埃尼石油 (E) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Eni's third-quarter 2010 conference call, hosted by Alessandro Bernini, Chief Financial Officer. For the duration of the call, you will be on listening only mode. However, at the end of the call, you will have the opportunity to ask questions.

I am now handing over you to your host to begin today's conference. Thank you.

Good afternoon, ladies and gentlemen, and welcome to our third-quarter results presentation. Here with me today are Claudio Descalzi and Domenico Dispenza. We will give you a brief overview of our third-quarter results, and then we will be happy to answer your questions at the end of the presentation.

In the third quarter of 2010, the macro environment showed a positive trend compared to the same period of last year. The Brent price averaged $77 a barrel, up 13% compared to the third quarter of 2009. The average European refining margin Brent/Ural was $2.44 per barrel, up slightly versus the corresponding period of 2009, although it remained depressed compared to historical trends and at nearly half the level compared to the second quarter of 2010.

Finally, the euro depreciated by almost 10% versus the US dollar compared to the corresponding period last year.

Moving to our results, adjusted operating profit in the third quarter amounted to EUR4.1 billion, up 32% year-on-year. This result mainly reflected the stronger contribution of the Exploration & Production and the Refining & Marketing divisions, which was partially offset by lower results in Gas & Power.

Adjusted net profit for the third quarter was EUR1.7 billion, up 47.5% year-on-year. These results reflect the improved operating performance and was supported by a lower adjusted tax rate, down by 5 percentage points in the third quarter. The low tax rate [registered] in the quarter was primarily due to the utilization of previously taxed provisions and the positive contribution to this quarter's pretax profit of foreign hedging derivatives, which benefit from a lower tax rate. The guidance for the adjusted tax rate for the full year 2010 is now around 55%.

In the third quarter of 2010, Eni reported oil and natural gas production of 1,705,000 BOE per day. Production was largely unchanged from a year ago when excluding the effect of the updated gas conversion rate.

Our performance was positively impacted by organic growth achieved in Nigeria, Congo and Italy, and by 92,000 BOE per day of new production from startups and the ramp-up of fields which were started from Q4 2009.

These increases were offset by planned facility shutdowns in Kazakhstan, mature field declines and lower gas uplifts in Libya, down 88,000 BOE per day year-on-year, due to oversupply conditions in the European gas market.

Third-quarter adjusted operating profit amounted to EUR3.3 billion, up 35% compared to the third quarter of 2009. This was mainly the result of higher oil and gas realization in dollars and of the positive impact of the depreciation of the euro over the dollar.

In Gas & Power, persistent gas oversupply in Europe and (inaudible) competitive pressures, particularly in Italy, continued to affect our performance in the third quarter. The overall gas volumes sold, including both consolidated and associated companies, totaled 17.4 billion cubic meters, a decrease of around 17.5% year-on-year.

Adjusted operating profit decreased by 38% compared to the same period of 2009. Such a result doesn't include EUR47 million of gains from derivatives recorded in previous quarters, but which could be associated with the sales of gas and electricity occurred in the third quarter. The EBITDA pro forma (inaudible) includes those derivatives in the reporting period of the relevant (technical difficulty).

Gas & Power adjusted pro forma EBITDA for the third quarter of 2010 was EUR675 million compared to EUR703 million in the third quarter of 2009. Adjusted pro forma EBITDA in the marketing business showed a decline, with mounting competitive pressure resulting in lower volumes and margins. Electricity margins also declined in the quarter. These negative factors were partially compensated by the renegotiation of certain long-term supply contracts, as well as portfolio optimization.

The regulated businesses generated EUR368 million, up 9% versus the corresponding period of last year. The increase mainly reflects the recognition of new investments in tariffs, as well as the remuneration of fuel gas costs, the higher volumes transported and the synergies achieved from the integration of Italgas and Stogit.

Finally, International Transportation results showed a 16% increase as a result of the return to full capacity of the TMPC pipeline, which had been damaged in an accident in December 2008, as well as the better performance of TAG related to the auctions of new capacity, partially offset by the accident occurred to Transitgas in July.

Turning now to Refining & Marketing, utilization rates increased by 6 percentage points year-on-year as a result of lower maintenance activity and improved margins, in particular in lubricants. In the third quarter of 2010, the division reported an adjusted operating profit of EUR14 million. This was predominately achieved thanks to the marketing activities which saw higher-volume sales on European networks and a less severe trading environment compared to the previous year. These results were delivered despite declining retail sales in Italy (technical difficulty) consumption and strong competition.

The improved results also reflected a better performance from the Refining business, which was boosted by cost efficiencies, optimization of supply activities and integration efforts among the domestic refining units. Eni's margins also benefited from a slight reopening of the light/heavy crude differentials in the Mediterranean area.

In the third quarter of 2010, results in Petrochemical business continued the recovery shown in the last quarters, reporting an adjusted operating profit of EUR31 million, driven by stronger volumes sold and higher cracker margins realized by the [olefin] products.

(Inaudible) delivered an adjusted operating profit of EUR316 million, up 18% versus Q3 2009, mainly due to increased activity in the onshore and drilling segments.

Other activities and corporate showed an aggregate loss of EUR93 million versus a loss of EUR146 million in the third quarter of 2009.

Cash flow from operations was EUR11.6 billion in the first nine months of 2010. Proceeds from divestments amounted to EUR900 million, including no strategic upstream assets, the sales of 51% interest in SeverEnergia and a 25% stake in the Greenstream pipeline. The cash inflows were used to partially fund cash outflows relating to capital expenditure of EUR10 billion and the dividend payments of EUR4 billion, which included the payment of the interim dividend 2010.

Net financial debt as at the end of September amounted to EUR25.3 billion. In addition to the increase in net debt, group leverage at September 30 was also impacted by the swift appreciation of the euro versus the US dollar during the third quarter. This reduced net equity by around EUR3.4 billion compared to June 30, and caused the net debt to equity ratio to rise to 0.47 versus 0.41 at the end of the second quarter.

Assuming the current US dollar/euro exchange rate to year end, management forecasts that the ratio of net borrowings to total equity, the leverage, at year-end will be at the same level as at 2009 year-end, supported by measures to optimize working capital.

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

(Operator Instructions) James Hubbard, Morgan Stanley.

Just two questions, please, both on gas. You mentioned on the last conference call that you were seeking to renegotiate gas supply agreements with the Libyans. And I think I saw something in the press about how that has progressed. There has been some softening in terms there.

Could you update us, to the extent you can, on what is going on with those renegotiations, where you are at the moment and how that impacts the talk of Gas & Power EBIT guidance having to come down a little bit, which I think was also on the last conference call?

And secondly, could you just update us on what -- what you expect to happen in 2011 as regards unbundling of the gas value chain in Italy or not, what the regulators, EU or Italian are, what you think they are planning to do in 2011?

It is true that we are going at the moment through a complete [effect] of the negotiation would have. This is not only true for Eni, but is true for many other companies, to this difference between the longer-term oil index at the [contractor] and the reality of the market, that where the (inaudible) we have are (inaudible) market.

Negotiations with Libya have been going for a while. We are now at the final stage of those renegotiations. I think that signature of the agreement should arrive in the next days. I think the agreement, it's a good agreement in defense that interest of the Libyan partners in terms of maintaining production, it will be maintained [under the side], the price of gas will be more in line with the reality of the market of the gas today.

As far as this second question you raise this concern, there are no major changes compared to the position we have already expressed during our last conference call. Which means that, of course, we are expecting the implementation within March 2011 from Italian Parliament the third gas directive which allows for three options regarding Italy's gas pipeline system.

Then after having approved the third gas directive, the Italian government will need to approve a decree determining how (inaudible) disposes (inaudible) gas in case one of the options will be identified.

And then finally, the government would have to find a way to create a (inaudible) mechanism for (inaudible) gaza which comply with the European Union laws. Which means that so far, nothing new; we are exactly at the same position that we already expressed a few months ago.

Okay, perfect. Thank you.

Alejandro Demichelis, Bank of America.

Good afternoon, gentlemen. A couple of questions. Just to follow up on the Libyan renegotiation and so on, should we expect some extraordinary charge on your fourth-quarter numbers coming out of this renegotiation of the contract? That's one question.

And the second question is regarding the gas pipeline disposal, that now it seems to have been delayed, is there any scope that the due diligence here may result in a reduced price for those pipelines?

For the first question, I think that we are not expecting any special charge for the last quarter this year. In fact, if this new contract were applied starting come October this year, we will get a reduction of price.

As far as the international gas pipeline disposal process, so far, based on the work which has been already done by some entities interested in acquiring those stakes, we don't see any reason why we have to change the guidance that we already provided to the market in the previous occasions.

Okay. That's very clear. Thank you very much.

Karim Rahim, Barclays Capital.

I wanted to ask two questions. The first was on take-or-pay liabilities. I've seen a very large decline in gas volume sales in Italy. I was just wondering what impact that might have on any cash provisions you would have to take with the full year.

And the second question was just around the tax rate guidance going forward, if you can provide anything beyond 2010. Should we expect a decline going forward, given the startup of more Italian production? Thanks.

Yes, talking about take-or-pay, we -- as you have already correctly mentioned, we expect 2010 volumes sold to be lower than those achieved in 2009. And the estimated take-or-pay, which is in advance -- and I want to emphasize that is relating to an advanced payment in 2010 -- to be in the range of EUR1 billion. The impact of this prepayment is included in our gearing guidance of 46%, 0.46 for year-end.

However, I believe that it is also very, very important to emphasize that we expect to fully recover the pre-paid gas, thanks to the fact that we can collect it over the residual life of the contracts, which average, more or less, 20 years and to the fact that we have the option not to renew the long-term contract expiring in the near future. So, confirming that we are talking about just an advanced payment.

As far as the tax rate is concerned for 2011 onward, we are now working on the new long-term plan. And we believe that it is not appropriate so far to give guidance when the exercise is still ongoing. We will provide all the information at the next strategy presentation.

Thank you very much.

Jon Rigby, UBS.

Thank you very much. Both on the upstream, two questions, please. The first, just noting the success of the third appraisal well on Perla, and just going back to your presentation in the first half of the year, you talked about a figure in terms of reserves of over 9 Tcf. With three wells drilled, are you able to give an update on that? Certainly just a range, in any case. And do you intend to go ahead with the fourth appraisal well? And then on to FID and what the timeline is for that?

And then secondly, I guess, unfortunately we always come back to this. Are you able just to give another update on what is going on with Karachaganak again? Obviously, high profile in the news at the moment. Thanks.

Perla first. We drilled three wells. I think that the last well, the Perla 3, confirmed the (technical difficulty) results. We have a slight increase in our reserves. And -- but is always in terms of gas in place -- I prefer to talk about gas in place than reserves, because reserves coming also from our reservoir studies, we talk about 14 billion of -- 40 -- sorry -- Tcf. So that is a figure that is more or less confirmed, slightly higher than what we saw with the second well.

The FID, the expectation for the FID for the experimental phase, the early production phase, we opt to pay this FID by the end of this year. Because we try -- we want to put in production Perla by 2013.

Secondly, on the Karachaganak, just an update. We are still under negotiations. As I said, we think that we are very close. We are negotiating in a very good environment, and I offer really that by the end of the 2010, we should be able to finalize our negotiations positively for both parties.

Just a follow-up, can you just run through what the points of negotiation are currently?

The main point that we are negotiating are the -- you know that we have two arbitration process, one on the taxation and the second one on the cost recovery, that are the main two points that we are negotiating. So I am talking explicitly about that.

And there are some other topics around these negotiations that as you saw in the newspaper, concerning the willingness of the Republic of Kazakhstan to [elevate] its stake -- its share in the joint venture. That are the three topics we are discussing.

Perfect. Thank you very much.

Paolo Citi, Intermonte.

Just two questions. First of all, regarding the derivative financial instruments you booked during the quarter, I think EUR171 million in the P&L, I'd like to have some disclosure on this figure, and also the relation to the quite high minorities booked in the quarter.

The second question is again on the gas sector. First of all, I'd like to understand how are you going to book your sales to residential clients in the last quarter this year, taking into account the decision of the regulator to [cut] (inaudible) of the raw material cost component, and also take into account your recent appeal to a regional court on this issue.

And finally, again on the gas, is it possible to have an update regarding your guidance on full year regarding adjusted EBITDA? During the last presentation, you made an indication of roughly EUR3.6 billion, EUR3.7 billion from EUR4.4 billion last year. Is it possible to have an update on this? Thanks.

Trying to answer to your first question, relating to the use of derivatives, you are right, in the third quarter, derivatives, which just for accounting reasons cannot be considered as specific -- so derivatives [contra] to which do not meet the criteria established by the International Accounting Standards have to be valued at the date of sale value -- at the fair value existing at the end of the quarter.

Accordingly, the fair value has been reflected in the P&L in the financial side of the profit and loss account, and resulted in a positive gain of approximately EUR200 million, which contributed to the achievement of a net financial income for the Group of EUR46 million.

For the second question, you are right to mention the (inaudible) for the energy the five-year reduction of the [IIe]. IIe is a complex metric by which they fix the price to the retail customers.

We are not happy with this decision and the (inaudible) way that we, with many other companies operating in Italy, are presenting to the Regional Tribunal -- tried through the Regional Tribunal to amend this decision now. This is a factor the price to the customers has been decreased starting since October this year. We will see what will be the final decision from the Tribunale.

As for the guidance for the 2010 EBITDA, I can confirm what has been said before, that we think that this year would be -- the value of EBITDA will be in the range of EUR3.7 billion.

Michele Della Vigna, Goldman Sachs.

Thank you. I just had two questions, the first one regarding Angola. I was wondering after the recent series of positive discoveries in Block 1506, if you could update us on the amount of reserves that you think you have in that block.

And secondly, relating to your CapEx plan, I was wondering if you could give us a guidance for 2010 and a rough breakdown of where you are spending that money. Thank you.

Angola, we prefer to talk about -- before about oil in place and not reserves that come from our detailed reservoir studies. And we reach now with the last important discovery close to 2 billion of oil in place in Angola. And that is the figure of the moment.

And as you know, we try to put in production with a very fast time-to-market, the first op by 2013, and back to back the second op. So it is very successful; now we go ahead with an appraisal phase. And also, exploration phase on additional structure in the south of this block.

Talking about CapEx, CapEx in 2010, total CapEx are expected to be slightly higher than 2009. And giving a more precise number, it could be in the range of EUR15 billion. Of our total expected CapEx of EUR15 billion, approximately two-thirds is attributable to our upstream division; the Gas & Power sector accounts for over 1/10 of the total, the vast majority of which is in the regulated sector. And then (inaudible) item accounts for another 10% of the total.

Geographically speaking, Italy accounts for approximately 20% of the total. Of the remaining 80%, the high proportion is attributable to our upstream operation in north and west Africa.

Thank you.

Barry MacCarthy, Royal Bank of Scotland.

I have a question following on on the EBITDA guidance. Back in February, when you updated the business plan to 2013, you gave guidance on the pro forma adjusted EBITDA to average, I think, 2009 levels, about EUR4.4 billion per year. Obviously, there has been some tough trading since those targets were issued.

Do you still think it is reasonable to hang on to that target? And if you were to revise it, knowing what you know today, what might be a more reasonable level, if there is cause to revise it? Thank you.

Of course, we are currently updating our business plan for the next (technical difficulty) years, looking what happening in the market, what we think will happen in the next years.

Of course, we are not yet finished with this exercise, and normally we do, we will announce our target in our strategy presentation that normally we hold in March 2011.

Okay. But is it fair to say that conditions have materially deteriorated since that was issued? Things are tougher than you thought.

Of course, our competitive pressures have increased in respect to what we have foreseen in the last (inaudible). And the big question -- and not a question only for ourself, but I think for all the gas awards in Europe, is when demand will recover, when all the gas that will be produced in (inaudible) access to the market. And in consequence, when the difference between the big oil price index of the crisis and the price of (inaudible) will decrease.

We expect this could happen in the next two, three years. But of course yet, we don't have a clear, full view what we think will happen. So really able to revert to our strategy presentation to May to give you a further guidance on this.

Okay. And can the outcome of the renegotiations on the long-term contracts also have a material effect on how the market firms up?

Of course. This is one of the main issues of now our stake. Unfortunately, you cannot ask revision of price at any date, but only when the contract foresee for this. So we have already some negotiations going on. Some others will be open next year 2011. I would say in 2011, most of our contracts will be under renegotiation.

That's very helpful. Thank you.

Kim Fustier, Credit Suisse.

Good afternoon, gentlemen. I would just like to go back to the gas business, if I can. Firstly, in terms of gas sales outside Italy, they are down 15% year on year this quarter, but I think they were up slightly in the second quarter. I was just wondering if you could give us some color on the reasons behind that deterioration.

Secondly, you mentioned that a proportion of your long-term contracts were expiring in the near future. Are you able to tell us with which counterparties those contracts are, and also what gas volumes they represent?

And thirdly, if you could give us an update on the state of renegotiations with Algeria, and also the second round of your renegotiations with Gazprom. Thank you.

Really very interesting questions. You rightly noticed that in fact recovery of demand in Italy has been quite good in the past six months of this year. In fact, it looked for the period from 2009 to 2010, 2008 to 2010 -- 2009, the decrease in sales overall in Italy has been in the order of around 10%, if we look to volumes not collected for the [terminal A] factor.

A large part of this has been recovered -- at least [30%] of this has been recovered, but it is mainly in the first six months of this year. In August and September, the recovery has been slowing down, and they say the reason (inaudible) you collectively (inaudible).

For the renegotiation of the contract, recall that what I said before, that now we are renegotiating all our contracts. We start already with Algeria, with some meetings. But the negotiation will go for sure for many months still. And the same will apply to Gazprom.

I don't think that I should mention exactly which contract or when this will expire, because as you may imagine, this has a very important -- a commercial side.

Domenico Ghilotti, Equita.

I have a question on your corporate costs, because I saw a decline, a reduction in corporate costs. I wonder if this is just a temporary impact or if it is linked to some structure reduction?

And the second question is still on the gas market. If you could elaborate a little bit more also on the performance in some markets, such as Turkey, for example, that was quite weak, while, let's say, economy should have been more buoyant.

Well, corporate costs depends if you -- whether are you analyzing this element at the gross margin, at EBIT level or net margin level. Because, of course, depending on the level of result you are analyzing, there are other elements which could affect the results of the period.

If you refer to the corporate costs, corporate results, what we attribute to the corporate, measured at EBIT level, they are not very different compared to the other quarters. Of course, there are some in terms of cost.

Then, since the variations which could affect the intercompany profit or losses realized between the group companies are attributed -- eliminated during their consolidation process to the corporate segment, the level of prices and the quantities existing by the end of the period in our stocks could affect the results of the period attributed to corporate. Which means that in terms of pure costs are in line with the previous quarters, the fewer costs.

The results identified as corporate are significantly higher, because the variation in the stock occurred in the third quarter has caused a positive adjustment in the period.

For the question on gas, is it true that after the crisis and demand in year 2008, recovery in different countries has been different. For instance, Germany nearly recovered all that demand that had been lost. Italy is midway, as we said before. Other countries, like Spain, for instance, are still at the beginning of the process of recovery. So we have a different situation in different accounts with (inaudible).

In the (inaudible), the situation of the market in terms of price is nearly same everywhere. So this excess of supply that is arriving in European market, of course, maintained the price (technical difficulty). One consequence of this is, as we said, the renegotiations with all the suppliers, all of the providers of gas.

A special case is Turkey, where notwithstanding a good economy, I would say demand in gas has been very, very low. So the exposure to take-or-pay or decrease of consumption in Turkey is quite high. And of course, because we are saving (inaudible) [imports] to gas in Turkey, this is affecting our own overall sales.

Thank you.

No more questions at the moment.

Thank you, everybody. We are available for further Q&A in the investor relations. Thank you, everybody.

Ladies and gentlemen, the conference is over. Thank you for calling.