Eni S.p.A. (E) Q2 2011 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Eni’s 2011 Second Quarter 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 in listen-only mode. However at the end of the call you have the opportunity to ask questions. I am now handing you over to your host to begin today's conference call. Thank you.

Good afternoon, ladies and gentlemen and welcome to our interim update and second quarter results conference call. During the first half of 2011, our results were [affected] by two uncertainties of which the major one is of course Libya. In this context we have made good progress on the strategic drivers, which underpin our medium and long term growth and value creation target. And we’ll now give you a brief overview of the developments in our business for this quarter. Alessandro will then take you through our financial performance in Q2. Let’s look at the two uncertainties which impacted first half results in more depth. The disruption in Libya has affected all our businesses. Turning first to E&P, in the second quarter of the year our Libyan production averaged about 50,000 BOE per day with a negative impact on more than 230,000 BOE per day on the average daily production for the quarter. Mean while, the suspension of Libyan gas import into Italy impacted gas and power results in two ways. In terms of volumes, we suffered from reduced sales to shippers, and in terms of margins, we suffered because Libyan gas was replaced with gas from other sources, which have not yet been re-negotiated. The situation in Libya is also impacting our balance in refining and petrochemical business as both had to replace Libyan feedstocks with more expensive alternatives. For forecasting purposes, we are assuming that the situation in Libya will continue as it is until the end of 2011. However, we are ready to resume normal operations as soon as the necessary political and security conditions are in place. Our assets have suffered no damage, and we will be able to return to pre-crisis levels of production in a relatively short pace of time, especially in our gas…

Thank you, Paolo and good afternoon, ladies and gentlemen. In the second quarter of ‘011, the macro environment was a mix. On the positive side, the brand price averaged at $117 a barrel, up 50% compared to the second quarter of ‘010. However, the average European refining margin brand euro was $2.2 per barrel, a 52% year-on-year decrease that heavily impacted our M&M result. Finally, the euro appreciated a 13% versus the US dollar compared to the corresponding period of last year. Moving to our results, adjusted operating profit in the second quarter amounted to 4 billion euro, down 3% year-on-year. This result is mainly due to the weak performances of the gas and power, which doesn't reflect any benefits upon gas contract renegotiation and (inaudible) businesses, partially offset by the contribution of Exploration & Production division (inaudible). Adjusted net profit for the second quarter was 1.4 billion euro, down 14% year-on-year. This result also reflects a higher adjusted tax rate up by more than 2 percentage point to 59.2%. In the second quarter of '011, Eni's hydrocarbon production amounted to 1,489,000 BOE per day, a decrease of 15% compared to the Q2 '010. This negative operating result was mainly due to the ongoing instability in Libya, which reduced the production by approximately 2000 BOE per day is compared to the first quarter of '010 and by at least 230,000 BOE as compared to our plan and production profile in Q2 ‘011. Furthermore PSA entitlements were negatively affected by the sharp increase in the oil price of 36,000 BOE per day. The increase in the oil price however boosted the division's adjusted operating profit which amounted to over 3.8 billion euro, up 11% compared to the second quarter of last year. This positive result comes in spite of the negative…

Thank you, Alessandro. In conclusion, in E&P we are delivering on our strategy of developing giant fields in promising areas and making good progress on our growth targets for the time period and beyond. For 2011, the forecast that Libya will continue to produce at current reduced levels until the end of the year, with an estimated overall impact of at least 200,000 BOE per day on full year production. Net of this impact, we confirm our previous guidance of growth excluding PFA affect; [offset] production at a $100 per barrel, rent offs and better performance from other areas of the world. We sustain our production in the second part of the year. In Gas and Power, giving guidance for 2011 is particularly complex. as our result will depend on both of the timing and the terms of ongoing supplier and negotiations, which are at present confidential. let’s state, assuming the negotiations of growth before the end of the year, we expect gas and power results to be broadly in line with results and intent net of the impact on Libya. The final impact of substituting Libyan gas with alternative from our portfolio we also depend on the outcome of negotiations, but we expect it to be around 300 million euro. In R&M, we previously guided to breakeven in 2011 at the same refining market conditions at 2010. So far this year, market conditions have continued to decline leaving us to report a 260 million loss for the first half. we expect market conditions to improve slightly in the second half of the year, which coupled with continuing cost optimization and the favorable seasonality of marketing results; we significantly reduce second half derivatives. In terms of leverage, we confirm our guidance of reducing year-end gearing below that reported at the end of last year. Looking forward, our strategy remains unchanged. We continue to invest our growth in the long-term interest of our shareholders while maintaining a firm financial discipline, a strong balance sheet and our dividend policy. Our solid long-term prospect and the group of overall results expected for this year support our proposal of an interim dividend of $0.52 a share with a 4% increase on the 2010 interim dividend. We will now be placed to answer your questions.

Ladies and gentlemen the Q&A session is now open. (Operator Instructions) First question comes from Mr. Clint Oswald from Sanford Bernstein. Mr. Oswald, please proceed with your question. Clint Oswald – Sanford C. Bernstein: Yes. Hi, good afternoon. Questions, first one just on the natural gas. Tonight it’s confirmed, are you counting for extra Russian gas in 2011 and you're not sourcing deferred volumes on your long-term contracts, potentially 2010. So you're actually buying extra natural gas from Russia. And then secondly, may be just on the gallon, could you talk about some of your second discovery that now you have. Could you talk about the prospect you think you have in that block and also the splits you may have between the natural gas and condensate. Thank you.

Very good. The first answer would be from Domenico and the second from Claudio.

Of course, we have taken more gas just to replace the Libyan gas. (inaudible) our own portfolio by 15, if we are taking more Russian gas than from other sources. But these within the contract that oppose also some flexibility enough takes.

Ghana. So, the second discovery we made in Ghana that is close to the first one is a 15 kilometer is a tropically with the discovery we doubled our resource base. And the percentage of condensate is few percentage, we talk about 5%, so the condensate is not a lot, but in this second discovery we have found also some good oil rising that other norm is just under evaluation and can give additional productivity on other – another (inaudible) in the surroundings. Clint Oswald – Sanford C. Bernstein: Okay, thank you. Just a follow-up. Could you potentially put some numbers on the resource. You said it doubled, could you talk about some numbers?

Yes, we are above 2 tcf. Clint Oswald – Sanford C. Bernstein: Thank you.

Next question, please.

Next question comes from Mrs. Lucy Haskins, Barclays Capital. Mrs. Haskins, please. Lucy Haskins – Barclays Capital: Good afternoon. And thanks very much for giving an indication as on what capital employed do you have in Libya. Could you give us an estimate of what proportion I mean, last year’s PV-10, which is represented by your Libyan asset?

No. I don’t want to disclose these numbers. Lucy Haskins – Barclays Capital: And do you, can you give us any indication of just the reserve number.

I think, when we speak about production, it’s our production leading normal conditions is between 208 and 300,000 BOE per day on which the last proportion is gas, almost to the 50 plus percent. This asset generally speaking and therefore with an amount of production expected to continue for our long time, this I think is the maximum we can really disclose about Libya. Lucy Haskins – Barclays Capital: Okay, thank you.

Can we have the next question please?

Next question comes from Mr. Barry MacCarthy from Royal Bank of Scotland. Mr. MacCarthy please. Barry MacCarthy – Royal Bank of Scotland: :

Okay. Let me make first a general comment about the Snam. You have heard me saying in the past that we were not dramatic about the presence of Snam in our portfolio. We were not dramatic, but of course, what we wanted to avoid at almost any price was to be obliged to sale, because when you are obliged to sale, you normally say that very poor conditions. Now we think we have achieved that approved adoption of the [dialective] in the form of the, what we call [eye toe], which will allow us to keep the ownership of Snam Rete Gas as long as we want. Now with this behind us, then we become even less dramatic than before, what I mean by that is that if we find ways to create value from the shareholding of ours for our shareholders, we would be happy to do it. Now this is easier to say than to do, because you should always remember that what pave us to loose and we find for a divestment of Snam we need the approval of the Italian government and even more need a decrease from the government which allows us to go below 50% of the capital because it is a kind of process of (inaudible). : : Barry MacCarthy – Royal Bank of Scotland: If you could Mr. Scaroni, that would be very helpful.

: So again, this is a point of which we are working. We are probably more in advance than on (inaudible) in terms of timing. We cannot really disclose much more than that. Again, we are relaxed in terms of timing for two leases, first of all because the company share price is performing reasonably well, and second because Galp is in the process of selling its stake of its (inaudible) asset, which includes all the assets that Galp has in Brazil, so roughly 75% to 80% of the value of the company, and we expect that at the end of this process, the share price, we move upper rather than down. So again, yes, we are working, but no hurry at all. Barry MacCarthy – Royal Bank of Scotland: That’s very helpful. Thank you very much.

Next question comes from Mr. John Reade from UBS. Mr. Reade, please proceed with your question. John Reade – UBS: Oh, yes. Hi, thanks for taking the question. Let’s talk about the gas and & power business and I recognize on the gas marketing, you don’t want to talk specifically about the negotiations by country. But could you sort of talk in rather a higher level about if the contracts had been renegotiated to your satisfaction prior to the second quarter, where you would have expected the gas marketing earnings to be or put it in another way, if we get to the fourth quarter and you’re able to renegotiate and we sort of spread it back across the, can you just talk a little more about that? And then secondly, I think you then said something about comparing it to last year, but then having to adjust it for Libyan effects, can you also just elaborate a little further on that if that’s possible? Thank you very much.

Okay. Let me try to take you through a kind of process out of which you might deduct what our expectations are, more than giving you elements about the negotiation, which as you can imagine is really delicate on one side and then it is not concluded so even more. Now, we try to solve this question of yours, giving you guidance for 2011. The guidance we give on gas and power is that on the basis of what we consider a potential outcome of the renegotiations. Our results will be in line with 2010 excluding $300 million of Libya. Okay. Now if you elaborate on that you take our results on the first half, which do not include any result of this negotiation and you compare with the guidance that we are giving to you I think you might expect a total number of what we expect to be the benefits we should have by year-end from our negotiations both with Gazprom and Sonatrach. John Reade – UBS: Okay. And the 300 million that is Libyan effect. Is that a loss of more market share to give you.

: John Reade – UBS: Yeah.

: John Reade – UBS: Okay. Now, that’s very clear thank you.

Next question comes from Mr. Sharma Nitin from JPMorgan. Mr. Sharma, please proceed with your question. Nitin Sharma – JPMorgan: Hi, just one question please. And I’m conscious that you’ve delivered a [4%] increase an interim dividend, but given the likely diverse in the Gulf International pipeline much stronger oil price versus your planning assumptions. When do you plan to revaluate your dividend policy in terms to pace of euro 1.

Not now. We are not planning to revaluate our dividend policy. We’re planning to revaluate our dividend base that is, I don’t if you remember, but our dividend policy is based on our scenario. And according to our scenario, our plan which include the CapEx we plan to make and the moves we have to do to go below 40% of leverage define the sustainable dividend for the four years period of the plan. Therefore, in our presentation, our strategy presentation we will make in February, which will present a new plan of Eni and will disclose as usual our scenario as far as oil prices are concerned, then we would give you the new base of calculation of our dividend. Now, of course, the new thing is that all these has to take into account Libya, because Libya is such an important position for us that if, while frankly, I hope will not be the case, but in February next year, the Libyan situation would be the same (inaudible) where we are today this would be also part of our considerations. Nitin Sharma – JPMorgan: Thanks.

Thank you.

Next question comes from Demichelis Alejandro from Bank of America. Mr. Demichelis please. Demichelis Alejandro – Bank of America: Yes. Good afternoon, gentlemen. Couple of questions. The first one is on the renewal seasons of the contract for your gas. These are the numbers that you are providing us with a kind of the minimum numbers you are expecting on those renewal seasons or is there a kind of range that of different alternatives that we should be thinking about. And the second question is regarding the media situation, how quickly you said you kind of will start production. Can you give us some kind of time if you are saying for the gas quite quickly, but for the oil how long should we think about that?

Domenico will answer the first one and (inaudible) with the second.

(inaudible) by Mr. Scaroni. Our expectation (inaudible) all the negotiation we are having, talk albeit what we think will be the possible outcome of them.

For Libyan production, for gas because of the reason the first one is that gas fields are quite young and so there is no water problem, water problem and all these conditions for up now are in a very good shape I think is a question of months, two, three months, we can restart practically good production. For oil field, quite frankly talking about (Inaudible) oil field, oil discoveries is some maybe some time not less than one year 12 months to restart production for oil it seems. Demichelis Alejandro – Bank of America: So then what you’re talking about your guidance that’s for this year and not for next year then we should be thinking that (inaudible) to be sold today your 2012 numbers would be quite significant?

Talked about we can see there a full rate for 2012 and for our share is very low because there is no big investments, so I think that we talk about 450,000 barrel per day and we can see the half of that production for the guidance of next year. Demichelis Alejandro – Bank of America: Okay. Thank you.

Thank you.

Are there any more questions?

No more questions at the moment. (Operator Instructions) Next question comes from Mr. Mark Bloomfield from Deutsche Bank. Mr. Bloomfield, please. Mark Bloomfield – Deutsche Bank: Good afternoon. Yes, three questions please. First of all on Iraq, perhaps you could update us on the phase of developments there, and how that’s progressing since you’ve taken operatorship there. And the second question, just turning to China, I wondered if you could update on the stakes of your negotiations with PetroChina on the MoU you signed earlier this year? Thanks.

Okay, Claudio will answer both the question.

: Mark Bloomfield – Deutsche Bank: Thank you. That’s all from that point, did that change your expectations perhaps from Iraq this year to next?

Now that’s doesn’t impact production because if you remember during the Strategy Presentation we’ve put some the contingency on Iraqi production, and so there is no impact from that point of view that seasonally say that our guidance for 2011 is absolutely the same. And I don’t think that these problems, that is not the technical problem, is just bureaucracy I think that will be solved. Mark Bloomfield – Deutsche Bank: Thank you.

Second question for the China. Mark Bloomfield – Deutsche Bank: China.

Well China will start, we said in the first and the beginning of the year with the PetroChina. And now, really recently with China. The aim and (inaudible) of Europe is more or less the same and to say that is, our main objective is to have some unconventional blocks in China and the main target objective of our Chinese partner is to have an access in Africa, where with this company in term of actually good production. So we are working, really identified some possible area, and I think in the next month we would be ready to start to see the discussion and possible transaction. Mark Bloomfield – Deutsche Bank: Thank you.

Next question comes from. Mr. (inaudible)

Yes. Good afternoon, (inaudible). Two question if I may. The first one that I’ll ask, how the sale and or did the consolidation of [Sonatrach] with the gas could change your strategy. I don’t know more aggressive exploration acquisition of assets or generally what are the main cost rates you see in that your current giving. Second question, what’s the main take away from the recent negotiation of Edison with Promgas your joint venture with the Gazprom. It looks like quite generous for Edison, so I was wondering whether you could give us more flavor on what happened there. Thank you very much.

Let me say a word about the consolidation of Snam Rete Gas. Let’s say, we do not expect that rating agencies will look at that in a different way if we did consolidate Snam Rete Gas. For the simple reason that it is true that out of our 26 billion euro of debt, 12 or 11.5 or 12 are Snam Rete Gas of debt. But the rating agencies quite correctly make or define recently that this debt is well hedged with the regulator assets and therefore, we are not expecting major change in the perception of the rating agency or of the financial markets. As far as Edison is concerned I think, Domenico will give you a view.

Yes, as you may have arrived, Edison formed an agreement with the Gaaprom on the gas that they buy. This is off to a track in fact an arbitration cost that’s a bit (Inaudible) part of it. (Inaudible) Edison and lost sales operating in different market. Edison is mainly concentrated in power generation, our market is a little bit different. Another element that we should consider is about the volumes folder to Edison around 2 bcm and it is around 10 time less (inaudible) by around or what is lead by around 20 billion cubic meter. Anyhow, this result is quite interesting, because of their ability over Gazprom to find agreements.

Are there any more questions?

Next question comes from Mr. Marc Kofler from Macquarie Securities. Mr. Kofler, please. Marc Kofler – Macquarie Securities: Good afternoon, everyone. I just have one very question on your exploration program offshore (inaudible) this year. If you could provide any color on that, that would be great thanks.

Exploration program, in the second (inaudible) that we have big expectation for this well and for the result of this well, also based on their result of the well driven by energetically. So we assume that we have big structure and with the BOS now very, very high cost of 50%, 60% and where I think the talk about possible appraisal phase, we have raised the rig and all the materials equipment and people ready to go add immediately with this back-to-back tuning to be able to design a very (inaudible) shares, but we are very, very positive. Marc Kofler – Macquarie Securities: Great, thank you.

: Jon Rigby – UBS: Yeah. Hi, I’m going to follow-up. Just on thinking about spend a little bit, is that, as you said is that, it was legally acknowledged that the structure that you had in place complied with the directives, you said directive, which I believe essentially says that you don’t have direct management control any further over the actions of that management. So does that mean actually in legal terms that you could be consolidated anyway even if you don’t own, even if you continue to own 50%, just on (inaudible) form?

Now, we’re thinking that we’d like to be more precise. Today in what we call as num, there is the transportation, that transportation which is the network in Italy, then there is (inaudible) to tolerate, then we have retail gas distribution. and then we have the G&A for the re-gasification terminal. Out of all these four businesses, the only one, which is object of the further activity in the transportation, therefore we bring this number to gas. they will create a company, which would be bear to around the rules of item, which are specific rules of government, which will manage the transportation system, all the rest, nothing would change. We’ll stay exactly as it is. Now this transportation business represents roughly 40% of this num, little less than 40% of num, whereas for the other 60% of num, nothing changes. Jon Rigby – UBS: Okay, all right. Thank you for the clarification.

Next question comes from the line of (inaudible) please.

Yes, good afternoon gentlemen. My question refers to cash and do you think that the relationship with the government are more friendly. So could you provide us an update on that, the two relations with the government and the possibility to see the second phase to start in the mid term. Thank you.

Thanks for the question. First of all, I want to add that the agency with the government are excellent. There is no problem with the government until and there is no problem with the field. So things are quite clear and for the first phase as we said already there are times we confirm that second phase is not problem to reach the first production by the end of 2012, and we are discussing about the close of the Phase II for that season we are slowing down and first of all, we want to see there as well as for the Phase I and we are looking at the concept of the Phase II to the demand cost increased internal rates of the project. So that is the situation we are discussing I don’t think that I have to say more about that, thank you.

Okay. Thank you.

No more question at the moment. If there are further questions please come forward. Next question comes Mr. (inaudible).

Yes, given the loop of stability of the refining business, would you (inaudible) kind of activities like is this probably to guess what ConocoPhillips into US?

Well, you see I’ve looked closely at what ConocoPhillips has been doing and for the time being, we think that would not be appropriate to disclose of this business in these difficult times. We still consider that our refining marketing business is an important is a core business will remain.

Okay. Thank you.

No more question at the moment.

Okay. If there are no more questions perhaps we can bring the conference to a close.

The counter has confirmed, madam. There are no more questions.