Good afternoon, ladies and gentlemen, welcome to Eni's 2014 third quarter results conference call hosted by Massimo Mondazzi, Chief Financial Officer. For the duration of the call, you will be in listen only mode. At the end of the call, you have the opportunity to ask questions. I'm now handing you over to your host to begin today's conference. Thank you.
Thank you very much. Good afternoon, ladies and gentlemen, welcome to our third quarter results. Before we start today, I would like to take a moment to express to Mr. de Margerie's family and to our colleagues at Total, the sorrow felt in Eni for his untimely loss. Many of us knew him personally, he will be very much missed. Now to our results. In this quarter, we began to deploy the revised strategic plan announced in July. In particular, in upstream, we continue to record outstanding results in exploration while production is in line with expectations. In gas and power, we confirm EBIT breakeven also thanks to the retroactive effects of contract negotiations in the first half of this year. In refining and marketing, we are back to profit in the driving season quarter.
We also temporarily benefited from the improved refining margins while we are continuing to restructure the business in order to rebalance our refining system. The sum of all these efforts have resulted in record operating cash flow of EUR 4 billion for this quarter. The standout data point of the quarter is our extraordinary cash generation. Notwithstanding a weaker scenario, this has been the strongest third quarter since 2008 in terms of cash flow from operations, thanks to the steady contribution of our profitable E&P production, the effective actions of net working capital, and the result of the accelerated turnaround program. In the nine-month period, cash flow from operations of EUR 9.7 billion was greater than capital expenditure by around $1 billion. When coupled with the EUR 3.2 billion of divestment already carried out, the resulting free cash flow entirely funded dividend payment for the full year.
At current market condition, we expect to further improve our cash generation in the last quarter so as to target the 40% cash flow growth this year in advance versus the previous 2014/15 average expectation. Now on to our profit and loss results. The reduction in operating profit was mainly due to scenario effects, namely the fall in Brent in European gas prices, which impacted E&P performance for the tune of over EUR 600 million. The other hand, I'd like to highlight the result of gas and power and refining and marketing. The former having reduced its losses by more than two-third and the latter having returned to profit thanks to the temporary supportive market environment and our optimization program. All of this confirms the value of our restructuring efforts and give us even more confidence in our announced breakeven targets.
The reduced contribution from E&P is the driving force behind the lower tax rate registered in the third quarter, which contributed to increase in net profit versus last year. As mentioned, E&P was impacted by the fall in prices over the quarter and slightly lower production, mainly due to unplanned maintenance. However, this was a good quarter for upstream due to the increase of our exploration resources by over 700 million BOE in the nine-month period with unit exploration cost of $1.90. This is without accounting for the recent discoveries in Indonesia and Congo. As we announced this morning, we have made yet another discovery in the Marine XII block in the Congo shallow waters through the Minsala Marine-1 well. Our preliminary estimates of resources in place are of about 1 billion barrels of oil equivalent, of which 80% light oil.
This brings the Marine XII total resources discovered in the past three years to 3.5 billion BOE. Our continuing drill bit success proves the sustainability of our exploration model, which hinges on the application of new geological concept to proven areas and the focus on conventional plays. Turning now to gas and power, the business reduced its operating loss by 70% versus 2013, notwithstanding a continuing weakness in market fundamentals, which kept reference prices at especially depressed levels. This strong result in the face of a testing scenario is a clear example of the benefits we have achieved by renegotiating our supply contracts and accelerating the turnaround. The ongoing effort to fully align supply cost to the hub reference will continue to drive our results in the coming quarters. Focusing now to R&M.
In this quarter, this business benefited from a robust appreciation in margins, which were up over 80% with respect to the same period of 2013. The margin effect, along with the strong marketing performance during the driving season, brought the business back to profit in this quarter. Also, thanks to the incisive efficiency and restructuring programs we are pushing through. However, the well-flagged structural headwinds the industry is facing will continue to affect our results in the foreseeable future. As for our other businesses, Versalis, though still impacted by a weak scenario, benefited from a decrease in oil-based feedstock costs, as well as the structural reduction in commodity capacity resulting from our optimization efforts. Furthermore, I'd like to highlight the reduction of around EUR 30 million of corporate costs.
That includes the effect of our streamlining actions, the bulk of which is allocated to the profit and loss of the various businesses. Finally, the improved cash position helped maintain leverage stable at 25%, even after the payment of more than EUR 4 billion in dividends. Though net borrowings were up by EUR 0.8 billion as compared to the year-end 2013, they were counterbalanced by an increase in net equity, also thanks to the appreciation of the dollar versus the euro. Assuming the current level of Brent prices and euro-dollar exchange in the fourth quarter, leverage is projected to come in slightly better than the level achieved at the end of 2013. Thank you for your attention, I'll be happy to answer, together with some of my colleagues, any questions you might have.
Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your question, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. The first question comes from Mr. Theepan Jothilingam from Nomura. Mr. Jothilingam, please.
Yeah. Hi, good afternoon, gentlemen. A few questions, please. Firstly, just on the cash flow and the working capital release, could you just talk about how that's broken down? How much of that was oil price related versus, let's say, releases elsewhere in the business? Secondly, congratulations on your exploration success in the Congo. I wanted to know, could you provide a little bit more detail around the early production systems, volumes there, and what you might hope to achieve over the next 12 months? In terms of the exploration success, both the Congo and Mozambique, could you talk about plans to sort of accelerate the value creation there through disposals? Thank you.
Okay. I give an answer to the cash flow question. Maybe I leave the floor to Luca Bertelli to give you an answer about the new discovery. As far as the contribution on cash flow, as far as the third quarter, the EUR 4 billion I mentioned is made around by two-thirds, or better, three out of EUR 4 billion relate to the operating cash flow before the working capital, and EUR 1 billion is made by the contribution of working capital. The first element is very resilient as the decrease versus 2013, when we appreciated a much higher oil price, is just a little bit lower than that level. As far as the working capital, I would say the major contribution will come from the make-up gas.
Some disposal in stock in excess, plus some, I would say, optimization in our overall lifting position in joint venture all over the world. Now I leave the floor to Luca to answer the question about Congo.
The discovery we announced this morning is quite a relevant discovery. We have a thick hydrocarbon column, light oil, and we are in conventional water, 70-meter water depth, and nearby existing infrastructures. We can imagine an integrated project together with the other discoveries that we already announced last year in Congo of relevant dimensions. Again, the asset is in shallow water, close to existing infrastructure, the time to market can be quick.
Okay. As far as the, I would say, the disposal program mainly related to exploration, you know very well that now we could consider this kind of contribution not a contribution from, I would say, portfolio activities, but we consider it a really contribution from operation due to the fact that this exploration system already is proved the continuance in time and is giving us the opportunity to dispose of interest in excess versus a normal interest to develop such a huge discovery. I would like to remember that in Marine XII, we retained 65%, there is ground to dispose of and anticipate cash flow, obviously at the right price, as we did in Mozambique. As probably there is ground to do, for example, Indonesia. The discovery we announced last Monday in East Sepinggan, which retain a very high interest.
Even in that area, there could be ground to go on with anticipated disposals.
Could I just follow up, in terms from your answers, just on working cap, all else being equal for next year, if the oil price was flat from here through next year, what level of working cap release do you think we should be modeling?
secondly, just back to Mozambique, do you still see the same level of interest in terms of buying a position in Mozambique today than, say, 12 months ago? Thank you.
I would say that around Mozambique, the interest is still alive. Some players are still looking at the possibility to enter, acquire a position, being interested in participating in such a huge project, an integrated project, as well as buying some equity gas. Definitely, the project now is living a specific period in time in which we are close to the first FID and maybe industrial activity prevails, but again, I can confirm that interest in acquiring interest in this project is still alive. Secondly, your question about working capital is a bit difficult, but in terms to give you some indication how to model. What I could say that we expect that this kind of contribution will keep on in the fourth quarter 2014 and even in 2015, helping us to sustain our overall cash contribution.
Okay. Thank you, Massimo.
Next question come from Mr. Oswald Clint from Sanford Bernstein. Mr. Oswald, please.
Thank you, Massimo. Hi, good afternoon. Maybe a question on gas and power, which seems to be performing well. I noted in the release some comments that even in the third quarter, there were also some price revisions being triggered by long-term buyers. Could you just talk about that and say what type of impact that may or may not have to your targets? Secondly, maybe obvious question, but just could you give us an update on Kashagan and obviously the pipe costs and some of the numbers we've been reading about in the press? Thank you.
I leave the ground to Marco to answer your first question.
Thank you. On gas and power, the overall target, you may remember, is to bring 100% of the contract in line with the hub level by 2016, I think that target is well on track. In terms of hub indexation, we started with around 20% of our take or pay volume being indexed to the hub. As a consequence of the last negotiation round, we now have around 70% of our contracts indexed to the hub. We had our agreement with Statoil in April. We had our agreement with Gazprom in July. We found a temporary solution with Sonatrach that we're continuing to work on for a more permanent solution by year-end. I think our entire portfolio has now been revised on volume and on price. That's the update on the negotiation.
Just to complete the answer about gas and power, I would like to confirm our guidance in term of EBITDA achieved as far as 2014, the strong cash improvement, thanks to the contribution of make-up gas again in 2014. Definitely, this result will be achieved thanks to the retroactive effect of the negotiation closed in the first half of the year. The benefit is clear, I would like to highlight that also in 2015, we expect such a contribution related to the negotiation that will take place that year. Now maybe I'll lend you over to Antonio as far as the question about Kashagan.
Thank you, Massimo. The material of the new pipeline is 60 carbon steel cladded with corrosion-resistant alloy. 100% of the pipeline material already has been ordered. The operator replacement plan is under finalization, is expected to be available by the end of 2014.
Okay. Thank you.
Thank you.
Next question come from Mr. Iain Reid from BMO. Mr. Reid, please.
Yeah. Hi, gentlemen. Thanks very much. Two questions, please. On your discoveries you've made in West Africa, I wonder if you could update us on what the future drilling plan is now in these countries, specifically Angola, Gabon, and Congo. Can you tell us, are you drilling any further wildcats over the next six months or so in these countries? Second question is on Saipem, just an update, if you could, on the progress of your discussions with investment banks or whatever on the potential disposal of your interest in Saipem. I see that there's been various things in the media about some other companies being interested in your stake.
I leave the ground to Luca to answer your first question, and then I'll give you the answer to the second one.
Thank you.
Good afternoon. Marine XII Block, we plan on drilling additional 2 wells next year, both of them will be exploration wells. In Gabon, we plan to appraise the discovery we did first half of the year in the first half of 2015. Starting drilling in February next year.
In Angola, we are still planning a couple of exploration wells in Block 15/06 for the next year.
Okay. As far as Saipem, Iain, since we made the announcement about Saipem last July, we started an in-depth analysis that is still underway. No decisions have been taken yet, and you can understand I cannot disclose any further detail on this. Let me take this opportunity to remind, generally speaking, some principles underlying to the declaration we made in July. In particular, I would like to remember that the relationship with Saipem, we are talking about comprises our relationship as controlling shareholders and financing entity. Any solution, whichever it will be, will cover both aspects as part of a whole design to achieve what we said at the end of July. On the other hand, definitely our target is also to leave Saipem at the end of this process with an adequate balance sheet to stay and compete comfortably on the market.
I think it was worth to remind the general principle underlying to this transaction.
Okay, thanks.
Next question comes from Mr. Dario Michi from Banca Akros. Mr. Michi, please.
Hi. Good afternoon, gentlemen. Thank you for taking my questions. You posted a very good cash flow from operations in both Q3 and the first nine months of 2014. This is in line with your full-year guidance. How do you expect the cash flow from operation in the last quarter? Could you also detail the main components it will be made of? The second question is still on Saipem, sorry for that. During the conference call, Saipem stated that they were not excluding a capital increase. When you stated that you want to leave Saipem with a sound balance sheet, does this include also the chance to have a capital increase in your view?
Okay, in term of cash flow contribution, yes, we expect a strong contribution in term of cash flow, even in the fourth quarter 2014. That's why we are saying that we are confident that the target that we gave to the market, so a 40% increase of cash flow from operation versus 2013 as an average of 2014, 2015, now could be anticipated to 2014. Definitely, the great majority of this contribution is coming from the cash flow from operation before the working capital contribution. Again, also from the latter item, we expect some contribution, especially related to the make-up gas, that definitely will be higher than the one we recorded in the third quarter because of the greater volumes. Having said that, back to Saipem. I just remembered the overall principle.
I said that the financing and the shareholders are one project to us and will be treated as a whole. On this respect, maybe some, I would say, request will come from the board of director of Saipem, maybe asking for a capital increase. What I meant is that in that case, this kind of proposal will be seen by us in the context of the overall project, having clearly in mind which is the final result we expect through this process.
Thank you.
Okay.
Next question comes from Mr. Mark Bloomfield from Deutsche Bank. Mr. Bloomfield, please.
Good afternoon. Thanks for taking my question. Couple questions on gas and power, first of all. I just wondered if you can give us a sense at this stage of the potential for potentially the gas and power for next year. I wonder if you can perhaps, if you can't give us a specific guidance, maybe you can give us some color on the moving parts versus 2014. Also wondered, sticking with gas and power, if you can clarify whether your guidance of EBIT breakeven for 2014 assumes any financial benefit from any settlement which may happen with Sonatrach. Secondly, moving on to Congo, 3.5 billion of in-place volumes. I appreciate it's very early days, but perhaps you can give us a sense of what kind of production rate you think that could ultimately support, looking out toward the end of this decade. Thanks.
Okay, Marco for the first answer.
I don't think we're here to provide guidance on 2015, although, as Massimo said, a lot of the benefits of the renegotiations achieved are enduring. Having said that, we've already started a new round of negotiations because our stated target is to bring all contracts in line with the hub level, and in case where we have logistic costs, indeed try to also go below the hub. In terms of Sonatrach, there's not much in the fourth quarter in terms of additional upside compared to what you see here.
As far as the production rate in Congo? Roberto. Well, clearly we are talking about a significant discovery, as Luca said earlier, in terms of volume and in terms of production, this will be the result of a phase development plan. For your information, we'll be starting in a few weeks from now, the production from Nené. Basically, 15 months after discovery, which is quite important time to market, and we will be starting with production in the range of 8,000 barrels of oil per day from two wells. Clearly, the future development will involve many wells, several platforms. This will be certainly a very important contribution to the production of Congo. Thanks.
Next question come from Mr. Emmett Craig from Bank of America Merrill Lynch. Mr. Craig, please.
Hi there. Thanks for taking my questions. Sort of a balance sheet question, really. I note your gearing. You've guided down year-on-year at current oil prices, to quote you in your outlook, which is fantastic. I just know that your previous guidance was for flat gearing year-on-year using a $108 reference price. Do you think you could maybe just talk us through what the delta to that, how much is volumes versus optimization? Because obviously, oil prices, you're going against that, which is obviously quite impressive. On Libya, you've ramped up volumes in Libya. Can you just maybe give us some color on how sustainable you feel that is, and what your ongoing approach to investment in the country is?
Okay. As far as the gearing, the leverage, yes, I confirm that now the expectation is to have a gearing slightly lower than the one we experienced at the end of 2013. I would say that broadly speaking, that's a result of the work that has been done in the last month in term of, I would say, performing on the restructuring plan that has been announced in detail at the end of July by Claudio. This gives us confidence that the result we announce today is an achievable one and gives us confidence also about what we can do in the future as the turnaround plan now appears to be on track or even a bit in advance versus what we thought at the end of July.
As far as Libya, yes, the current production is higher than the budget average we gave at the beginning of the year. Definitely, the situation there remains very volatile. The uncertainty now is still present in that country. Nevertheless, I could confirm that since now our fields remain totally out of any kind of turbulence or any kind of crisis in country. I would say so far so good.
Thanks so much.
Next question come from Ms. Lydia Rainforth from Barclays. Ms. Rainforth, please.
Thank you. I have a few questions, if I could. The first one, I saw that you mentioned this earlier, but could I just check on how you're seeing the tax rate develop going forward? Secondly, given where the oil price has come down to, clearly you're talking about a strong balance sheet now, but are you worried that you might not get some of the asset sales that you were planning to do done in a lower oil price environment? Finally, just on the outlook statement, you talked about CapEx being down year-on-year. That is consistent with what you said at the second quarter stage, but I didn't know if incrementally you're expecting lower CapEx than you might have been three months ago. Thank you.
Tax rate. The tax rate, yes, we recorded a tax rate, I would say a low tax rate in the third quarter. I'm just looking for the reference. We experienced tax rate of 59.4% in the third quarter 2014, much lower than the 64.6% we experienced in 2013. The reason why we experienced a lower tax rate this quarter is related to the, I would say, lower contribution in E&P. That is close to the lower scenario. The higher contribution from the Italian activities that you know benefit a lower tax rate versus the average. Thanks to the result so far achieved, I get that in term of guidance for the full year, the last time I mentioned a number in the range of 66%, that would be equal to the one we experienced 2013.
Now, I would say that the expectation today would be a bit less than that tax rate. As far as the disposal program, you remember that we announced EUR 11 billion disposal program. I would say that, first of all, a little bit less than that amount has been already achieved or well on track because you remember that around EUR 2.2 billion relate to the disposal of the Russian asset already done, EUR 2 billion will come from the, I would say, the expiration of the convertible bond in NAM and Galp, in which we retain the right to repay the bondholders through shares. This number are, I would say, done.
As far as the remaining part, the remaining around EUR 6 billion in the next four years, I guess that the quality of the assets we are talking about, we have just commented about the discovery in Congo or in Mozambique. That will allow us even to put in production this new discovery in a very few months, as Roberto said about Congo, and the high quality of product, mainly oil, a light oil, give us the full confidence that this number can be achieved. I don't remember the third question.
CapEx.
CapEx. Yes. We confirm a guidance as far as 2014, lower than the budget that we announced during the strategy presentation last February. The number would be broadly in the range of EUR 400 million, less than the number we announced in February.
Wonderful. Thank you very much.
Next question come from Mr. Marc Kofler from Jefferies. Mr. Kofler, please.
Great. Thanks. Good afternoon, everyone. I just had a quick question around the buyback program there. I was hoping you could remind me of the parameters, specifically how you're thinking about repurchasing shares at the moment, given the volatility in the oil markets, and the overall capital allocation process. Thanks.
First of all, in principle, you remember that our priority order in cash allocation, see first CapEx, second dividend, third buyback. Definitely as far as CapEx and dividend, we release a guidance. We don't want to release any guidance as far as the buyback that we would like to retain as a very flexible tool to remunerate the shareholders. The ground to, I would say, attribute money to the buyback is based on the degree of realization in our overall turnaround plan together with the oil price. These are the internal guideline we used to refer to in order to assess the overall amount. From now to the end of this year, beginning of next year, I could say that the pace we are seeing today will remain in place.
Maybe another deep thought internally, on this respect, will be taken, looking at the number of the new four-year plan that, as you know, will be announced in February 2015.
Great. Thanks very much.
Next question comes from Ms. Irene Himona from SG. Ms. Himona, please. Yes. I'm sorry. She is not available at the moment. Next question comes from Mr. Thomas Adolff from Credit Suisse. Mr. Thomas Adolff, please.
Hi. Good afternoon. Thanks for taking my questions, and congrats on the drilling results. Two questions, please. One on the dividend. In a $100 environment, you basically said already that your payout ratio was too high. I'm just going to state the obvious. Let's say in an $80 environment, obviously that looks even worse. Let's take disposals out of the equation because that may not be directly organic. How comfortable are you just with the dividend being funded purely from the balance sheet? Would you actually use a bit of CapEx to fund that? Second question on my favorite topic, which is Mozambique. I believe your neighbor in Mozambique may not mind bringing in a super major to let the whole project be developed jointly. Would you welcome this situation? The other question I had on Mozambique is where are we on the FLNG?
I believe your guidance in June was to take FID by the end of the year. My understanding from your minority partner on the block that not even HOAs have been signed. Thank you.
Okay. I leave the ground to Roberto to answer your question on Mozambique, and I'll answer the question about dividend. Please, Roberto.
Okay, thanks for this question. Let's start from the Straddling Resources, the one where, as you mentioned, we are also discussing with Area One partners, and in particular Eni as operator. Well, first of all, we have some positive news. As you know, the enabling law has been passed by the parliament, and this is allowing us to discuss with the government the special legal and fiscal regime that will be applied to the development of LNG projects. Secondly, we launched the tender for the EPC contract. Activities are ongoing, and we are positive toward the reaching of an FID in the second half of 2015.
About the plans in Area 1, I can tell you that the first phase, because clearly it is a major development that will be done through different phases, the first phase will envisage a parallel project of two trains, five million tons each, in both Area 4 and Area 1. We are, for the first phase, independent from Area 1. About Coral, you mentioned the FID. We can confirm that we started the process to reach FID. This means that this process is made of several steps. The first one is the submission and the approval by the government of the final development scheme, and this is expected in the next few weeks. The second one is the declaration of commerciality. We'll be submitting in the next few days to the authorities this declaration.
Again, we are expecting the approval in the next few weeks, certainly by the end of this year. At that point, we'll be in a position to submit also the plan of development, which has been extensively discussed and basically agreed with the authorities. While we are progressing the discussions also with buyer, we have intense discussion. Maybe Marco can elaborate more, but we have a short list of buyers. At that point, we will have all the conditions to make FID. By the way, I have to mention also that the engineering activity, as you know, we are running a competitive FEED exercise, is very well advanced with three major consortia. Also from the project point of view, everything is going smoothly and well. Maybe Marco can add something more about the LNG buyers.
As Roberto said, we're working with a number of shortlist of buyers. There's a significant strategic interest in being part of this project for all its reasons of being a one of a kind and an early startup. I can confirm we're in deep discussions.
Okay.
If I can follow up on the discussions now? Obviously, maybe when you started the discussions, the oil price was a little bit higher, and the buyers wanted to have a slightly lower slope. Now, obviously the oil price is a little lower, and it's a little uncertain where the oil price will end up. For you to make the economics to work, maybe as well as when the oil price was at $100, from your perspective, are you pushing for a better slope?
The forward markets haven't moved that much. We're talking about 2019, 2020 deliveries. We're talking about relatively small volumes in the scheme of global LNG demand at that time. I don't think we're concerned at looking at the prompt part of the curve.
Okay. Thank you.
Okay. As far as the dividend, Thomas, you may appreciate that the third quarter conference call is not typically the place to discuss the overall dividend policy. I would say, I would like to postpone the discussion by mid-February next year when we, let me say, deal with in deep in this issue. I would like to remember in general terms that our dividend takes into consideration two parameters, such as the oil price, so the oil price that we see for the future, the fate, and the progress against our strategy. Looking at a piece of this, I would say, thought, looking at the result that has been achieved so far in 2014, I would say that we are very well in time with the plan we announced, mainly in the turnaround of the losing money businesses.
On this part of the equation, as far as the result up to now, we feel quite happy.
Okay. Thank you.
Next question come from Mr. Jason Kenney from Santander. Mr. Kenney, please.
Yes, good afternoon. If I may just go back to the Congo, is it too early to be thinking about recovery factors across the Congo asset base? Even a range would be useful. Secondly, on Mexico, I note the MOU that you've agreed today. I'm just wondering what or how you might participate in 2015 with some of the first-stage processes there. What is of particular interest to you in Mexico, be it onshore, midstream, offshore? If you could just talk further around the subject, that'd be great.
Well, about Congo, as I said earlier, we have a very important discovery in terms of thickness, in terms of extension. Clearly, we have to properly evaluate, firstly, through the next appraisal wells, and then with the appropriate studies, the best development scheme to maximize the recovery from this very important discovery. I think that also thanks to the acceleration we are giving to Nené, so we are collecting data about the productivity of the wells. Very soon we will be able to define first phase of development also for this new discovery. Okay. As far as Mexico, Antonio, do you want to? Or Luca, do you want to comment?
I think Mexico, of course, as everybody in the oil industry, we are looking at the opening of Mexico to foreign investors. We will evaluate Ronda Uno information, and after our assessment, we will decide which is the most attracting area for potential investment in the country. This is what I can say today.
Okay, thanks.
Next question come from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Oh, yeah. Hi. Thank you for taking the questions. Two, I think the first one's for Marco, and I think I've asked this question before, but I just want to come back to it again. As we approach the winter season, and obviously we've gone through the summer negotiation season with your customers on the gas side, are there any changes either in mix or in your sales contract terms that would suggest that the margin we saw on your gas sales in the third quarter changes through the winter period? Or is the third quarter performance a relatively good indicator of what you'd expect over the next, let's say, six months or so? Then the second question, I guess, is for Massimo. Is there a point during the process of considering what you do with Saipem, to which you decide to stop consolidating it as a subsidiary?
It's clearly somewhat sort of touch and go anyway. I know you have board control, but you don't have 50% ownership. I think from memory, you got to a point in the process through the Snam disposal, when you took the view that you wouldn't consolidate it any further. It seems to me that going forward, actually, it's a better snapshot of the underlying performance and financial status of the Eni group to actually not include it within your financial statements anymore. Certainly, if the ultimate decision is that you exit. Thanks.
Jon, Marco here. Thanks for your question. I think you should not extrapolate too much on Q3. Q3 has some element of retroactivity. If you look at the first nine months of the year, the EBIT is better by EUR 1.2 billion compared to the previous year, whereas the overall yearly guidance we're giving is a breakeven. You can expect some deterioration as that one-off retroactive element in 2013 disappears. It doesn't have that much to do with the movement as we have, as I said, now 70% of the contracts which are directly indexed to the hub. They tend to move in sync with the movement on the sales side.
Right. That sort of implied 4Q is a good number for 1Q as well? X anything else happening, is that reasonable?
We'll discuss that when we disclose Q4.
Okay.
Okay. Jon, as far as the deconsolidation of Saipem, leaving aside for a while the, I would say, the formal aspect, the accounting principle, and focusing the discussion about the real control, I would say that looking at the process ahead of us, what we would like to do, in principle, is to take the control of Saipem just to drive the process. That, as I said before, would imply the refinancing of the company, then I would say, start to release the shares. Having this in mind, I would say that the process should follow this priority. As we retain the majority of the board members in Saipem, I think that we'll be even formally obliged to consolidate the company.
Right. If you actively make an announcement that you are going to exit, could you then treat that as an asset held for sale and therefore deconsolidated in that fashion?
I don't know if it could be useful just to put the numbers on a different prospect. I guess that since we retain the majority of the board members, we'll be obliged to, first of all, from a point of view of responsibility, Jon, we'll be obliged to exercise the degree of guidance and control that pertain to the majority shareholders. Then we'll be anywhere responsible about the, I would say, the result of Saipem as far as the main shareholder could be responsible for that.
Right. Just one follow-up on that. Is there enough representation on the board of Saipem right now for the board ex the Eni members to be able to technically make decisions, because clearly they're going to have to do that. Where they have to be independent, presumably on the matters of restructuring the financial relationship, your representatives will have to step out of the room. Is there the technical capacity to do that on the Saipem board, or will that need to be reconstituted or changed in some way, shape, or form, do you think?
That is a quite complex matter. I would say that in principle, this process will be pursued and will be rolled out in taking, I would say, into consideration the different interests of both parties. The process will be a very transparent one, will be a very clear one. Notwithstanding this, definitely, I would say the current situation, as I said, will oblige us to keep the number of Saipem consolidating to the Eni consolidation.
Okay. All right. That's clear. Thanks, Massimo.
Next question come from Mr. Andrea Scauri from Mediobanca. Mr. Scauri, please.
Yes, hi. Good afternoon, all. I have a question on South Stream and your commitment in the project. If I'm not wrong, you are supposed to finance the project with an investment of some EUR 2 billion. Correct me if I'm wrong. Could you please provide us any details about what is the intention of the company in this investment, and if there is a possibility that Eni doesn't participate to the financing of this project in a context of relationship with Gazprom and the Russian partner? Thank you.
Marco to answer.
Thanks for the question. Just to recap where the numbers stand, we have a 20% stake in the project, and the project is assumed to be project financed by third-party institutions by 70%. We have informed already Gazprom and the other shareholders that should that financing not happen, we would not be prepared to increase our commitment above what had previously been assumed. Just to be very clear, our plan assumes a 70% financing. There's been some speculation that the financing may be delayed. We have informed shareholders that we're not ready to step up and substitute the financing institutions. That's as much as we can say at this stage.
Okay. Thank you.
Next question come from Ms. Irene Himona. I beg your pardon, madam, from SG. Please.
Yes, good afternoon, Massimo. It's Irene Himona at Soc Gen, congratulations on a very good quarter. I had three quick questions. Firstly, refining and marketing. The last time you had a profitable quarter was about 2012, I think on a full year basis, not since 2008. When we look at the profit you made this quarter, how much was driven by your restructuring? How much was the micro, the refining margin? What do you anticipate for the next couple of quarters? My second question is on Kashagan, very quickly. I hear what you say that the repair plan will be submitted by year-end. Can you tell us, please, under this repair plan, when is it realistic for us to expect these fields to go back to production? How long does it take? Is it 2016? Is it 2018?
My final question, just going back to the oil price environment. It's obviously good news that your gearing will be a little bit lower than before. Can you tell me, in a world of $80 oil or $85, do the credit agencies become nervous at all with gearing at that level, given that their gearing definition is a little bit different to yours? Thank you.
Okay. I'll try to give some detail about refining and marketing, then about the gearing, and I'll leave the floor to Antonio to answer the additional question about Kashagan. As far as the result of the third quarter of our refining and marketing business, yes, definitely, as I anticipated, as you know very well, the result this quarter has been positively affected by, I would say, very high margin, very high in respect of what we have seen in the previous part of this year. Definitely it contributed to the final result. Giving you some, I would say, additional information, I would say that the overall EUR 39 million we record in the third quarter as refining and marketing, this has been composed by around EUR 150 produced by the marketing part of the business, and the loss of EUR 110 is the loss in refining and marketing.
What we expect, looking at the final part of this year, supposing that the margin will remain for the quarter in the range of $3.5 per barrel, we expect Overall, a lower loss from our refining and marketing because of a slight contribution in term of margin, but mainly, I would say the result of the restructuring plan that has been launched since the beginning of this year. This minus EUR 150 in term of minus loss could be translated as an overall result in refining and marketing. Just to make the story short, we expect that by the end of this year, a reduced loss in this business by EUR 150 million. Now I leave the floor to Antonio to answer your question about cash flow.
Okay. For 2016, the plan need to be confirmed by the operator. The contribution of production will be fraction of the normal production rate of 370,000 barrels per day.
What you're saying is the startup is to be confirmed.
Yes
2016?
Yes, 2016. Yes.
Okay. Thank you.
Okay. As far as the balance sheet at $80, Irene, I would say it will require a more detailed exercise that we, I would say, are going to perform, performing the overall full year plan. I'm not in a position to give you now, I would say, a completed answer to your question. Let me say that you know that as far as E&P, the expectation in term of cash contribution would remain still high, even $80, because of the relatively low breakeven price embedded in our portfolio. You know that our exposure to the unconventional is extremely limited, that the breakeven of our conventional portfolio is much lower than $80. At the same time, what we are seeing is the, I would say, accelerated recovery in our non-E&P businesses, as I just described.
I guess that the overall effect of these two components will take us in the better position to sustain even lower price. For a full and complete exercise, I remind you, maybe mid-February, when we can deal with this issue in more complete way.
Okay. Thank you very much, Massimo. Thank you.
Okay.
No more questions.
Okay. Thank you.
Okay. Thank you very much. Bye-bye.
Ladies and gentlemen, the conference is over. Thank you for calling Eni.