埃尼石油 (E) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Eni's interim update and second-quarter results conference call, hosted by Paulo Scaroni, Chief Executive Officer. For the duration of the call you will be in listen-only mode. However, at the end of the call you will have the opportunity to ask questions. I am now handing over to your host to begin today's conference. Thank you.

Ladies and gentlemen, welcome to our 2010 interim review. In the first six months of the year we achieved strong results, with EUR8.5b of adjusted operating profit, EUR3.5b of adjusted net profit and cash flow from operations in excess of EUR9b. Our healthy cash flow from operations, coupled with some progress on our disposal plan, has reduced leverage to 41%, down from 46% at the end of 2009. I will propose an interim dividend of EUR0.50 per share to the Board of Directors, convening on September 9.

During the first half of the year we made good operational progress. In E&P we are delivering on all our targets. In Venezuela, following the agreement with PDVSA for the development of Junin 5, we will sanction the first phase for a capacity of 75,000 boe per day at the beginning of next year, targeting first oil by 2013. In Iraq, the Zubair rehabilitation plan, including the major contracts, have been approved by the first party and we are ahead of schedule, with a start-up cost recovery by year end.

We delivered five major start-ups, while the start-up of Appaloosa has been postponed as a result of the Moratorium in the USA. Production grew by 1%, thanks to our strong performance in Nigeria, Congo, USA and Italy, partially offset by weaker Gas off-takes in Libya. The really good news of the first half has been the exceptional result of our exploration. We have added 600m boe of resources, mostly from Block 1506 in Angola, Perla in Venezuela and Jangkrik in Indonesia.

In Gas & Power overall gas sales were down 6%. In Italy, as expected, we suffered from higher imports, with the Rovigo LNG terminal in the Adriatic Sea now running at full capacity. Our international business has, however, continued to grow, with sales up by 6%. This was driven by an excellent performance in the key countries of France, Spain, Germany and the Benelux, while, in Turkey, sales were weaker than the previous year.

Power generation performed particularly well, with kilowatt hours sold up by 21% and an increase in our market share in Italy from 10% to 12%. Regulated businesses and international transport are doing well, benefiting from the synergies with Snam and the higher volumes.

R&M performed better than expected in a still-challenging environment. Refining margins remain depressed, but cost reductions and the enhanced flexibility of our operations are supporting steadily improving profitability. In marketing, strong campaigns by our competitors have caused a dip in our market share. We have, however, maintained satisfactory margins. I will now hand you over to Sandro for a more in-depth analysis of our first-half results.

Thank you, Paulo, and good afternoon, ladies and gentlemen. In the second quarter of 2010 the macro environment showed a positive trend compared to the same period of last year. The Brent price increased by 33% compared to the second quarter of 2009, averaging $78 per barrel. The average European refining margin for Brent/Ural was $4.5 per barrel, up 15% versus the corresponding period of 2009. Finally, the euro depreciated by 6% versus the US dollar.

Moving to our results, adjusted operating profit in the second quarter totaled EUR4.1b, up 62% year on year. This result mainly reflects the stronger contribution offered in the Exploration & Production division. Adjusted net profit in the second quarter increased by 80%, to EUR1.6b, as a result of the good operating performance, partly offset by an increase of over one percentage point in the adjusted tax rate.

In the second quarter of 2010 Eni reported oil and natural gas production of 1,758m boe per day. Production was substantially unchanged from a year ago, when excluding the effect of the updated gas conversion rate. Our performance was positively impacted by organic growth of 111,000 boe per day achieved in Nigeria, Congo and Italy, as well as new start-ups and production ramp up at fields which were started up in 2009.

These increases were offset by planned facility shutdowns in the North Sea and in Kazakhstan, mature field declines and lower gas uplift in Libya, due to oversupply conditions in the European Gas market. Libyan production in the second quarter of 2010 was 12,000 boe per day lower than in the second quarter of 2009, and 50,000 boe per day lower than in the first quarter of 2010.

Second-quarter adjusted operating profit amount to EUR3.4b, up 67% compared to the second quarter of 2009, mainly as a result of higher Oil and Gas realization in dollars, of deposited impact of the depreciation of the euro over the dollar, and of lower exploration expenditures. These positives were partially offset by higher operating cost and [delay].

The overall Gas volumes sold in the second quarter of 2010, including both consolidated and associated companies, totaled 18 bcm; a decrease of approximately 6% year on year. This decline reflects the lower volumes sold on the Italian market, which is experiencing higher competitive pressures, partially offset by steady growth trends in the wider European market.

Adjusted operating profit decreased by 9% compared to the same period of 2009. And the second-quarter adjusted operating profit doesn't include EUR61m of gains recorded in previous quarters, but which could be associated with the sales of Gas and Electricity occurred in the second quarter.

Gas & Power adjusted pro-forma EBITDA for the second quarter of 2010 was EUR825m, compared to EUR821m in the second quarter of 2009. Results in the Marketing segment declined, mainly as a result of lower volumes sold and lower margins in Italy, due to increased competitive pressures as well as the unfavorable trend in energy parameters. These negative effects also were partially compensated by the renegotiation of certain long-term supply contracts, as well as portfolio optimization.

The Regulated Businesses generated EUR350m, up 16% versus the corresponding period of last year. The increase mainly reflects their recognition of new investments in tariffs, as well as their remuneration of fuel gas costs and higher the volumes transported. Finally, International Transportation results showed a 20% increase, as a result of the return to full capacity of the CPC pipeline, which had been damaged in an accident in December 2008.

Turning, now, to R&M. The utilization rate declined slightly year on year, but increased by seven percentage point compared to the first quarter of 2010, as a result of the announced integration of our production cycles. Second-quarter results showed a significant improvement, with adjusted operating losses narrowing to EUR52m, compared to a loss of EUR106m in the second quarter of 2009.

This performance was driven by improved refining margins on complex throughputs, mainly thanks to the reopening of light/heavy crude differentials in the Mediterranean area. Results are also benefited from the appreciation of the dollar over the euro. Marketing reported a flat performance due to lower volumes sold in Italy, reflecting a poor national demand for automotive fuels in the quarter and some improvement in the international business.

Our Petrochemical businesses show a significant recovery after several quarters of poor performance. Operating losses declined to EUR11m, compared to EUR146m the year before, driven by a stronger demand and an increased market share. Saipem delivered adjusted operating profits of EUR343m, up 15.5% versus second Q 2009. The Other activities segment reported an operating loss of EUR51m, and Corporate posted an adjusted operating loss of EUR75m.

At the end of June net debt was EUR23.3b. Our leverage decreased from 0.46 to 0.41, well on tack for our target of a debt to equity ratio below 40% in the plan period. We have also been making progress on our EUR3b disposal plan. We have already completed sales of marginal non-synergic assets for over EUR1b, of which EUR800m were cashed in by June. The completion of the announced sale of some Italian offshore assets is currently on hold, due to possible changes in international environmental regulation which could affect offshore operations.

The sale of our European gas transport pipeline is proceeding as anticipated. For (inaudible) we are arranging an international offer, while we are going ahead with cash-deposit (inaudible) for the disposal of our stake in [Italgas]. We expect to close all these transactions by year end.

Thank you for your attention, and I will now hand you over to Paulo for his closing remarks.

Thank you, Sandro. In conclusion, in E&P we are delivering on our strategy, with a healthy pipeline of projects coming on stream to support our organic growth. This year production will be flat, but will grow in the coming years, confirming our plan. Lower gas off-takes from Libya will be compensated by new production from start-ups in Italy, Algeria, Norway, Angola, Nigeria and Egypt.

In Gas & Power the lower demand caused by the economic recession, and the unprecedented divergence between spot and long-term prices, will continue to affect our short-term performance. 2010 remains a challenging year for this division, with a possible decline in pro-forma EBITDA.

However, the second quarter showed some positive trends. Gas demand has begun to recover and the gap between spot and long-term prices have started to narrow. Looking ahead, we see the European Gas market moving towards a situation where our large and diversified long-term supply portfolio will again provide a valuable competitive edge.

In R&M we expect weak refining margins for the rest of the year. As a result of our increased flexibility and efficiency this division will return to breakeven in the second half of the year. Looking forward, our plan remains unchanged. We will continue to invest for growth in the long-term interest of our Company and its shareholders, while maintaining a firm financial discipline, a strong balance sheet and our dividend policy.

We will now be pleased to answer your questions.

(Operator Instructions). The first question is from Mr. Alejandro Demichelis from Merrill Lynch. Mr. Demichelis, please.

Yes, good afternoon, gentlemen; two questions, if I may. The first one is, maybe you can update us on the situation in Kazakhstan. We have seen some news over there, and maybe how you see it going forward?

And the second question is -- there are some reports of you going to acquire some downstream assets in Turkey. Maybe you can explain the rationale of putting more capital into the downstream division at this point in time?

Okay. Let me ask, first, the second question. Then I will pass it over to Claudio for Kazakhstan. No acquisition of any downstream in Turkey; we have no intention of doing that thing. Claudio?

Kazakhstan; I think that you are referring to Karachaganak. So the discussion within the Republic continue, and there are good discussion on the two arbitration process. I think that we are aligned, and we hope that by the end of the year we can find a solution. So we are positive on Karachaganak.

Okay, that's great. And, coming back to the downstream situation, Paulo, you mention about breaking even in the second half of the year. What kind of margins do we need to see before you break even there?

Break even in which business?

In the downstream business.

In downstream R&M, you mean?

Yes.

Well, we are expecting to have refining margins in the region of the $4, $4.5 per barrel, so more or less where we are today. For the rest we think we'll be breaking even. The only, of course, question mark we have is the differential between heavy crude and light crude, which has been quite good in the first months of the year, worsening lately, but we expect to improve again.

Okay, that's fantastic. Thank you.

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

Hi there, and thanks for taking my question. You've had very good exploration success and the development start-ups continue to progress. Is there anything that's making you feel more optimistic that this significant contingency you maintain for medium-term volumes could be reduced early next year?

And, secondly, when do you think you can feel more confident about raising the dividend? You seem to have an outlook for quite positive free cash flow cover at this juncture, and it would be nice to have a signal on improved cash returns again.

Now, let me answer, then maybe Claudio will add something about the first point. You quite correctly remember that we took a provision, so to say, in setting in our targets as far as production growth is concerned. And I have to say that we did it rightly, because the bad news of this year has been the fact that, from Libya, we are losing roughly 30,000 barrels of production simply because this is Gas, and demand for Gas, particularly the demand for Libyan Gas in Italy and in Europe, is not as high as we anticipated.

And we are -- we can still feel our target of a flat production this year, despite this loss of the Libyan production simply because we have been doing better in other areas of the world. Now we think that to keep a contingency is wise, because there's always something happens somewhere. Nevertheless, we expect production to grow, starting in 2011, as anticipated in our plan. Then maybe Claudio will add something.

As far as the dividend is concerned, we are not changing our dividend policy, simply because our cash flow is improving or not improving. We said that we will review the base for our dividend, not our dividend policy, only if in the next plan we will have a different number than $65 a barrel, which is the number we're using today for our planning process. It's early days to say what will be the number we would use in our 2011/2014 plan. This number will come out some time later this year, possibly towards the end of the year.

Claudio has nothing to add to what I've said.

Okay, many thanks.

Next question from Mrs. Lucy Haskins from Barclays Capital. Mrs. Haskins, please.

Hi, good afternoon; two questions, please. Firstly, on Gas guidance, do you think the chances are now that you will come in below the 3.5 to 3.6 range that you gave as a steer to this year?

And the second question was on Iraq, and how you plan to account for profitability and barrels of production and reserves from that asset, either towards the end of this year or as we move into 2011 and beyond?

Okay, I will let Domenico to tell you something about our guidance for this year.

Well, the decrease in demand, the now spot prices and the growing competitive pressure, particularly in Italy, have reduced the commercial margins in the last quarters. As a consequence, today most of our long-term contracts are under revision. As Paulo said, there are signs of recovery of demand as the gap between the longer term and of the crisis is strengthened. However, in the worst-case scenario, for us, it means that the gap remains better today and that we don't finalize the supply contract revision by the end of this year, and this was the worst-case scenario, I would expect a decrease of the pro-forma adjusted EBITDA of around EUR500m in respect of 2009.

Second -- about Iraq. So our (inaudible) project in Iraq is going very well; we are ahead of schedule. And I think that we are the only company that has been approved the experimental rehabilitation project -- program. And we already award most of the main contracts for drilling and -- for drilling and facilities. So I think that if we are able to continue like that we will be able, in the next future, to account some barrels in 2010 and, for sure, in 2011. So I think that's the -- so, from Iraq up to now, good news.

Could I just go back on the guidance in terms of the Gas? So in what circumstances will you formally revise your -- or is this a formal revision of your guidance for this year in terms of what you just said?

Do you have the guidance?

No. Well, let's say -- you are keeping a -- let's say, a tricky point, in the sense that we are under revision right now of our major supply contracts. Now, if this revision will go as we would like it to go, then we think we can be close to the guidance. If, on the opposite, we will not be able to change the condition of our contracts, then, in the worst-case scenario that is the market as it is, the differential between long-term prices and spot prices and the present contract that we have, we'll be EUR500m worse than the guidance you have so far.

So we're talking 3 to 3.1?

If you're talking about EBITDA --

Yes.

-- we will be in the region of 3.7, 3.8, if I'm not wrong, no? Am I correct, Claudio?

That's right.

Okay, 3.7, 3.8 in terms of EBITDA.

Right. Okay, thank you.

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

Hi, two questions, please. One, when you look at the kind of assets that BP is out there selling, better shifting mature decline -- high-intensity mature fields, basically, are those the kind of things that you think you have some core strengths in dealing with and, so, you'd be looking to be a net buyer of such assets around the world?

And, secondly, on the same kind of theme, you mentioned in your remarks that you're delaying the sale of your offshore Italian assets due to potential changes in offshore regulations. I assume you're connecting that to the Gulf of Mexico oil spill fallout. What impact do you think there could be on Italian shallow-water offshore fields? Is it reasonable to expect there would be any impact from what's happened in the Gulf of Mexico?

Okay, Claudio will answer both questions.

Okay. So, first question, first of all, I want you to remember that we don't need to buy or acquire any assets to -- for our growth plan, so it's not in our program to buy any producing asset. Be true that we have some common asset with BP in Egypt and Indonesia, and we have the [provincial] rights of these assets, so it depends. And from a [publicity] point of view, if they're going to sell those assets, -- at the moment I don't think that is the case -- maybe we can apply and we can be interested. For the rest I think that are in the other part of the world we are not interested to BP assets.

Second point, it's true, after the BP, and probably in the Gulf of Mexico, our Minister of Environment has issued a Decree that is not still applicable. But, in any case, it's a Decree that's not -- it doesn't concern the past. So, first of all, I want to assure that there is no problem on the past production. And for the rest we have to interpret it, because there is some regulation for the really shallow water, five miles close to the coast. And from looking at our assets we don't have any asset close to the coast in our offshore. So I think that for the future, and especially for us for exploration, I don't foresee any problem for our future offshore development in Italy.

Okay, thank you.

Thank you.

Next question from Mrs. Irene Himona from Exane BNP Paribas. Mrs. Himona, please.

Good afternoon, I had two questions, please. The first, is it possible to give us some guidance on your expected 2010 asset disposal proceeds? And, in relation to that, if you could perhaps remind us of the position on Galp?

And my second question is on capital expenditure; if you could perhaps help us to understand what portion of the EUR1b annual increase is due to the stronger dollar and what is genuine increased E&P activity? Thank you.

Now, let me answer the first two questions, and we'll move to Sandro on the third one. On the asset disposal, in total we expect EUR3b this year.

Okay.

As far as Galp is concerned, let me just remind you that Galp has been a fantastic business for us. We invested EUR900m and we cashed almost EUR1b so far between dividends and tax credits. Now, the market value of our stake is maybe in the region of EUR3.5b. Having said that, as I had the opportunity to say before, the situation of being a minority shareholder is not going to last forever. You know that we have a standstill agreement until the end of this year, so we cannot do anything. When this agreement will expire we will evaluate all the opportunities that may arise at that time. Sandro?

And, as far as CapEx is concerned, Irene, you are right, we have just an increase compared to our original estimator by EUR1b. And we can say that more or less half of this amount relates to the appreciation of the dollar versus the euro, and the remaining percentage, which is the remaining half, to the expenditure of E&P, predominantly for the optimizations of projects for our production.

Thank you very much.

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

Yes, good afternoon. Can I come back to the question on the Gas guidance again? It seems to me that Eni has been negotiating with its suppliers for much of the last couple of years. Am I right to take it that many of the negotiations that have gone on previous are simply delaying the problem with the hope that the market is going to recover, and now that the market is not recovering we're having to renegotiate things that have already been negotiated? Is that the way to think about this?

No, Alastair, you are wrong. We negotiate when we have a window of negotiation. For example, I give you just an example. The Libyan contract, which, for us, is an important one for many reasons, including for the fact that half of the Gas is our own equity Gas in the country, has a window of negotiation in which we renegotiate from October 1, the price.

So we could not negotiate before. We have not negotiated before; we started negotiation in the last few weeks. The only contract that we have renegotiated so far is the Russian contract, for the simple reason that the window allowed us the renegotiation. Now we have the Libyan, and in the next few weeks we will start renegotiating the Algerian contract. So it's simply a question of windows of negotiation; no renegotiation at all.

Can I ask a supplementary?

Yes, please.

Where do you stand relative to your take-or-pay obligations under these contracts, roughly? Are we above, below?

Yes, maybe Domenico (inaudible).

As we said before, the economic crisis led to this significant decrease of Gas demand in Europe. And it's a question [of our supply]. We expect, we hope, that in 2010 or from 2010 onwards there will be -- and we are seeing already signs of that, a strong Gas consumption and growth on top of sales. But it will take a little bit of time before going back to the 2008 levels.

As a consequence of this situation, our withdrawals from the supply contract are in -- below the minimum, so I expect that we will find ourselves, by the end of the year, in a take-or-pay situation. Of course, you will remember that take-or-pay means that you have to pay a quarter of the price of Gas you are not taking. And, of course, at the moment, [which] in the future of next years you take this gas you have to pay only the difference in respect of what we have paid already. So it's a kind of a financial arrangement, in fact.

By the way, I would like to add that in the negotiation we are undertaking now we are renegotiating, not only the price, but also take-or-pay conditions. So it is a negotiation which involves every economic aspect of our long-term supply agreement.

And that guidance, the 3.7 to 3.8 worst-case EBITDA, includes maximum take-or-pay penalties?

It includes maximum -- well, maximum -- take-or-pay does not involve anything in terms of economic impact. It is a balance sheet impact, but we are not considering the take-or-pay a profit and loss issue. But this worst-case scenario implies that we are not in condition of renegotiating any contract, particularly the Libyan and the Algerian that we have in front of us, within the next six months.

I just would like to remind you that the next six months are particularly important, because the campaign for Gas starts October 1. So, let's say, what we can do in the next few weeks is very relevant for our results. On terms of the winter campaign we start October 1 and ends up March 31, I think, or April.

Thank you very much.

Good.

Next question from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.

Hi, I had a couple of questions. First of all, could you update us on your tax rate guidance for this year?

And, secondly, could you remind us what are the key FIDs that you intend to take before year end? Thank you.

As far as the tax rate is concerned, the adjusted tax rate -- well, you can extend more or less the same tax rate we experienced by the end of June for the rest of the year. So we are forecasting more or less an adjusted tax rate in the region of 57% all over the year.

Before the end of the year we are going to sanction Dubai, and now we've got to prove that is 100% sure. We have the Block 15 West Hub in Angola, and [Salbushka] in Russia, and an introduction of Perla, and also the announcement program for [Gondali], so you can say the second phase on Gondali. And the FID projects that we are going to sanction totally this year will bring, in term of 2p reserve, more than 1b barrel.

Thank you.

Next question from Mr. Sergio Molisani from UniCredit. Mr. Molisani, please.

Yes, good morning to everybody. A follow-up question on the take-or-pay contract, if I may. Can you tell us also what's the impact you expect in terms of net working capital in a worst-case scenario you are not able to renegotiate these contracts?

And then a confirmation of the fact that you do not have any further open windows of negotiation with Gazprom until 2012? Thank you.

Well, let me answer the second question, and then I will leave either Sandro or the rest to give you some elements on the working capital. No, the only negotiation we made with Gazprom is from January 1, 2009. So the next window will be January 1, 2012.

Okay, on working capital? I'm not sure we want to give you this number at this stage.

Exactly.

There are many uncertainties, in fact, because we will know only at the end of the year what we will be exactly our take-or-pay or [ex portion]. So at this moment it's quite unpredictable what this number could be.

In conclusion, we don't want to give you any number on this, because we don't have this number, as a matter of fact.

Right. Last year we have already declared that the number relating to 2009 was a negligible amount of money. But we have already -- know that this year it will be more significant. But it is still too early to have -- to define precisely what could be the magnitude of this amount. But, however, it is an amount which is absolutely in good -- is sustainable, as far as our financial forecast is concerned.

Okay.

Any more questions?

Next question from Mr. Domenico Ghilotti from Equita S.I.M. Mr. Ghilotti, please.

Good afternoon. Back to the disposal process; could you give us an update on the timetable, in particular for the disposal of international pipelines, and clarify if Snam Rete Gas is allowed to bid for these pipelines?

No, Snam Rete Gas is not allowed at all to bid for these companies, for these acquisitions. And, as already anticipated, we are targeting to be able to close all the three deals within year end.

Okay, thank you.

There are no further questions for the moment.

Okay, very good. Thank you very much, everybody.

Thank you very much, and goodbye.

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