埃尼石油 (E) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Eni's 2017 Fourth Quarter and Full Year Results Conference Call, hosted by Mr. Claudio Descalzi, Chief Executive Officer; and Mr. Massimo Mondazzi, Chief Financial Officer. (Operator Instructions)

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

Good morning, and welcome to our 2017 full year results. 2017 was a year of outstanding result, coming from the implementation of our strategy over the last 3 years. And based on our strong focus on upstream's value of growth, the well advanced turnaround the mid-downstream and the structural reduction of our cost bases, we have succeeded in making our company financially sustainable also in weak scenario, delivering material cash generation while putting into a position to be able to benefit from possible upside. We had improved our main operating and financial targets in all businesses and HSE.

Starting from HSE. We continued to reduce turnaround time trend of improvement in all key metrics. In (inaudible) 2017, we reached a total recordable injury rate of 0.33, 7% lower than 2015. For the environment, we are strongly committing to reducing the carbon footprint of our activities. The GHG emission intensity in the upstream decreased by 3% versus 2016 and by 19% versus 2014, confirming that we are well on track to our long-term target of reducing of 43% in 2025. Maintain emission and (inaudible) flaring reduction are the key levers to reaching the GHG target. And for both, we are progressing well and close to achieving our goals.

Our strategy in reducing our carbon footprint also implies the growing exposure to renewables. With 20 projects around the execution or close to sanctioning, we will add around 250 megawatt of new power capacity in the coming years, a major first steps toward a much later presence in this emerging business.

In upstream, let me highlight the 4 key metrics of our strategic execution. In production in 2017, we produced 1.82 million barrels per day, a 3.2% growth versus 2016 or 5.3% when factoring in OPEC cuts and PSA effects. Our 2017 production increases around 220,000 barrel per day, 14% higher than in 2014 when the price started to fall and they're notwithstanding an E&P cut reduction of around 40%.

In CapEx efficiency with $10.6 per barrel of fine and development cost in the period 2015 and 2017, we are growing more efficiently, thanks to the great portfolio optionality, which is continuously enhanced through exploration, the new model of development and the benefits of market deflation. This is a remarkable reduction, where so the [SMB] of $21 per barrel we had in the period 2012, 2014.

In operating cash flow in 2017, upstream cash flow from operation inclusive of interest and taxes was EUR 8.3 billion. We generated a free cash flow of around EUR 1.7 billion, corresponding to a sale financing ratio of 125%, and this is without taking into account any benefit from disposals.

And finally, in upstream cash neutrality, upstream cash flow covers its CapEx at around $45 per barrel, a reduction of more than 50% versus the level of 2013 around $100 per barrel.

Let's turn to exploration, the engine of our growth, which had another outstanding year, with 10th in a row. We added 1 billion barrel of equity resources, including 200 million barrel from the farming of (inaudible) in Australia. We continued to add resources at a competitive unitary exploration cost of $1 per barrel.

In 2017, we continued to explore near-field with contribution from Egypt, Indonesia, Libya and Norway. And we open promising new basin in Mexico, where we discovered 2 billion barrel of oil in place. Most of these discoveries will be fast-track and will start up within the 4-year frame. At the same time, we further reloaded our portfolio by adding 97,000 square kilometer of new net acreage in offshore Oman, Mexico, Ivory Coast, Cyprus, Morocco, Norway and Kazakhstan.

Exploration success in fast-track development are key to reserve replacement. And this year, we recorded an organic reserves in the pricing ratio of 151%, or 103% taking to account the effect of the reclassification of Perla Phase 2 reserves to unproved, due to the contingent domestic situation.

And finally, another metric which proves the effectiveness of our upstream model between 2015 and 2017, our reserve replacement ratio all sources was 120%, even including the effects of the disposals.

And now let's have a look at the 2017 start-ups. In December, we started up Zohr, just 28 months after discovery and 22 months from the FID, an industry record for a giant deepwater development. Zohr is now ramping up faster. It has reached a gross production of 400 million scf per day. It is expected to contribute 1.9 billion scf per day by the end of the year. In 2018, it will be contribute on average around 70,000 barrel per day to Eni production. This is just the latest success of our integrated model of development.

In the first half of 2017, we started up cleaning deepwater fields in Angola, Ghana, Indonesia. All of these projects coming from our exploration discoveries started ahead on schedule, with an average time-to-market of less than 3 years from FID. Overall, these 4 fields are performing better than expected, contributing to 80,000 barrel per day to 2017 average equity production. They are expected to contribute around 210,000 barrel per day in 2018.

Let's now move to E&P results. 2017's EBIT of EUR 5.2 billion is double last year's. OpEx at $6.6 per barrel and depreciation cost at $10.3 per barrel are in line with our expectation. In 2017, benefiting from high-value barrels, upstream operating cash flow was around EUR 8.3 billion. This 38% increase in cash generation, coupled with a 20% CapEx reduction, generated free cash flow of EUR 1.7 billion. Our cash generation is equivalent to a cash flow of $14.1 per barrel or $15.3 per barrel at the budget scenario of $57.5 per barrel, exceeding our original guidance.

And now let me give you some numbers of the key turnaround of our Mid-Downstream. Gas & Power is structurally positive with more than EUR 200 million of EBIT, that include around EUR 100 million positive nonrecurring profit. We have exceeded the original guidance of achieving. We have progressed in the restructuring of our supply portfolio and logistics cost and enhanced the contribution from high-value segment, driving LNG every day.

The overall EUR 600 million improvement versus 2016 is equally split between the restructuring of our portfolio, such as supply and logistics; high-value segments, such as energy trading optimization and retail.

The refinery sector is profitable at $3.8 per barrel, a margin of achieving that is 40% lower than 2014.

R&M generated a EUR 530 million of EBIT, with marketing contributing EUR 390 million.

This year's refinery results of EUR 140 million in a $5 per barrel margin scenario has been achieved notwithstanding the impact of EUR 100 million fixed cost, mainly related to Gela, currently under conversion into a biorefinery, aiming production at the end of 2018.

We are, therefore, well on track to reduce the breakeven to $3 per barrel by the end of this year with the start-up of Gela, the restart of (inaudible) and additional operating improvements.

Chemicals generated EUR 460 million, a record and an improvement of 50% on 2016. The negative results from 2008 to 2014 are behind us, and Versalis is now a self-sustaining company also in terms of free cash flow. The operating profit from our mid-downstream is at its highest point for a decade, while cash flow maintains the positive trend of the past 2 years.

Mid-downstream contributed more than EUR 1 billion of EBIT in 2017, triple the average result of the past 2 years. Overall, in the period 2015 and 2017, we accumulated an economic result of EUR 2 billion versus the losses of EUR 2.1 billion of the previous 3 years. All sectors are now structurally positive, and they are much more resilient to weaker scenarios.

This turnaround is even more remarkable at cash flow level. We were able to turn a drain of EUR 3.7 billion in the period 2012, 2014 into a contribution of EUR 8 billion in the last 3 years through greater operational efficiency, optimization of logistics, renegotiation of gas supply contracts and the recovery of working capital, including take or pay. In 2017, our mid-downstream business is as if we're self-sustaining. And with a generation of around EUR 1 billion of free cash flow, they are able to cover 1/3 of our dividend.

Before concluding, let's have a look at our group result for 2017. The fourth quarter was marked by an acceleration of our economic and financial performance. In this quarter, which is seasonally stronger for Eni, we leveraged our upstream position, producing growth and efficiency for our mid-downstream assets. Compared to the third quarter, we record an increase of 100% on EBIT and 50% of cash flow from operation level. The 2017 economic result confirm the trend of our improvement. Overall, the company generated EUR 5.8 billion of EBIT, an increase of EUR 3.5 billion versus last year. This result was driven by the improved scenario for EUR 3.1 billion, mostly in the upstream sector; growth in the efficiency action from EUR 600 million; and negative one-off effect on OPEC cuts for around EUR 200 million.

Cash flow from operation for the year was EUR 10 billion, or EUR 9.3 billion before working capital at replacement cost. We generated an adjusted net profit of EUR 2.4 billion. The average tax rate in the full year was 56% or around 61% normalized for one-off effect. Our reported net result was 3.5 -- EUR 3.4 billion, the highest since 2013.

In 2017, Eni achieved a margin through financial position beating its cash neutrality target. Hence, 2017, organic cash neutrality covered all costs, CapEx, and a full cash dividend is at $57 per barrel, an improvement to the original guidance of $60 per barrel. If we take into account the cash in from the dual exploration model, our cash neutrality was equal $39 per barrel, generating a free cash flow after dividend of EUR 3.4 billion. As a result, we have lowered our net debt to EUR 10.9 billion, contributing to a reduction of the gearing to 18%, one of the lowest among the European managers.

Before concluding, let's have a preliminary look at 2018. For this year, I can anticipate an organic reduction growth of 3% versus 2017. That empowers underlying EBIT expected at EUR 300 million. Refining breakeven at around $3 per barrel at year-end. CapEx in line with the 2017, up to EUR 8 billion, confirming our focus on a disciplined and sustainable growth.

With the upstream set for growth in a lot of scenario and continuous improvement on mid-downstream and a strong financial position, we will be able to capture all the potential upside from the recovery of the oil and gas prices. We will disclose our -- but I confirm that all the actions and the initiatives are in place to build a stronger, a longer future for Eni and its shareholders.

Thank you. And now we can pass to answer your question with our management team.

(Operator Instructions) The first question is from Mr. Jon Rigby of UBS.

Can I ask 3 questions, please? The first is just on the tax rate, which obviously came down in 4Q. I guess there's some sort of reappraisal going on, so we need to look at the full year 2017 number to get some guidance on the outlook for tax rate. But could you just talk a little bit more about that and maybe reference also cash tax rates as well? The second is on production. There's a big pickup in North Africa in gas production in the fourth quarter. And I just wonder whether you're able to characterize that between organic growth in Egypt and maybe demand pull out of Italy from Libya, but that sometimes impacts your quarter. And then lastly, I was intrigued by discussing your comments around the creation of surplus value for shareholders or substantial surplus value for shareholders. And I just wonder whether you could maybe start to talk a little bit about how you think about how that could maybe share with shareholders. I know you'd probably talk about it more on the 16th of March, but it does seem to sort of hint at some plans behind the scenes about looking at your share -- your dividend policy or your distribution policy.

Okay. Thank you. Massimo is going to answer about the tax rate and then we follow up.

Jon, so the normal tax rate that we got in 2017 is around 60%. The 60% is a bit lower than the guidance we gave, that was in the range of 65%. Why we got this slight reduction? I would say because mainly 2 reasons. First of all, the Italian activities in all the mid-downstream businesses, including retail and with gas and the chemical business got the result that had been expected there. This result is as close to a lower than the average tax rate. So this is the first reason. The second one is that the mix of production we got in E&P is slightly different there versus the expectation. We got a higher contribution from the new start-up, including Angola, for example. This is exposed to a lower tax rate than the average, while we got some less production from Norway that you just post to a 78% tax rate. So the combination to cash to a lower tax rate in the range of 60%. I believe that 60% would be the right guidance as well as for 2018 in a $60 per barrel Brent scenario. In term of cash tax rate, the cash tax rate we got in 2017 is that something in the range of 30%, and we expect, I'm just checking the numbers, something in the range of 25% in 2018.

And just to try to give more context about gas, gas in the Mediterranean, so we talk about Libya and Egypt and mainly also if we have also Algeria. So the main source of new gas comes from Egypt. It was Egypt. We have (inaudible). We have also Nooros. And additional gas that will go on stream, and that is for the local market. Then we have also gas clearly from Libya. And the flow of gas is split at the 40-60, 60% is for the local market and 40% for the Italian market. And we can add some fluctuation, some variation, but there's no -- we didn't increase our import. Set maybe in some special days, but we didn't increase our import from Libya. And Libya is really consuming and increasing the gas consumption, so that is the situation. Clearly, the gas rate and the gas acreage here mainly is going to be increased in this area because we have new field and new project on stream. For the remuneration for the TSR, for the remuneration of dividend, as you -- well, note that this is something that we are going to discover and elaborate on it in March. So you have to be a little bit patient. And in March, we're going to answer to all of your questions. Thank you.

The next question is from Oswald Clint of Bernstein.

Maybe just a question on the cash flow neutrality number that you've given out this morning, the $57 versus your expectation of $60. It feels -- I mean, it looks like that's mostly coming from the lower CapEx spend versus budget of $300 million or $400 million less CapEx spend versus EUR 8 billion. Is that where that's coming from? And where did that kind of $300 million, $400 million CapEx saving come from? And is that not something that could flow into 2018 as well, please? First question. Second question, just on Mexico. I see you've completed your exploration campaign pretty quickly. I'm just curious to know what is the activity plan for Mexico in 2018, please.

I believe that cash neutrality is the sense of your question if the $57 are sustainable or even potentially improved -- to be improved in the future. The answer is definitely yes. So it's not depending on the level of CapEx. It's a bit lower than the EUR 8 billion. We believe that this level of cash flow from operation and CapEx is sustainable even to feed in the future production growth. So this is our view in this respect.

Okay. For Mexico, Luca and Antonio, if you want to answer, please.

So we have already -- we presented to the authority of Mexico the plan of development. Well, the discussion is already ongoing. We expect by end of March, early April to get the approval of plan of development. And then immediately after, we will proceed with our FID. Luca?

Exploration-wise, we will start working on the other license that we won in 2017 round and where we expect to start drilling operation around the year-end of 2018. So we will prepare for drilling and a new license by the year-end of 2018. And regarding Area 1, we will continue drilling, of course, appraisal development drilling for all the years. These wells were to keep producers for their project.

The next question is from Mr. Alessandro Pozzi of Mediobanca.

Two questions. The first one is on Gas & Power. Clearly, a good quarter, probably there's a bit of seasonality, but certainly there's a structural improvement in the results. And now I think that you have a further improvement this year. I was wondering if you can maybe give us a bit more color on how you're going to achieve that, whether it's based on previous renegotiations or whether you are planning to perform more cost-saving initiatives over the next few quarters. And also the second one is on production growth. I think you're assuming a 3% this year. I believe there is a 200,000 barrels from new project. I was wondering if you can give us maybe a bit more color on that as well.

Massimo, you can answer to Gas & Power.

Yes. On Gas & Power, the driver we had this year were mostly renegotiation on gas supply and at least 3 bigger long-term contracts. Then we had, of course, huge efforts on reducing the logistics and costs. This was done mainly by terminating, also taking opportunities from the regulation contracts or capacity and in particular, on asset-backed trading. We had also quite a significant result from LNG trading, and those are also the drivers, which we see for the future. And in the strategy, we will tell a little bit more in particular on LNG.

So Antonio, maybe you can talk about and give some light on the 210 in terms of -- around parts and the other contributions and the gross production.

So the exactly number we have achieved, and the ramp-up is that it's going to continue on 2018 is going to be 60 -- sort of 55,000, 60,000 barrel. It's going to be new start-up. And 280 is going to be the ramp-up new along the year.

So it gives some names to the ramp-up. Clearly, the ramp-up, we can -- the big ramp-up is coming from Zohr hitting production, 4 -- additional 4 trains. So we pass from a 400 million scf per day to 1.9 million by the end of the year. Then we have a ramp-up in OTCP (sic) [OCTP]. So we have the gas phase of the project in Ghana, and we double the production to reach 85,000 barrel per day of gross production in Ghana. Then we have the additional on top -- in Egypt for the great Nooros area that is the shallow water considering Nooros and Baltim West. So Egypt will be a big contributor. Then we have Indonesia where we increased production in Jangkrik. We have an additional growth for a project, the West Hub, that start up -- structurally, West Hub, they start up in May, April. So that are the main contributor. We have also aid in offshore production in Libya, and we are projecting on Guri. So this is a quite diversified contribution from different projects, but we are going to all ramp up, all start up, as Antonio said.

The next question is from Mr. Massimo Bonisoli of Equita.

Three questions from my side. Could you just spend a few words on the explosion block in Block 6 in Cyprus? And what's the current situation following the opposition of the Turkish government? And maybe also a few words on the awards of the blocks in Lebanon. Do you have potential synergies with Zohr from those blocks? The second question is on the divestments lesser in 2018 if you have an update on what to be cashed in over this year. And third question is, out of the...

Sorry, can you talk loud because we just catch the first question, but we lost the other 2 questions?

Sure, sorry.

If you can shout (inaudible)

Sorry. Could you give us an update on the divestment to be cashed in over 2018? And out of the EUR 8 billion CapEx, how much is related to Zohr and Mexico?

Okay, okay. So we couldn't hear you but we've got some questions, and we try to answer. If not completely, we can repeat. Now the first point, so the Block 6 is not yet -- the Block 6, it seems would yield. So the well that is under -- that is stock and is in discussion is the well in the Block 3. So it's -- the Block 3 is another well. And the situation in the Block 3, I asked just to enlight that the block is in the exclusive economic zone of the super south. So we have been really, really attentive to put it through, locate the right location. That is the third well that we drill in this area. And the first -- for the first 2 wells, we didn't have any problem. Now the situation is not really under our control because the diplomacy of different countries into the Europe, France, and Cyprus and Turkey that are discussing this issue. At the moment, we are waiting. And for Lebanon, maybe, Luca, you can say something?

Lebanon is start of our position in the Eastern Mediterranean, and we don't see direct synergies with Zohr. It's mainly an exploration activity that we look for, first of all, domestic opportunity. This is our intention.

Thank you. So for the other question that we understood was about the return on the (inaudible) 2018 on Zohr and on Mexico. We give the floor to Massimo to answer it.

So Massimo, the 2 aspirational model we apply successfully, the -- up to now would be continuing in the future. So as I already commented in September, the potential divestment in the near term could relate some recent aspirational success we had. With the very high interest rates such as the Area 1 in Mexico where we commented Merakes in Indonesia, that simply there are some other candidates in our portfolio even right now as well as, I would say, we are very confident that the future exploration activity that probably we will comment at length during our strategy presentation will give us additional floor to keep on this kind of strategy. I cannot give you a precise number because it will be definitely an M&A activity looking forward. But I'm strongly confident that the positive contribution from the dual exploration will be continued without jeopardizing the production growth as we did up to now, including the replacement, because I would like to highlight the comment that Claudio already made about our replacement ratio, that in the last 3 years when we put in place the significant part of our dual aspirational model selling down 25% or more than mid-40% of Zohr. Anyway, our replacement also has been 120%. So everything included.

(Operator Instructions) The next question is from Mr. Marc Kofler of Jefferies.

I think from the press release, it shows that you're adopting a more conservative approach with regards to the operations in Venezuela going forward. So I was just wondering if you could talk a bit more about how the situation there is unfolding at the moment. And then also, if you could, I think it would be great if you could talk about the production that's in the budget for 2018 from Venezuela.

So I'll answer the first part of the question, then I will give it to somebody, to Massimo and to Antonio, to complete the answer. From the operational point of view, we are producing from Perla, from Coral, from Junin 5. So the production is daily, and the Perla is producing quite well. We're certainly slamming everything to the domestic market. And so there is no operational issue and problem. What happened that, due to the situation of outstanding that we had, clearly, we are not proceeding with the second clear phase. The second clear phase is there in term of authorization, in term of production and technical ability, but we want to understand better the situation and be able to recover our spending that now are around EUR 600 million, our share. So we want to understand when and how we can recover, and then we can continue our operation. All our -- most of our operation are offshore. So they are not impacted, but we want to be sure about the economic and financial return. Antonio?

Okay. In term of budget 2018, we still have the same budget of 64,000 barrel per day of '17 and also in '18. The growth in -- expected on the previous activity have been suspended. And there, we are delivering the gas requirement for local market as the facility trait. Thank you.

The next question is from Bertrand Hodee of Kepler Cheuvreux.

Two, if I may. The first one is about potential FID Eni could take in 2018. So you've talked about Mexico year 1, if it's Junin, develop reserves, also potential candidates. And the second question relates to Zohr and the divestment. So Rosneft and BP did not exercise the option to acquire another 10%. So would you try to sell another 10% of Zohr going forward?

Okay, thank you. About the FID, Roberto, Antonio can answer, and then we talk about Zohr.

Okay, thank you. We have envisaged in 2018 a number of important FIDs. Well, as we discussed earlier, Mexico will definitely be one of them for the entire Area 1, (inaudible). Then in Egypt, we continue the developments in the area of Nooros with Baltim South West. In Italy, we will sanction the Argo, Cassiopeia project, gas project offshore. Then we have the continuation of Nenè development in Congo. In Indonesia, we can go ahead with the Merakes development, which is the field, the -- close to Jangkrik. So very cost effective in terms of tie-in. And last but not the least, deepwater Nigeria will be another major FID envisaged this year.

Massimo, the last one.

So about the potential divestment, the addition of 10% on Zohr, I would say the divestment following the dual exploration model has been done on Zohr. So the sale of 40%, I would say, completing the most important part of what we like to do on this respect, I would say an additional 10% would be an opportunistic way to handle our real portfolio and to swap with some asset to some other asset, no more than that.

Okay. Can I just make one follow-up on FID? You mentioned deepwater Nigeria. You are referring to OPL 245 development being sanctioned this year?

Yes.

The next question is from Hamish Clegg of Merrill Lynch.

A few questions. Firstly, just on Venezuela. I know quite a lot of the moves in the housekeeping today related to some of the write-downs taken there. I just wanted to confirm a number you gave us last year for existing or outstanding receivables with close or around EUR 400 million, I believe. If you could clarify where that stands today, so we have an idea of what receivable is still pending from Venezuela given the moves you've taken in results. Second question, I'm sticking with Venezuela with Perla 2 appearing to be canceled now. I guess, it's the result of the situation in Venezuela. Could you confirm where that CapEx will be directed, given you're keeping with a sort of EUR 8 billion CapEx level, and what I believe you were due to spend some money in Venezuela which you will no longer do? And thirdly and finally, if Mexico is good as you've increased the reserves several times, which has been impressive, could you confirm why you chose not to increase your acreage in the recent licensing rounds in January?

So Venezuela, yes. So Venezuela last year was EUR 450 million, now we are at -- as I said, we reached EUR 600 million of our spending. Second, the Phase 2 is not canceled. The Phase 2 is suspended, and so we are observing and we are discussing and understanding if we can go ahead. At the moment, we don't invest for 2018, and that is already included in our budget. So we are going to invest in Phase 2. So there is not a direct impact on the -- on our CapEx spend because it's already included. Mexico, I feel that we have been very successful, and we won other 3 blocks and we won another block. So we continue through different bid round to increase our resource base, asset base in Mexico. So we -- now we have blocks in the offshore, conventional water and deep offshore. So we are present, and we are going to continue to participate to the other bid rounds.

The last question is from Martijn Rats of Morgan Stanley.

All of my questions have been answered, so I'll leave it to this.

That was the final question. Thank you for participating in the Eni conference call. You may disconnect your telephones.

Thank you very much. Have a good weekend.