埃尼石油 (E) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Eni's conference call on its 2009 third quarter results hosted by Alessandro Bernini, Chief Financial Officer. Now I hand over to Mr. Bernini. Thank you.

Good afternoon, ladies and gentlemen, and welcome to our third quarter results presentation. Here with me is Claudio Descalzi and Domenico Dispenza and, together we'll be happy to answer to your questions at the end of the presentation.

The market environment in the quarter continued to be challenging, with hydrocarbon's prices sharply lower when compared to the same period of last year. Brent was down 41% and Henry Hub prices down 61%. And European refining margin continuing to weaken, averaging $2.3 per barrel, down 63% year on year. The euro showed a depreciation of 5% versus the US dollar, averaging $1.43 during the quarter.

As usual, I would like to remind you that Eni's results are affected by several issues, including the seasonality of demand for natural gas and petroleum products used for residential heating, the demand for which is highest in the first quarter of the year and lowest in the third quarter. Therefore, Eni's operating profit and change in net debt in the first nine months cannot be extrapolated for the full year.

Moving to the results, adjusted operating profit in the third quarter amounted to EUR3.1b, down 50% year on year. This result reflected the lower contribution of the Exploration and Production, and the Refining and Marketing divisions. Adjusted net profit in the third quarter declined by 61% to EUR1.2b as a result of a weaker operating performance, lower results reported by equity-accounted entities and the higher adjusted tax rate, up 3.4 percentage points in the quarter.

Hydrocarbon production in the third quarter decreased by 4.9% compared to the same period of 2008, averaging 1,678m of boe per day. The decrease is due to OPEC cuts, approximately 25,000 boe per day, continuing security issues in Nigeria, weaker European gas demand and mature field declines. These negatives were partially offset by the production ramp-up and field start-ups in Congo, Kazakhstan, Norway, Venezuela and Gulf of Mexico, as well as the positive impact of production sharing agreements.

This quarter adjusted operating profit -- third quarter adjusted operating profit amount to EUR2.4b, down 54% compared to the third quarter of 2008, mainly as a consequence of lower hydrocarbon realizations in dollars and the lower production sold. These negative elements were partially offset by the depreciation of the euro over the US dollar and the lower exploration expenses.

As for the Gas and Power division, overall Gas volumes sold in the third quarter of 2009, including both consolidated and associated companies, increased by approximately 12% year on year, totaling 21.1b cubic meters. The higher international Gas sales, reflecting the Distrigas acquisitions, and the organic growth achieved European target markets were partially offset by the lower volumes sold in Italy as a consequence of the economic downturn.

Adjusted operating profit amounted to EUR721m, up 23% over the same period of 2008. The increase is mainly due to the higher contribution from regulated businesses in Italy, benefiting from the new tariff mechanism from the Distribution business.

It is worth saying that performance in the Marketing segment benefited from the gains recorded on the settlement of certain non-hedging commodity derivatives amounting to EUR144m, associated with the future sale of Gas and Electricity at fixed prices. Net of this effect, performance in the Marketing segment would have declined as a result of the current weak gas trading environment. This factor is excluded in the EBITDA pro forma adjusted.

Gas and Power adjusted pro forma EBITDA for the third quarter of 2009 amounted to EUR703m. This compares to EUR787m in the third quarter of 2008. Results in the Marketing segment declined by 44% as a result of lower volumes sold in Italy due to the economic downturn and the weaker pro-quota EBITDA contribution from associates. These elements were partially offset by the higher international direct sales.

The Regulated business generated EUR338m, up 44% versus third quarter of 2008. The increase mainly reflects the higher contribution from Distribution business as a result of the revision of the tariff mechanism in 2009, which has muted the seasonality of the business. Furthermore, the Regulated business benefited from incentives provided on new investments in the Transportation network, partially offset by lower volume transported due to the weaker gas demand.

Finally, International Transportation declined versus the third quarter of 2008 as a result of high amortization charges and costs incurred to repair the TMPC pipeline, which was damaged in an accident last December.

Turning now to Refining and Marketing, utilization rates declined by 12% year on year as a result of the weak trading environment and higher maintenance activity. The third quarter recorded an adjusted operating loss of EUR110m, compared to an operating profit of EUR227m in the same period of 2008.

This result reflects significantly weaker refining margins, mainly due to the narrowing of the differentials between light and heavy crude. This reduction was partially offset by the depreciation of the euro/dollar exchange rate. Marketing performance declined as a result of lower margins and volumes sold due to the economic downturn.

In the third quarter of 2009 the Petrochemical business posted an adjusted operating loss of EUR65m due to the weaker demand and high feedstock costs. In the Engineering and Construction sector the third quarter adjusted operating profit amounted to EUR267m, substantially in line with last year. The Other activities and Corporate showed an aggregate loss of EUR147m versus a loss of EUR125m in the same quarter of 2008.

In the first nine months of 2009 operating activities generated a cash flow of EUR9.7b. On top of this, the disposal of Gazprom Neft's 20% stake and of marginal E&P assets, as well as the Snam Rete Gas minority shareholder capital increase, contributed around EUR5.1b, bringing the overall cash generated to EUR14.8b.

The cash flow generated financed CapEx of EUR9.8b, acquisition costs mainly related to Distrigas minorities of EUR2.3b, and dividends paid in May and September totaling EUR4.2b. Other uses absorbing EUR700m and brought the overall cash outflow to EUR17b.

Net financial debt as at the end of September amounted to EUR20.5b, and the debt to equity ratio increased to 0.42 when compared to 0.38 at the end of the year.

Thank you for your attention. And now, together with Claudio Descalzi and Domenico Dispenza, I will be happy to answer any questions you may have.

Ladies and gentlemen, (Operator Instructions). The first question from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.

Hi. I was wondering if you could update us on the guidance for what you expect for Gas and Power in 2010. And also what you expect next year in terms of the Italian Gas marketing margins, given the fall in domestic demand and the increased competition from the re-gasification terminal. Thanks.

You know that we are in front of a consequence of the economic downturn. This means that there is less demand for Gas in Italy and Europe and there is additional gas coming from other sources which will have an impact on margins, of course. So what we expect for 2010 is a decrease on overall sales and a decrease in this margin. We cannot, of course, quantify and also this [market] trend isn't clear for the moment.

Thanks.

Next question.

Next question from Mr. Colin Smith from ICAP. Mr. Smith, please.

Good afternoon. Two questions. I just wonder if you could comment on where things stand in relation to your take-or-pay obligations and whether you expect to have to make a payment this year, and how we might see that through the P&L and the cash flow.

And the second thing was you've significantly moved up your view of second half oil prices, but the gearing guidance is basically the same as it was. I just wondered if anything in particular had changed in your view about cash in/cash out in the second half between the second quarter and the third quarter results announcement. Thank you.

Well, first of all take or pay, I want to remind first that take or pay is, in fact, a [partial] pre-payment for [not taking] contractual minimum quantity. If the gas will be taken later, paying the difference.

What I expect is that the impact on the 2009 accounts will be negligible, if at all. And next year, of course, we cannot give up to now a clear indication. That depends on the way in which markets will develop. It depends, of course, in some negotiations prevailing with the suppliers to restore the competitivity (sic) of Gas.

[Do you have] gearing?

As far as the gearing is concerned, we have already taken a number of measures, like cost cutting, working capital optimization and the CapEx spending discipline, in order to ensure the achievement of a ratio which supports the Company's current credit rating. So we do not expect by the end of the year to have a gearing far from the level which we had by the end of September.

Thank you.

Next question.

Next question from Mr. Iain Reid from Macquarie. Mr. Reid, please.

Hi, there. Two questions, please. I wonder if Claudio could update us on the Pearl discovery in Venezuela. I know you've drilled -- sorry, you've tested that well now, so maybe you could tell us a bit more about what you think the range of reserves could be and your initial thoughts about developments.

And I wonder, secondly, if you could also say something about production expectations for next year.

First, Venezuela. Following the preliminary evaluation of the test, we anticipate a really significant discovery. So the test confirmed the discovery that we released one month ago, so we talk about six and eight bcf. We talk about wet gas, so now we have a confirmation that there is not only gas but is also some condensate associated, so that is the good news. And we plan to have a second appraisal well, so the structure is very big. And we think that we can double these reserves.

Just to be clear, we are thinking really to have possible early production for domestic disposal. And domestic disposal in general terms, not just is for power, and also for the upgraders and also for the announced recovery in the oil field. So that is the Venezuela.

Talking about production for 2010, you know that we are collaborating the new plan so, for sure, we are going to talk about 2010 and the four-year plan in February. But just to give some view of the future, for sure, the main issue is gas demand that is going to impact on our growth. And we are elaborating a new plan more on oil development.

Sorry, can I just follow up there and just say you never actually mentioned gas demand as one of the reasons why gas production -- overall production fell in the full quarter. How much was that in total in terms of numbers of barrels per day?

When I talk about the gas demand, the reason that won't impact, the first statement, direct impact, on Italian and Libyan production, and we can talk about something in the range between 15,000 and 20,000 barrels per day average per year, because we had to reduce our production. And that is what happened in 2009.

Okay, thank you very much.

Next question from Mr. Neil McMahon from Sanford Bernstein. Mr. McMahon, please.

Hi, just a few questions, just following up in terms of production in terms of fourth quarter and looking into next year again. Do we take from you made in your announcement that you're offering your guidance in terms of projects coming on as well this year? Obviously, there is a seasonal effect of natural gas volumes coming through, but maybe you could just go into a bit more in terms of projects and timing of them coming on next year.

And, secondly, maybe you could give us a few comments around Iraq. And, given the earlier BP deal, I think there's a general feeling in the market that going into Iraq under the current terms is a bit crazy at $2 a barrel or thereabouts. Maybe you could go into some details on your deal.

Okay. First, about projects, you're right we talk about the gas demand but also we have to talk about projects. What we can say that in February we promised 11 main projects in 2009, and we put in production 10 out of the 11 that we promised. And we are sure that the last project, that is the oil project, offshore project in Nigeria, will be put into production mid-November.

We had some delays on our projects. For that reason also our production in the third quarter has been impacted negatively by this fact. The main delay has been in Blacktip in Australia, Longhorn in the Gulf of Mexico and oil in Nigeria. And that is one of the reasons.

So in the fourth quarter will be a new set up and build up of production for a total of 150,000 barrels per day. And that will help us to keep an average production in line with 2008. And if adjusted, a gross up by the [other] quarter and price, with an increase of 1.2, 1.3 with respect to 2008.

Talking about Iraq, we are in the same situation, obviously. I mean that we refused the $2 per barrel. They have said they would review the $2 per barrel with [Exxon] in July. And now, after two months of negotiation and of clarification meetings, we accepted $2 because, basically, the fiscal terms are different now.

Before the fiscality (sic) was on the total revenue, post oil and profit oil. Now the fiscality (sic) tax are just on profit oil, and that changed drastically the result. And we can say that the $2 of today are comparable more or less with the [$4.5] of yesterday in terms of profit per barrel.

Maybe just following up on that, maybe the best way to think about this is comparing it to maybe some of your Angolan PSA arrangements or PSAs elsewhere in the world. How would it compare overall from a profitability IRR point of view? And are you not concerned that it's going to dilute your overall net income per barrel matrix in your portfolio? Sure, lots of volume, but not so much margin relative to other assets you have.

Okay, just to give you an outlook of our internal rate of return, about internal rate of return on the future projects, you know that we have about 30 projects in the next full year that will contribute to our growth. And the average internal rate of return of these projects is about 20%. Without Kashagan, its 30%. And this new Iraq project is not going to reduce our average internal rate of return.

Okay.

Next question from Mr. James Hubbard of Morgan Stanley. Mr. Hubbard, please.

Good afternoon, hi. You had a press release on Block 15 Angola discovery this morning. Could you give us any indication on what you think the scale now of your total discoveries in that block is? And do you have a view on when you will start developing them?

Second question would be could you -- you mentioned mature field declines in Nigeria, which we've heard before. But could you just remind me of what percentage you see as your mature field decline rate, ex the growth projects obviously? And what is the current impact of the Nigerian disruptions on your production?

And then, finally, just following up on that last question, you said average IRR 20% for 30 projects, ex-Kashagan 30%. Are you saying that's ex the CapEx? I don't quite understand that. Are you implicitly saying the Kashagan returns are very, very low, or have I missed something there?

Okay, first Angola. Angola we drill four wells, we discovered two hubs, I can say two good hubs. We talk about reserves -- average reserves at the moment with the well we drilled of about more -- exceeding 100m for one hub and the same for the other hub. These hubs are close to existing facilities [Neto, Agrida], and so to that reason we are planning a fast track, so I think that the time to market would be about three, four years that, for a deep offshore, is a good time to market.

We're going to use some existing facility. And when I talk existing facility, I talk about existing FPSO. That is something that we are talking and we are planning with Sonangol, and that is going to help us not only in terms of time to market, but also in terms of that the breakeven price.

If you think that a deep offshore development worldwide could be about $60 per barrel in Angola, in this area that is very mature and we have a lot of synergy, we are between $40 and $45. So it's not only good from a time-to-market point of view but also from internal rate of return of the project. So up to now the north part of 15/6 is quite good. Now we're going to -- we are going this year -- next year, sorry, to start drilling in the south part. That is little bit -- it's more far -- it's far from the existing producing field.

Okay.

As to Nigeria, we have a mature field there. We're in production since 1975 [a 1885]. And in the last two years, three years, we were not able to make production optimization project that normally we do in Nigeria, especially in the oil field to five-day depletion. The depletion in the oil field in Nigeria is more or less 10%. Normally, with the production optimization we go to 3% depletion where we can. And with the new project we can go in a positive area in term of growth. So that is the reason.

In Nigeria, we change our strategy because we reduce the gas project that are mainly onshore. We increased our effort in the offshore that are oil production and also because we have a different contract. We have P&C contract in the offshore and we had a concession contract in the onshore. So we have more project like hub station, oil, ONL119. We have also then [Bunda] south and west. So we are increasing not only Eni, but also the other co-ventures and the other operators. We are more -- we are increasing our investment in the offshore.

Talking, the last question was about Kashagan. You are right. But it's something that we stated last year, that Kashagan at the moment has a good internal return in respect to the -- our [other rate]. But it is less -- the internal rate of return is less than our average internal rate of return.

Okay. Fine, thank you.

Next question from Ms. Lucy Haskins from Barclays Capital. Ms. Haskins.

Good afternoon. Three questions, please. The first, in the downstream business you don't seem to be making any sequential improvements, which, perhaps, from other competitors we have seen a bit of a pickup. I wondered what self-help measures you were taking to try and restore profitability to your Refining and Marketing business.

Well, in terms of Refining, we have already planned and we are realizing some initiatives, in particular addressed to improve the efficiency and in order to achieve some cost savings. We have been already succeeded in obtaining good results in the first part of the year and this program will continue also over the next year.

Then, as far as Marketing is concerned, we are concentrating in maintaining our market stake, in particular in Italy, where we succeeded in maintaining and improving our market share since, in the first nine months of 2009 we -- despite the general economical condition, we succeeded in improving by 1% our market share and, at the same time, maintaining a profit -- a unit profit in line with the past.

So all in all we expect in 2009, in particular in the rest of the year, notwithstanding the Refining margin which are extremely depressed, and we expect that they will remain depressed also for the remaining part of 2009, we'll be able to slightly recover the losses that we have incurred so far.

So is that a lower level of loss, or do you actually expect to be back in profit for the fourth quarter?

We believe that our -- it will be a great success in reducing, in maintaining a low level of loss. We do not expect that the present market condition in terms of Refining margin will allow ourselves to realize profits.

And perhaps the second question, then, I was going to ask on the dividend policy. And if we could have some follow-through from the decision made at the second-quarter stage. What was the catalyst behind the reduction there and what would you be looking for going forward?

Well, as things stand currently we see no reason why the second-half dividend should not be at least equal to the interim dividend paid in September.

Thank you.

Next question from Mr. Domenico Ghilotti from Equita. Mr. Ghilotti, please.

Good afternoon. My first question is on your disposal process. If you can give us an update, in particular on the E&P domestic assets.

The second question is on the take-or-pay contract. If you could elaborate a little bit more on what are you asking for to your counterparts in terms of volumes, or pricing, or advanced payments?

And the third question is an updated guidance on the tax rate for the full year.

Okay. So first with the M&A on the E&P asset. You know that, as we said before we are testing the market offer non-strategic asset, non-operated asset in UK. And that in order to optimize our portfolio and be able to -- in the future to have assets in different region with a better time to market and low cost. By November we will be in the position to know if that is possible in term of value, because it's sure that we have our target value and we are not in the need (inaudible) going to lose money. And if the offer will be correct, we go ahead. Otherwise, it's not a process that we would want to continue.

On take-or-pay, this one is evident to everybody, that starting since October last year the consequence of the economic crisis brought the decrease in gas consumption in all Europe. Another estimate of the decrease that could be in the order, in Europe I'm saying, of around 10% or more. So 10% have also been sold less. This means that there are on the market 50b cubic meters that have no buyer.

If you add to this that there are additional import capacity all over Europe, this include expansion of the lines to bring gas from Russia and from Algeria, the new LNG terminals, like the [Robigo] terminal in Italy and other additional import capacity of LNG in UK, you may understand that the quantities of gas already for sale brought a big difference between the spot prices we could have in [not] part of Europe and the price of the oil [rig] contracts. Because of all this, that big difference should be some way reduced this projection, either to an increase on demand that we also hopefully expect in the next future or look to an addition of the price you have with your suppliers.

So what we are doing is discussing it with some of our suppliers. We cannot open with all because this is linked to the contractual requirements of additions we have with them, asking to restore the competivity (sic) of the gas (inaudible) intake. Where to this process, I don't know what will be the result because (inaudible) discussions and negotiations are normally quite difficult on this side. And if the competivity (sic) is restored, of course, even the problem of take-or-pay is not solved.

As far as '09 tax rate is concerned, we expect that it will be, at year end, a little bit higher compared to 2008, since presently we -- it is expected to be around 55%.

Okay, thank you.

Next question from Mr. Alastair Syme from Nomura. Mr. Syme, please.

Yes, good afternoon. I just wanted to get a sense on CapEx, how you're thinking here. Given where the gearing is at the end of third quarter and you've put in negative statements on the outlook on gas, whether we should be expecting some fairly dramatics CapEx cuts as we head into 2010.

I'll start talking about CapEx and selling on the upstream side. You know that we expect some good cuts at the beginning of the year with the very low energy scenario. And due to the rapid improvement of the price scenario, we are expecting only a limited amount of saving now on the upstream cost for 2009, in the order of between EUR300m and EUR200m. So with the -- at the end of the day, we'll be in the same range of capital investment of 2008, so maybe 3% less than 2008.

I guess my question was, as you look ahead and, I don't know, it sounds as though you're hinting at revisiting many of the gas projects that you're thinking about in the next few years, does that translate into something on the CapEx front that's materially different?

Talking about the next year, we talk about a selling of EUR5b. So, for sure, we can keep at least 50% of this selling for the contract and for the operation we already done. And I think that's what we are going to save. 50% of what we planned at the very beginning of the year with a very low energy scenario, $40 per barrel -- $35, $40 per barrel.

Okay, thank you.

Next question from Mr. Neill Morton from MF Global. Mr. Morton, please.

Yes, good afternoon. A couple of questions, please. Firstly, I was intrigued by your recent statement that you've farmed into a couple of blocks in Ghana, the Vital blocks. I understand you've found a lot of gas there. Firstly, what do you plan to do with that gas? And perhaps, secondly, can you update us on your future drilling plans and what you've learned so far?

And then just, secondly, circling back to Lucy's question, on the R&M loss in Q3, a EUR110m loss, could you perhaps just split that into Refining versus Marketing? Thanks.

I star talking about gas. Ghana, we entered early this year. We drilled the first well in the first block. We have two blocks. And we discovered a good amount of reserves. There is gas, gas condensate and oil. So there is also oil. And we are still elaborating and studying on these blocks because they are just entry. And we want to drill a second well in the second block early in 2010 and go back for an appraisal once the geological model and the assessment of the first block has been finished.

We already start talking about the gas utilization with the government because, in any case, they need gas for power and also for other industries. So, for sure, we are going to put together the oil development and the gas development with investment in the domestic sector. But it's really -- we are in an early stage, so I think it's premature to talk about future development. I think in 2010 our view will be more clear.

So as far as the results of the third quarter for Refining and Marketing, more or less the results of the third quarter generated by the Refining activity was in the region of EUR200m negative. And, of course, the Marketing activity contributed with a profit in the region of EUR90m.

Could I actually be greedy and just ask for a similar split for Q3 last year, just to give us a feel for how these two divisions -- subdivisions have moved year on year, the EUR185m last year?

Just a second.

So in the third quarter of last year Refining activity were -- the prevailing condition were a little bit different. In the third quarter we have realized -- of last year, we have realized an EBIT of a positive result of EUR70m, compared to a positive result resulting from Marketing activity in the region of EUR160m.

That's right, so plus EUR170m and plus EUR160m.

Right, exactly.

Okay. I thought last year's result was EUR185m. Am I missing something?

Can you repeat?

Unless I'm mistaken, I thought Q3 last year total EBIT for the division was EUR185m. So is there something else in there?

The adjusted operating profit realized in the third quarter of 2008 by Refining and Marketing was EUR227m. So with the breakdown that I have provided you before, I mean more or less EUR160m positive from Marketing activity and EUR70m from Refining activity.

Okay, that's fine. Thank you very much.

Next question from Mr. Jason Kenney from ING. Mr. Kenney, please.

Hi, there. I'm not sure if you're able to answer this, as such, but is there an element of your debt aimed at covering the worst-case outcome for legal proceedings? And, if so, should a best-case scenario happen, where you get negotiated settlements or no legal obligations, could we expect a sharp turnaround in that debt?

Well, the situation of our most important litigation have been fully disclosed in our half-year report which was published by the end of July, early August. And, as reported in our press release, no significant -- no material developments have occurred since then. So, presently, we do not believe that in 2009 something will affect our results nor our cash flow.

And is there a timing when you could expect an impact, if there were to be one?

Of course, these litigations are ongoing. Some of them are expected to be finalized in the first half of 2010. And then the remaining, in particular, those relating to the environment and litigation, which you know the litigations process is extremely long, so it is not foreseeable at present when the final outcome could arise from this kind of litigation.

Okay. Many thanks.

Other questions?

There are no more questions for the moment.

Thank you very much to everybody. And see you, then, in the next occasion.

Ladies and gentlemen, the conference call is over. Thank you very much for your attention.