario and higher hydrocarbon production sold. This positive effect was partially offset by the 5% appreciation of the euro over the U.S. dollar. This return to the [indiscernible] the reported operating profit reached €5.271b up by 52.1% versus the same period of 2004. Excluding special items the increase is in the range of 54% with operating adjusted profit reaching €5.420b.

As for the gas and power business, overall gas volumes sold, both consolidated and associated, rose by more than 7% in the second quarter of 2005, reaching 19 Bcm. The bulk of this increase comes from our sales growth, in particular, international sales rose by more than 7% reaching 7.4 Bcm from 6.9 Bcm in the second quarter of 2004, as a result of higher gas streams through the Greenstream pipeline, the build up of the Libyan gas [indiscernible], and in Spain thanks to the set up of the Danietta LNG plant.

As to the domestic market, in the second quarter of 2005, gas sales increased by more than 7% as a result of higher self consumption related to the expansion power [indiscernible], which more than offset lower sales to oil sales. Without considering self consumption, any sales in the second quarter 2005 were up by around 4%, thanks to higher volumes sold to the thermoelectric customers. In this period, because demand in Italy controlled each dynamic trend with an increase of more than 5%, if compared with the second quarter of 2004.

The same applies to the first half, when the overall Italian gas demand reached around 45 Bcm with an increase of 4.5%. In the same period any gas sales increased by around 2%. These results in the gas and power business are fully in line with our forecast for the year.

Turning to the results of the G&P business. The second quarter the reported operating profit amounted to €592m, 4.6% up. This compared to the €566m accounted for in 2004. The second quarter results includes negative special items for €24m, mainly related to provisions for the commission. In addition we also accounted for €22m inventory loss.

The Gas and Power adjusted operating profit amounted to €638m, with an 8.9% increase over the same period of 2004.

In the first 6 months of 2005, reported operating profit reached €2.155b, 1.8% up which compared to the results achieved in 2004. If we turn to the adjusted operating profit this reached €2.173b, 4% up on a like-for-like basis.

Let me comment more extensively on the G&P second quarter adjusted operating profit by activity areas. The results in marketing and distribution activities, showed a slight decrease as a result of the lower margins due to the competition, and lower contribution from the distribution activity, due to lower sales. These negative effects were partially offset by higher volumes abroad. In the transportation activity, the adjusted operating result shows an increase, both abroad and in Italy, as a result of higher volumes transported. The higher contribution by the Power generation business has seen an increase of electricity production sold, thanks for the full commercial operation of the plant in Mantova and Ravenna.

Let's now turn to the R&M sector. The second quarter 2005 reported operating profit totaled €596m, up 98% versus the same period of 2004. The result includes a negative special item for €51m, mainly related to provisions for risk and contingencies relevant from environmental laws and site decommission. In addition, we also accounted for €316m for inventory gains.

On an adjusted basis, operating profit amounted to €331m, showing an increase of 68% over the same period of 2004. The result was achieved thanks to the strong increase of the contribution of both refining and marketing activity, the consequence respectively of the high level reached in the refining margins, and the positive trend in marketing margins. These positive elements were partially offset by the euro appreciation versus the dollar.

In the second quarter of 2005, the petrochemicals business posted an adjusted operating profit of €71m, compared to the €46m in the same period 2004, thanks to higher margins in base chemicals and efficiency of power. [indiscernible] in the second quarter 2005 reported profit was affected by special items for an overall amount of €21m, mainly related to asset write downs and by inventory gains for €80m.

In the second quarter 2005, the €49m adjusted operating loss in other activities, which now includes SnamProgetti, was mainly related to the [indiscernible] €56m negative result. The reported result was affected by negative special items for €142m, mainly related to provisions for environmental laws and site decommission.

Lastly, corporate activity posted an adjusted operating loss of €108m, worsened overall consolidated loss of the second quarter 2004. The reported result was affected by special items for €64m, mainly related provisions for environmental remediation.

As far as investments are concerned any capital expenditure in the second quarter 2005, amounted to €1.7b of which 95% were concentrated in the core business. In particular, €1.2b were invested in the upstream sector, and around €250m in the gas and power business.

In the first half 2005 the CapEx rose €3.1b, with a decrease of around 17% it compared to the same period of last year. Mainly related to lower expenditure in the upstream business as a charge of completion of important projects, in Iran and Libya, and in the gas and power business, due to the completion of the Greenstream project and of some power generation plants.

This CapEx profile is in line with our forecast for the full year 2005, when we expected the overall CapEx in the range of €7.5b. Finally, in the first half 2005, we returned to our shareholders more than €3.8b, a dividend of €3.6b and buyback about €230m.

Before opening the Q&A session, I would like to comment on the net debt and the yield. Net debt as a [indiscernible] 2005 amounted to €9.5b, around €1.8b higher if compared to March end figures, as a consequence of the payment of dividends, buyback and taxes, as well as CapEx requirements. This was partially compensated by cash generated in operating activities.

However, the net debt at the end of June was around €1b lower if compared to 2004 year end figures. This is a significant result achieved, mainly thanks to the strong operating cash generation in the period, around €9m.

Our debt rate [indiscernible] decreased to 0.26%, in comparison with a 0.3% 2004 year end figure. Thank you for listening. Now we are pleased to answer any questions you may have.

Thank you. Ladies and gentlemen, your question and answer session on the 'phones has now started. [OPERATOR INSTRUCTIONS]. The first question we have coming through is from the line of Mr. Huw Williams at Cazenove. Please go ahead with your question.

Marco, thank you so much. Just 2 quick questions. Firstly, on the marketing side, I noted that you made commentary that marketing is actually looking better in the second quarter, and I just wondered if you could make some comments as to how that was achieved, whether it was due to your self help measures, or whether we are seeing a turnaround in the marketing markets going forward? The second question was on the Kashagan project and maybe just give us an update on progress on that, and also on the drilling program surrounding the Kashagan area please?

As far as the first question which relates to the marketing side, I would say it's more on the improvement on the margins because of sales of the improvement of the general environment. And Kashagan listen, as I have explained a major element of [curiosity], but as Jadran said before we are planning an update of our strategic presentation in September and if you don't mind, I would like you to wait 1 month when I'm sure this question will be properly addressed.

Okay. Fine.

Okay. Thank you for that question. The next question we have comes through from the line of Mr. Neil McMahon of Bernstein in London. Please go ahead with your question.

Hello. I've got a few questions. The first is could you go through the details of asset impairments in the upstream and maybe tell us where? And then I've got 2 follow on questions.

It was on gas field around the world, for some of them I can mention, if you want, 1 geographic area is Venezuela is South America. And another 1 is North Sea, 4 other countries seems that there are negotiations going ahead with the [indiscernible] country, I would prefer to not to discuss any further detail, because it might have an impact on the negotiations themselves.

Sure. Were these impairments taken as part of a thing you do in the second quarter, looking across the globe? Or was it just -- it just all happened in the second quarter?

It was something which materialized in the second quarter of the year.

Okay. The other questions I had, was 1 really on demand, and if you could give us an update on where you see petrochemical demand at the minute in Europe, and just comments around that? And your refining demand and where you see that going over the next quarter?

As far as the petrochemical activity, which performed well in the second quarter, I would say that we are beginning to see some signals of weakening of the general situation. Or we might expect a lower contribution in the second part of the year.

And on the refined products?

Refined products for the time being are enjoying a healthy situation, let me say so, and we are not expecting, for the time being, any worsening.

And just a last question I have is a very quick 1. There are some press comments out a few weeks ago on the timing of your Snam divestment down to a lower percentage. Have you any comments on that?

The fact is that we forsaking any decision in that respect. We have to wait until the environmental decree is issued. So until that -- when that document is issued, and the content is not a marginal aspect, we can't take any decision. And our decision would be anyway affected by the content of the document itself. So it's just press speculation as it occurred in the past.

Okay. Thank you very much.

Thank you for those questions. The question we have comes through from the line of Mr. Barry MacCarthy of Exane in London. Please go ahead with your question.

Mr. Mangiagalli hello. A question on the share buyback activity. In the first half you bought back just over €200m of shares, it is reasonable to expect a similar amount in the second half, or should we expect a somewhat higher amount, given operating conditions we have currently?

Barry, according to the general conditions you should expect evidently a higher amount. To be quite frank on the basis of the excellent performance of our shares, you know that we are putting into operation a formula which takes also into account the relative performance of our shares, versus the others. I have to say that in the last weeks, we had to acknowledge that is low down in the purchase exercise, so I would say that in principle we could think of a -- to replicate the first half of the year amount.

Okay. Thank you.

Thank you. The next question we have comes through from the line of Irene Himana from Morgan Stanley. Could you please go ahead with your question?

Good afternoon Marco. I had a couple of question if I may? First of all, the upstream depreciation of the barrel, if I look at it in dollar terms it appears to have gone up about 13%, in the first half of the year, obviously with new fields coming on, I was wondering if you can give us some guidance for the trend in unit depreciation going into the second half of the year? And secondly, in capital spending you mentioned the €7.5b budget for this year, which is of course a post IFRS number, in other words it excludes Saipem's €250m annual spend. The budget given at the time of the strategy which was €7.3b was inclusive of that Saipem spend, so we have a divergence or an apparent increase of about €450m or €500m, I was wondering if you could just explain that increase for us? Thank you.

About the operating cost, the mid year OpEx per barrel is unchanged compared to the 2004, it's about $3.3 per barrel. It's likely to increase to the [indiscernible] in the range of 3 to 5% for the full 2005 is expected in the second half of the year. As you said the overall OpEx per barrel is benefiting from the new large fields which are coming into production.

Irene, Jadran speaking, regarding the CapEx for '05 there are no major changes, compared with what we present in the past. In the beginning of March we presented €7.3b, it was including the Saipem CapEx for the 2005 year, and with assuming euro dollar currency rate of 1.36. Then, when you saw in the first quarter CapEx provide of €7.5b in net figures, that we are comparing it, there is a deconsolidation of standard GAAP -- a deconsolidation of Saipem, a different exchange rate is 1.30 for euro versus dollar, and then in the €7.5b CapEx for the year includes a bigger [indiscernible] for the Kashagan stake that we acquired from British Gas. And on top of that also the rate of the CapEx for the development phase of Kashagan. So for that reason we come to €7.5b for the year, without no major changes compared with what we presented some months ago.

That's great. If I could just ask a quick 1 of clarification. Following the IFRS restatements, can you just remind us what the equity value -- equity book value is for Snam, for your stake in Snam, and also the net debts. In other words, what is the amount of capital employed in your books for Snam Rete Gas? Thank you.

The capital employed is €6.9b.

Okay. Thank you very much.

You're welcome. And Irene, I understand that since Jadran jumped into the conversation I couldn't have the chance to comment on the [DD&A] which was also a part of your first question. And the increase in the DD&A which we experienced in the first half [indiscernible] the substantial new production that came on-stream, carrying recent development investment, and additional CapEx spend in mature fields to contra the extra depletion. We expect a slight increase also in the second part of the year.

Thank you very much.

Thank you for those questions. The next question we have comes through from the line of Edward Westlake of Credit Suisse. Please go ahead with your question.

Yes. Just 2 small questions on the results. Just firstly, on the corporate charges which obviously -- sorry the charges for financial and other companies which obviously increased to €108m in the second quarter from a lower run rate, what's the outlook for the second half? And then just in terms of tax rates, obviously on a clean basis went up and that's due to the upstream, but what, assuming the current level of oil prices, tax rate would you assume is reasonable to expect for the full year?

Edward, about the €108m result corporate level, it was formed by an increase of about €50/52m this is the same result experienced in the second quarter of 2004. And the major component are the ITC services, is the institutional advertising campaign, which was not put in place last year, research and some redundancies which were phased in this second quarter of 2005. As regards the outlook for the remaining part of the year, I would say that since last year the operating result was in the range of €270m. And since about €50 -- an increase of about €50m has already been posted, we can make it back for the full year, we could expect something for another €50 to €80m up to the year end.

While as regards the tax rate it's absolutely correct, what you said, that the relative weight of the upstream contribution to the results, which by the way is substantially impacted by our international activities, where the tax rate are higher, and increased in the second quarter. As far as the year 2005 is concerned, we could envisage an upward trend exactly for the reasons which we commented so far. If you need a longer assumption, listen I think that [40/44 in the old 1] could still be as kept as visible this at least is what we're doing.

Thank you.

Okay. Thank you for that question. The next question we have comes through from the line of [Sven del Poso] of John F Herald in the U.S. Please go ahead with your question.

Yes. Good afternoon. I just have 1 question. Your EDITDA margin on sales, particularly only in the upstream segment, I notice it's declined from the first quarter of 2005 to the second quarter by about 2.6% or so. It looks a little more significant on a BOE basis. I'd like to know if you could give me some more detail on where you're experiencing operating cost increases, or if it's spread out across many of your regions?

I think that in a way I addressed already this question, when I said that in fact are experiencing a slight increase in the operating costs, and I would say that this is generally widespread, with no specific reference to any specific country.

Okay. Thank you.

You're welcome.

Thank you. The next question we have comes through from the line of Alistair Syme of Merrill Lynch. Please go ahead with your question.

Hi Marco. I'm just trying to get a sense of the exploration program for the first half of this year, how many wells you drilled and number of successes you've had?

Alistair, if you don't mind, I won't repeat myself in saying, as I mentioned before, about the question on the Kashagan project. I'm sure you can wait 1 month and present this question on the occasion of the updating of the business review which will occur on the September 21 in Rome.

Okay then.

Please forgive me. Thank you.

Thank you. The next question we have comes through from the line of Mr. Rory Stewart of Simmons and Company. Please go ahead with your question.

Yes. Good afternoon. I want to revisit some of the questions around upstream costs. If I take out the depreciation, the upstream operating costs [inaudible] pretty significantly on a BOE basis sequentially and year-over-year, I was just wondering when you're saying that OpEx is maybe just increasing 3 to 5% or so, what else is in there that we're missing apart from perhaps exploration expense, and can you just talk about that a little bit? Thanks.

I would say that it's in fact an increase in the exploration expenses it's a fact.

Okay. And that would account for a couple of hundred million euros?

Would you mind repeating the question? I didn't get this last part portion.

You're suggesting that the difference is exploration expense.

Yes.

And if I look at the numbers the appreciation seems to be, in costs of around €2 or so a barrel, so I'm just saying is exploration expense a couple of hundred million euros in the second quarter?

I would say yes. Yes I think that is a fair assumption.

Okay. Thanks.

Thank you for that question. We currently have no further questions in queue. [OPERATOR INSTRUCTIONS]. Okay. It appears we have no further question in queue, so I'll now hand you back to your host to wrap up the call.

Thank you. So many thanks for attending this conference call at the very end of the month of July. And I'm looking forward to meeting you on September 21 in Rome I understand, when Mr. Scaroni and the whole of the Management Team will host the meeting which Jadran mentioned at the beginning of our conference call. Thank you again. Bye.

Ciao.