Eni S.p.A. (E) Q4 2010 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen, and welcome to Eni’s 2010 Fourth Quarter and Full Year Results Conference Call, hosted by Paolo Scaroni, Chief Executive Officer and 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’ll have the opportunity to ask questions. I’m now handing you over to your host to begin today’s conference call. Thank you.

Good afternoon, ladies and gentlemen. Welcome to our fourth quarter and full year preliminary results conference call. 2010 has been a very good year. We have delivered outstanding operational achievements and laid the foundations for our future growth. In a particularly strong fourth quarter, led to full year production of 115,000 BOE per day, 1.1% higher than in 2009. This growth was driven by the timely delivery of ‘012 of our plant start-ups, which contributed 40,000 BOE per day of new production in 2010 and will account for 230,000 BOE per day of production at peak. We also make excellent progress on our key projects. We count Zubair in Iraq, as a major success having been the first IOC to reach production growth target. In Venezuela, we established a joint venture with PDVSA to develop the giant Junin 5 field and further increased gas in place with our giant Perla discovery. In Angola, we have sanctioned the rest half of Block 1506, recorded significant exploration success. In fact new discoveries has been – have been one of the highlights of the year. Exploration successes in Indonesia and Brazil, on top of those in Venezuela at Angola, added almost 1 billion BOE of new resources overall, at a very competitive cost of $1.5 per BOE. We are also very excited about the new countries and place we have entered in 2010. We added acreage in Togo and in Democratic Republic of Congo and gained a conventional gas exposure in Poland and China. Turning now to gas and power, we have faced unusual market conditions due to oversupply and the gap between oil-linked and spot gas prices. We are tackling these new conflicts through contract renegotiations with our suppliers. The revision with the Libyan NOC has been delivered successfully and we are now well in track in negotiation with Sonatrach and Gazprom. In RNN despite re-priced the refinery margins, we substantially improved our performance more than half in losses compared to the 2009. This improvement has been achieved thanks to efficiency. Sandro will take you through now through our fourth quarter results.

Thank you, Paolo. Good afternoon, ladies and gentlemen and welcome to our fourth quarter results presentation. In the fourth quarter of ‘010, the macro environment was positive compared to same period of last year. The Brent price averaged $86 a barrel, up 16% compared to the fourth quarter of ‘09. The average European refining margin Brent/Ural was $3.78 a barrel. While it remained depressed compared to historical trends, it was higher than in the corresponding period of last year. Finally, the euro depreciated by 8% versus the U.S. dollar, compared to the corresponding period last year. Moving to our results, adjusted operating profit in the fourth quarter amounted to EUR4.7 billion, up 28% year-on-year. This result mainly reflects the stronger contribution of the Exploration & Production, and the Refining & Marketing divisions, partially offset by lower results in Gas & Power. Adjusted net profit for the fourth quarter was EUR1.7 billion, up 24% year-on-year. This result reflects improved operating performance, partially offset by a slightly higher adjusted tax rate, up by 2 percentage points. The adjusted tax rate for the full-year ‘10 was 54.4%, up slightly from last year 53.6%. In the fourth quarter of ‘10 Eni’s reported oil and natural gas production reached the record level of 1,954,000 barrel oil equivalent per day. When excluding the effect of the updated gas conversion rate, production increased by 2% compared to the fourth quarter of ‘09. Our performance in the quarter was positively impacted by the contribution of ramp-ups and the startups of the 12 projects we launched in the ‘10, especially Zubair. The new production was partially offset by declines of mature fields in the North Sea in the Gulf of Mexico as well as by lower entitlements from our production sharing agreement contracts. Production entitlements in the fourth quarter…

Thank you, Alessandro, and now our outlook for 2011. Our upstream production will grow to around 1.830,000 BOE per day at our $70 Brent scenario, confirming the growth profile set out last year. Ramp-ups and start-ups will deliver around 90,000 BOE per day of new production. In Gas & Power, regulated businesses will perform well. Our marketing activity will continue to face oversupply and a gap between oil linked and spot gas prices. We expect to close the renegotiation of the supply contracts with Sonatrach and Gazprom by year-end. These renegotiations will have a material impact on 2011 results and provide the basis for a more competitive marketing strategy in Europe and in Italy. Our Gas sales will benefit from our position in key European markets. In Italy, we’ve invested heavily in our retail customer service aiming to strengthen our position in this robust market segment. In R&M refining margins will remain weak. We will continue to improve the division results through further efficiency. Consolidated CapEx will remain broadly in line with 2010 and we will be mainly focused on the development of our new major projects. This will continue to fuel Eni’s growth in the future, a theme which we will discuss further in our strategy presentation next month. We’ll now be pleased to answer your questions.

Ladies and gentlemen, the Q&A session is open. (Operator Instructions). Thank you. First question comes from Mr. Reid Iain from Jefferies. Mr. Iain, please proceed with your question. Iain Reid – Jefferies: Hi, it’s Iain Reid here from Jeffries. Can I ask two questions, please? Firstly, on the production you’ve had from Zubair, is it possible to say how much profit you realized from that on a pre or post-tax basis? And secondly, you talked about contract renegotiations significantly improving profitability. Do you think, you could quantify that in terms of how much you’d expect to regain of your previous profitability in the Gas & Power business? Thanks very much.

Well, I will ask maybe Claudio to give you some detail on Zubair, even if I doubt he can really give you a precise number on that. But maybe he can give you some guidance. On, as far as our renegotiations are concerned, now of course we are not going to give you a lot of detail on negotiation, which by the way are underway. This is a very sensitive issue. Let me just give you the ballpark, in which we are moving. As, you know, all our long-term contract are oil-linked 100%. Now we have in front of us essentially two alternatives. Either we renegotiate what we call the P-zero that is the basis price, on which we start calculating the link to oil, or we will negotiate the portion of our gas will be achieved linked to the spot prices. Now these are the two kinds of negotiations that we are having today. We – I have to say that on the basis of the only one renegotiation, which we had been – which we’ve finalized, which has been the negotiation with the legal NOC, we have fairly confident to achieve a reasonable and fair solution, which will restore at least partially the profitability of our marketing business. Having said that just to see some expecting a few new questions on this area, I just would like to give you a few elements about the dimension of the problems affecting our Gas & Power division. We – the EBITDA of our Gas & Power division is only for one-third linked to the marketing of gas, and this one-third of the Gas & Power division represents roughly 5% of EBITDA of Eni. Iain Reid – Jefferies: Paolo, if you won’t give a kind of indication of the scale of the recovery of that, is it possible then to give us some indication, where you see EBIT for the Gas & Power division for 2011 as a whole?

Yes. We expect our EBITDA – we measure normally the EBITDA in this division, because we look at it more likely utility. We expect our EBITDA pro forma adjusted in 2011 broadly in line with 2010. Iain Reid – Jefferies: Okay. Thanks. And the value of the Zubair?

Claudia, will answer.

That’s a summary of what we have done this year. Internal production, the result of the average daily production in Zubair this year is about 236,000 barrel per day. That means about 29% above the initial production target. And that was absolutely enough to recover all our cost, so we don’t have any carry forward in terms of cost sustained 2010. And we can book reserves and production, and as you know, we got $2 per barrel. The profitability of Zubair is based on the possibility to recover completely in your cost, get 3% or 2% and anticipate production. So you can recall, or you can accelerate reduction, you can increase debt that we’re just looking at this contract as you can increase your remuneration. So we – at the moment, the remuneration is well above our other rates that’s what we can say. Iain Reid – Jefferies: Okay. Thanks very much.

Next question comes from Mr. Jason Kenney from ING. Mr. Kenney, please proceed with your question. Jason Kenney – ING: Hi, there. I appreciate you have got a strategy update in March, and so it only take too much into the future. But maybe just to focus on the current operations in North Africa. Could you let us know what impact, if any you’ve seen in Egypt from the popular demonstrations there? And given the news flows for further demonstration of Libya next day (ph) what if any impact for operations there could be envisaged.

For the time being no problem, from – neither from Libya, nor from Algeria, nor from Egypt, nor from our small activities in Indonesia, so good as far as we are concerned. Jason Kenney – ING: Okay.

Next question comes from Ms. Lucy Haskins from Barclays Capital. I am sorry. Ms. Haskins, please proceed with your question. Lucy Haskins – Barclays Capital: All right. Good afternoon. Congratulations of your result replacement last year. Claudia, perhaps if I could ask you a little bit about the schismatic in terms of how production will grow from both Junín and Perla. So, you’ve given us an indication in terms of the starting positions of the both projects for 2013, but I just wondered how – what was the trajectory is in order to get to peak volumes from both those prospects.

Okay. Claudia will give you an idea about Junín and Perla.

Okay. Junín and Perla. Junín and Perla, as we stated last year we have an early production that is confirmed by second – sorry – third quarter 2013. We are starting the production of Perla with 300 million of standard cubic meter per day. And that is the early production and after few years and at four years we expect a full production in Perla of 1.2 billion of standard cubic feet per year. That is based on the first assumption and until the third well. Now with the third well of Perla we discovered additional 2.5 tcf and that means that we can increase production for domestic and we can also increase production for exploration (ph). And that will be the main focus over the next month for a study to upgrade the Perla production. For Junin 5, the early production is expected by 2013 with the production of 70,000 barrel per day. And after that in the Indonesian until 2017 and 2018, we can reach production to 230,000 barrels per day. Lucy Haskins – Barclays Capital: And – sorry, could you just clarify when in 2013 you expect the first oil stock coming through?

Third quarter. Lucy Haskins – Barclays Capital: Third quarter, in Venezuela. Okay. Thank you very much.

Next question comes from Mr. Clint Oswald from Sanford Bernstein. Mr. Oswald, please proceed with your question. Clint Oswald – Sanford Bernstein: Hi. Good afternoon. Just back on Iraq actually, could you just talk about how easy it was to lift the production in the fourth quarter and what actual activities you did actually performed in terms of was it just starting up from pre-drilled wells or was there more complex set of activities that done that? And then – may be back on the first point about the gas contracts, is it – would it be your preference to renegotiate the P0 rather than look to adopt a lot more spot price gas within your long-term contracts, given what happened in December where we saw the spot price actually increased above the oil and price? Thank you.

Maybe Claudio will add about Zubair and would give you – tell you something about the gas contracts.

So in 2010 we have a very strong intense activities on Zubair. We drilled – so we drilled six – sorry, we drilled six wells. We performed more than 65 rigorously interventional on each well and six were core. So had a very strong activity concerning the wells and we are also active on the bottlenecking over a lot of different lines. So that is the result of our activity and now we are producing, today 275,000 barrel per day. So we are above – we are 35% above the initial production considering also a depletion of 5% to the year. Let me add something about our cash counter. For example, in the case of Libya, NOC what we did would be is been to renegotiate the P0 and we have also shortened the time of renegotiation, that is instead of renegotiating every three years which would be the normal period for a new renegotiation of price, we decided in common agreement with NOC to shorten this period in two years to make sure that the agreement that we reach was still a market agreement in two years from now. Now this is certainly a very fair solution, which I think give satisfaction to both parties, with Sonatrach and Gazprom we would be debating similarly should but as I said before it’s also possible to link some part of our purchases to spot prices. We are flexible, in fact, is the result of the counts. I cannot really anticipate what will happen. We think that there is preference, certainly from Sonatrach and possibly also from Gazprom to have a changing the Peseiro (ph) rather than a proportion in spot prices, but you know in the negotiation you can never tell before what will be the outcome. Clint Oswald – Sanford Bernstein: That’s great. Thank you.

Okay.

No more questions at the moment. (Operator Instructions)

So thank you very much everybody. With no further questions...

I am sorry, if I can? There are some questions now on the queue...

Please.

May I go ahead?

Yes.

Thank you. This question comes from Ms. Kim Fustier from Credit Suisse. Ms. Fustier, please proceed with your question. Kim Fustier – Credit Suisse: Hi, good afternoon gentlemen. Just two questions please. First one is sorry to come back to this contract renegotiation with Libyan NOC. Can you tell us when exactly the contract was renegotiated? And whether that negotiation was fully reflected in 4Q numbers or whether that was achieved more recently and therefore should has a positive impact on 1Q numbers in Gas & Power? And secondly, could you give us some more color on – of the efficiency improvements you expect in Refining & Marketing? And whether you could quantify cost cutting targets? Thank you.

Well, on the first question, and beside that the negotiation with Libya ended in second half of last year and the impact on results (ph) is already seen and for the other contract, I would say that very efficient most probably will take most of the SIA (inaudible) from both parties in achieving in the profitable result. But what is important to say that whatever will be the final result, this result will apply starting this year, probably not after the end of the year probably what would be the result that those result will apply in full – probably in 2011.

Now on the efficiency program in refining, we achieved roughly 50 million in 2010 and we expect to achieve the double in 2011. So in total, cumulated in the two years we would be achieving EUR150 million of savings. Kim Fustier – Credit Suisse: That’s great. Thank you.

Next question come from Mr. Mark Bloomfield from Deutsche Bank. Mr. Bloomfield, please proceed with your question. Mark Bloomfield – Deutsche Bank: Good afternoon, gentlemen. Yes, two questions on gearing of the balance sheet, please. First, just wondering if you still regard 40% net debt to equity as a valid selling, particularly in the context to how the rating agency is recessing you? And secondly assuming that to be the case, just wondering if you’re going to be taking any measures this year beyond obviously disposing of the regulated pipelines and the operating cash flow you generate to actually reduce that level of gearing? Thanks.

Now let me first comment the gearing and then I will leave Alessandro to give you a more precise answer to your second question. Yes, we still consider 40% a target to be achieved by 2013. We’re well on track to achieve this growth and this will be achieved. Having said that, we feel that the gearing of 40 rather than 42 and 44 is much less important today or as compared to what it was only 18 months ago. But we don’t want to – not to comply with our target. So we still consider this target that we will deliver to the market.

Yes. And continuing on the same track, as we have already anticipated with our press release assuming Brent price $70 per barrel in 2011, and since we expect it to be able to complete the ongoing disposals of the international pipelines within the end of June, we expect it to be able to reduce the leverage of 0.47 at existing at the end of the year to be low by the end of 2011. Of course, we have focused our attention in particular on the working capital, because working capital is one of the most important element to generate cash, and this is the reason why we have already put in place several actions, some of which have been already generated some benefits in the last quarter of the year and will continue all over 2011, 2012 because it is not only one-off transaction but is just a framework agreement we have defined with some banks. So it is a real tools’ in order to improve our efficiency on the working capital. Then we have entered also an agreement with the special institution specifically focused on the monetizations of receivables vis-à-vis of public owned entities. And this has been another very important element to generate cash in 2010 and will continue all over 2011. Mark Bloomfield – Deutsche Bank: Thank you very much.

Next question comes from Mr. Neill Morton from Berenberg. Mr. Morton, please. Neill Morton – Berenberg: Good afternoon. I had a question on your gas volumes in Italy in the fourth quarter. You actually saw a year-on-year increase the first time in over two years. I wonder if you could firstly estimate how much of an effect the colder weather had on volumes. And secondly, you also make reference to recapturing some wholesale clients, wondered had that been achieved simply through lowering your prices. Thank you.

Well, in fact there has been some kind of effects from the colder climate. But the effect is mainly on the retail business, although there’s been an increase of consumption by industries. It has been quite fertile, it should be for the entire year. So the effects are both some contribution from colder climate and some contribution from the increased in demand due to the effect of situation, in this effect on Italy. We expect that this could continue in the next year. So we expect an increase of demand and on the other side there could be a little bit more competitive in terms of the prices or could we think that, the market share in Italy could be recorded (ph). Probably not in full, we had three or the figures, but at least we expect any colors. Neill Morton – Berenberg: Thank you. Just one quick follow-up. I noticed in the upstream business, your North African gas volumes had a big jump in Q4 versus Q3, I can’t think of it off the top of my head what that would be, could you quantify that please?

Yes. The increase of volume in the last quarter is mainly due to the domestic market. So the domestic market based around 1.5 billion cubic meter area to round up about 3 billion domestic Libyan market, so that will be power – to the power, because they are starting a new power plant, so they are disposing all their lot gas domestic. So we’re increasing on top of what we exports domestic production and domestic utilization. And this is going to stay. The event increase – the event increase, Libya essentially is producing all of its electricity out of gas now, which makes that we can count on a stable consumption of gas.

We have a final (ph) target in a couple of years about 5.4 billion standard cubic meter per year in domestic. Neill Morton – Berenberg: Okay. That’s great. Thanks very much.

Next question comes from Mr. Domenico Ghilotti from Equita. Mr. Ghilotti, pleased. Domenico Ghilotti – Equita: Good afternoon. I would like to have some more color on the guidance of set CapEx for 2011 particular say, your assumption on raw material cost and how are you facing, if you are facing some price pressure from your suppliers?

Well, we do not expect in 2011 major changes in the cost of our CapEx. And we expect our CapEx to be below 2009 with the 2010, both in amount and in composition that is our E&P business will continue to represent roughly 70% of the total CapEx. While Gas & Power, which in this case, moves essentially our regulated businesses, will continue to represent roughly 15%. Then we start to decrease, but you can see the numbers through the analysis of this item results. We start to decrease quite rapid, at the end of its program of new vessels. Domenico Ghilotti – Equita: And so sometimes obviously for the E&P, you don’t see the price increases or cost programs.

We have an average of about 4%, 5% considering raw materials and the services, so we increase CapEx for the new projects, but there are lots of old project at the end, so that is the balance between the two and we have a particularly a steady CapEx flow. Domenico Ghilotti – Equita: Okay. Thank you very much.

Next question is from Mr. Andrea Scauri from Mediobanca. Mr. Scauri, please. Andrea Scauri –Mediobanca: Yes. Good afternoon. My question refers to your dividend policy. Given that positive outlook of E&P capital with the benefit from the renegotiations of (inaudible) contract. I was wondering if you see the chance to revise your dividend policy to assume an increase into dividend for the next year. Thanks.

Obliviously, a very interesting question, but I think we will answer this question in March. Andrea Scauri –Mediobanca: Okay. Thank you.

May I go ahead, sir?

Yes – no thanks.

Move to our next question please.

Yes. Next question comes from Ms. Lucy Haskins from Barclays Capital. Ms. Haskins, please. Lucy Haskins – Barclays Capital: Yeah. Thank you for another chance. Could I just clarify one of your answers? It was with the Kim’s question about whether the Libyan renegotiations were actually reflected in the fourth quarter. And the second question I had was what term it actually was in terms Galp holding?

Yes. Let me answer quickly the first question, which is simply yes. It is reflected in the fourth quarter, because the renegotiation took effect from the 1 of October, if I’m not wrong, right, 1 of October. So it is reflected. On Galp, on Galp I would probably ask Alessandro to give you – who is our Chief Negotiator from Galp to give you some detail about this long story.

Thanks Paolo. Effectively we have a lot of time to repeat that our strategy is not to hold a non-controlling stake in a listed company. It is a situation doesn’t fit with our long-term objectives. Petrobras particularly was just one among a group of international entities, both industrial and financials who have notified our solicited expression of interest. Of course, we are not in a hurry to dispose our stake, since we have already enjoyed so far a phenomenal return from our investment in Gulf. Just to give you an indication in the last 12 months, total shareholders return generated by our investment in Gulf is something in excess of 40%. And if we extend the monitor inferior up to 24 months, Gulf was capable to deliver a shareholder return in excess of 87%. So this is the reason why we are not in a hurry. We are happy to have received some other demonstration of interest and need an extra few weeks and we will decide on how to proceed. Lucy Haskins – Barclays Capital: Thank you.

Next question comes from Mr. Jason Kenney from ING, Mr. Kenney please. Jason Kenney – ING: Yeah. Thanks also for second chance and thanks to Lucy for speaking the Galp question. Maybe just to go a step further on the MoU with PetroChina that was announced in the quarter and which – I mean you are looking to expand operations in Africa with PetroChina, I just wanted to know if you have made any progress with particular assets and particular countries that might be of might of interest for them at least.

So the MoU we signed with PetroChina mainly is reason – on three points, the first one as you said is to have, to develop together jointly some initiatives in Africa, especially in Eastern Africa and also in North Africa and deal with some possible firming in some Eni assets. And we have some joint initiative in shale gas in China that is the second point and the third point is an exchange of technology and know-how in the shale gas and also on conventional exploitation of oilfields. So that are the three main points. We have six month in front of us to exchange data and to sign the main objective in term of assets of our collaboration of our joint venture, but that’s mainly the highlights of the MoU. Jason Kenney – ING: So PetroChina enlisted for potential Gulf exploration?

Well, we are not going to disclose any potential interest on Gulf. Jason Kenney – ING: Okay. Thanks.

Next question comes from Mr. Sergio Molisani from UniCredit. Mr. Molisani, please? Sergio Molisani – UniCredit: Yes, good afternoon to everybody. Two question, if I may. The first, a clarification on the Gas & Power guidelines for 2011, and in particular can you confirm that the guidelines of the flat EBITDA performance factors in the successful negotiations of the contract with Algeria and Russia? And secondly, can you give us an indication of the networking capital increase related to the take-or-pay contract that you’re expecting in 2011? And moving to the upstream, if I look at this slide of your last strategy update in March – February or March 2010, it looks like the impact of first half and ramp-up in 2011 was expected in the range of plus 45 kbd, probably I am wrong. In any case can you give us an idea if there any delays or what are the main startups you are expecting in 2011? Thank you.

Well, when Paolo said that we expect an EBITDA pro forma of 2011 for the Gas & Power division in line with 2010, of course we made reference to what we expect as a result of one of these renegotiations mainly with Sonatrach and Gazprom. Of course, I cannot just say it would be prudent, but I would say that we ask you to make this calculation in reality of (inaudible). So we repeat what we said, we speak – we said that we expect the results of 2011 be broadly in line with the results of 2010. For the take-or-pay, expect to still having the exposure to take-or-pay in 2011 if I think and expect that it would – if it’s in line of what we had in 2010.

I want to be sure that you have a clear view of what is our thinking about that. If I may add something to what Domenico said. First of all we give you a guidance of broadly in line with 2010. Our view is that we will be surprised not to be somewhat better than 2010. But we – our forecast, it depends from so many variables which are out of our control. We give a guidance of 2010, remember that one of the key factors which – this has spread some optimism about the future is the consumption of gas is growing in Europe and in Italy as well. As far as the take-or-pay, you know that we had a take-or-pay in 2010 of a little higher than EUR1 billion – EUR1.2 billion, this number including some take-or-pay of 2009, so that’s a little more than 1 billion. We would expect that take-or-pay in 2011 significantly lower than this number as a result of the growth of the market and the growth of our market share. Okay.

No more question at the moment.

I’d like to answer to the start-ups. Start-ups – yeah, just a few comments about your question, about the start-ups in 2010 and 2011. Last year, during the strategy presentation, we talked about 40,000 barrel per day expected in 2010 and we didn’t mention exactly any figure for 2011. Now we say that for 2011, our expectation is to have – actually to get about 30,000 barrel per day. And the main start-up in 2011 are in Kashagan that is already started few days ago. Kisan in Australia, (inaudible) Gulf of Mexico, Coupdutsche (ph) in Italy and MLE in Algeria and Belayim in Egypt. So that are the main contributor so for 2011.

Thank you. As there are no more questions, there is a just another question from Mr. Michael Afton (ph) from (inaudible) Robinson. Mr. Afton, please.

Hello, good afternoon. I was wondering if you could maybe give a little bit more color on your forecast productions on 2011 where you’re talking about a slight increase on $70 Brent price and now $70 Brent price looks pretty conservative, given what we’re seeing on the screens at the moment. And I was wondering if you could elaborate a bit as to what slight means. We’re looking at sort of 1 to 2% and where do you see that would be if in fact we see an average oil price near 80, $85 anything more you can give on that that would be a great. Thank you.

Okay. So when we talked about slight increase, we talk about 1, 1.2% in 2011, our scenario is $70 for Brent. If we look at a 100, it took about $100 for barrels. So the price of today is flat, because of the PSA price affect. And we have to consider just to give more color to our production that in 2010 we declared a flat production profile. And we increased 1.1, 1.2 because we anticipated some interventional work hours in wells, because of the higher price, so that is a reason that our growth in 2011 will be a 1.2.

Okay. Thank you very much.

There are no more questions at the moment. The control room confirmed there are no more questions.

Okay.

Thank you very much. Thank you very much, ladies and gentlemen. And if there are any further questions, we are available on the IR number whenever you like.

Thank you.

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