Good afternoon, ladies and gentlemen, and 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. However, at the end of the call, you have the opportunity to ask questions. I'm now handing you over to Joost to begin today's conference. Thank you.
Thank you very much. Good afternoon, ladies and gentlemen, and welcome to our Q3 results. Before we start today, I would like to take a moment to express to Mr. Demagiri's family and to our colleague, Rex Total, the sorrow felt in any for his untimely loss. Many of us knew him personally and he will be very much missed.
And 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 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 $4,000,000,000 for this quarter. The standout data point of the quarter is our extraordinary cash generation. Notwithstanding a weaker scenario, this has been the strongest Q3 since 2008 in terms of cash flow from operations. Thanks to the steady contribution of our profitable E and P production, the effective actions of net working capital and the result of the accelerated turnaround program. In the 9 months period, cash flow from operations of €9,700,000,000 was greater than capital expenditure by around €1,000,000,000 When coupled with the €3,200,000,000 divestment already carried out, the resulting free cash flow entirely funded dividend payments 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, 2015 average expectation. And 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 and P performance for the tune of over €600,000,000 On the other hand, I'd like to highlight the results of Gas and Power and the Refining and Marketing. The former having reduced its losses by more than 2 thirds and the latter having returned to profit, thanks to the temporary supportive market environment and our optimization program. All of these confirms the value of our restructuring efforts and give us even more confidence in our announced breakeven targets.
The reduced contribution from UP is the driving force behind the lower tax rate registered in the 3rd quarter, which contributed to increase in net profit versus last year. As mentioned, E and 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 700,000,000 BOE in the 9 months period, with unit exploration cost of $1.9 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 12 block in the Congo shallow waters through the new Sala Marine 1 well. Our preliminary estimates of resources in place are of about 1,000,000,000 barrels of oil equivalent, which 80% like oil.
This brings the Marine 12 total resources discovered in the past 3 years to 3,500,000,000 BOE. Our continued real big success proved 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. These strong results in the face of a testing scenario is a clear example of the benefits we have achieved by negotiating 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 and 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 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 cost as well as the structural reduction in commodity capacity resulting from our optimization efforts. Furthermore, I'd like to highlight the reduction of around €30,000,000 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. And finally, the improved cash position has maintained leverage table at 25% even after the payment of more than €4,000,000,000 in dividends. Though net borrowings were up by €800,000,000 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 Q4, leverage is projected to come in slightly better than the level achieved at the end of 2013.
Thank you for your attention. And now I'll be happy to answer together with some of my colleagues any question you may have.
Ladies and gentlemen, the Q and A session is now open. I'd like to remind you that if you want to register for your question, please press star Thank you. The first question comes from Mr. Tivan Jotlingham from Nomura. Mr.
Jotlingham, please.
Yes. 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? And then 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. So I'll give an answer to the cash flow question and then maybe I leave the floor to Luca Bertelli to give you an answer about the new discovery. As far as the contribution in cash flow, as far as the Q3, the EUR 4,000,000,000 I mentioned is made around by 2 third or better 3 out of EUR 4,000,000,000 dollars relate to the operating cash flow before the working capital and $1,000,000,000 is made by the contribution of working capital. The first element is very resilient as the decrease versus 20 13 where we appreciated a much higher oil price is just a little bit lower than that level. And as far as the working capital, I would say that major contribution will come from the makeup gas, some disposal in stock in excess, plus some, I would say, optimization in our over under lifting position in joint venture all over the world.
And now I leave the floor to Luca to answer the question about Congo.
So the discovery we announced this morning is quite relevant discovery. We have a thick hydrocarbon column, light oil. And we are in conventional water, 70 meter water depth and nearby existing infrastructures. So we can imagine an integrated project together with the other discolored that we already announced last year in Congo of relevant dimension.
Again, the asset is a shallow water close to existing infrastructure. So the
time to market can be quick.
Okay.
And especially, 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, say, portfolio activities, but we consider it really contribution from operation. Due to the fact that this exploration system already is proved to be continuous in time and it's going to have the opportunity to dispose off interest in excess versus a normal interest to develop such a huge discovery. I would like to remember that in Marine 12, we retained 65%. So there is ground to dispose off and anticipate cash flow, obviously, at the right price as we did in Mozambique.
And probably there is ground to do, for example, Indonesia. So the discovery we announced in last Monday in Sterpingam, which retained a very high interest. So even in that area that could be ground to go on with anticipated disposals.
So 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 is flat from here through next year, what level of working cap release would do you think we should be modeling? And then secondly, just back to Mozambique. Do you see 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. So some players are still looking at the possibility to enter acquire a position being interested in participating in such a huge project and integrated project as well as buying some equity cash. So secondly, the project now is leaving 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. And 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 Q4 of 2014 and even in 2015 helping us to sustain our overall cash contribution.
Okay. Thank you, Massimo.
Next question comes from Mr. Clint Oswald from Stanford Bernstein. Mr. Oswald, please.
Thank you. Matthew, hi, good afternoon. Yes, maybe a question on Gas and Power, which is seems to be performing well. I noted in the release some comments that even in the Q3, 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?
And secondly, yes, maybe obvious question, but just could you give us an update on cash again and obviously the pipe cost and some of the numbers we've been reading about in the press? Thank you.
Okay. So I'll leave the ground to Marco to answer your first question.
Thank you. So 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. And 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 Sonotrek that we're continuing to work on for a more permanent solution by year end. So I think our entire portfolio has now been revised on volume and on price. So that's the update on the negotiation.
And just to complete the answer about Gas and Power, I would like to confirm our guidance in terms of EBIT breakeven as far as 2014 and the strong cash improvement, thanks to the contribution of makeup gas again in 2014. Secondly, this result will be achieved thanks to the retroactive effect of the renegotiation closed in the first half of the year. Therefore, the benefit is clear, but I would like to highlight also in 2015, we expect such a contribution related to the negotiation that will take place that year. And now maybe I'll hand you over to Antonio as far as the question about cash again.
Thank you, Marcio. The material of the new pipeline is 60 carbon steel cladded with corrosion resistant alloy, 100% of the pipeline material already has been ordered. And the operator replacement plan is under finalization is expected to be available by the end of 2014.
Okay. Thank you.
Thank you.
Next question comes from Mr. Ian Reid from BMO. Mr. Reid, please.
Yes. 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 further what the future drilling plan is now in these countries specifically Angola, Gabon and Congo?
And can you tell us are you drilling any further wildcats over the next 6 months or so in these countries? And 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.
Okay. So I'll leave it now to Luca to answer your first question and then I'll give you the answer to the second one.
Thank you.
Good afternoon. Congo Marine 12s, we plan drilling additional couple of wells next year and 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 twenty fifteen. So next start in drilling in February next year. And in Angola, we are still planning a couple of exploration wells in Block 1506
for the next year.
Okay. So as far as Saipem, Ian, since we made the announcement about Saipem last July, we started on in-depth analysis that is still underway. So no decision has been taken yet. And you can understand I cannot disclose any further detail on this. But let me take this opportunity to remind generally speaking some principles underlying to the declaration we made in July.
And 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. And any solution, whichever 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 another great balance sheet to stay and compete comfortably on the market. So I think it was worth to remind the general principle underlying to this transaction.
Okay. Thanks.
Next question comes from Mr. Dario Miki from Bankagros. Mr. Micky, 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 1st 9 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?
And what are could you also detail the main components it would be made of? And the second question is on Simon Saken, sorry for that. But during the conference call, Saken stated that they were not excluding a capital increase. So when you stated that you want to leave 2nd with the sound balance sheet, Does this include also the chance to have a capital increase in your view?
Okay.
So in terms of cash flow contribution, yes, we expect a strong contribution in terms of cash flow even in the Q4 2014. That's because 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 operations before the working capital contribution. But again, also from the latter item, we expect some contribution, especially related to the makeup gas that technically will be higher than the one we recorded in the Q3 because of the greater volumes. And having said that, back to Saipem.
So 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. So 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. Marc Blomsoet from Deutsche Bank. Mr. Blomsoet, please.
Good afternoon. Thanks for taking my question. A couple of 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 potential EBIT for 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 20 14 assumes any financial settlement which may happen with Sonatrach? And then secondly, moving on to the Congo, euros 3,500,000,000 of in place volumes, I appreciate it's very early days, but perhaps you can give us a sense of what kind of production rates you think that could ultimately support looking out towards the
end of this decade? Thanks.
Okay. Marco for the first answer.
So 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 Sonatrack, there's not a lot of there's not much in the Q4 in terms of additional upside compared to what you see here.
Okay. And as far as the production rate, Roberto? Yes.
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 phased development plan. For your information, we'll be starting in a few weeks from now the production from Menai, 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 2 wells. Clearly, the future development will involve many wells, several platforms. So this will be certainly a very important contribution to the production of Congo.
Thanks.
Next question comes from Ennis Clegg from Bank of America Merrill Lynch. Mr. Clegg, please.
Hi, there. Thanks for taking my questions. A sort of a balance sheet question really. I know you're gearing, you've guided down year on year, cut on oil prices to quote you and your outlook, which is fantastic. I just note 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 deltas of that? How much is volumes versus optimization? Because obviously oil prices is you're going against that, which is obviously quite impressive. And then on Libya, you've ramped up volumes in Libya. Could 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 the now the expectation is to have a gearing slightly lower than the one we experienced at the end of 2013. And 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. So this gives us confidence that the result we announced today is an achievable one and give us confidence also about what we can do in the future as the turnaround plan now appear to be on track or even a bit in advance versus what we thought at the end of July. And as far as Libya, yes, the current production is higher than the budget average we gave at the beginning of the year.
But definitely, the situation there remain very volatile. So the uncertainty now is still present in that country. Nevertheless, I can confirm that since now our fees remain totally out of any kind of turbulence or any kind of crisis in country. So I would say, so far so good.
Thanks so much.
Next question comes from Ms. Lydia Rainforth from Barclays. Ms. Rainforth, please.
Thank you. And I have a few questions, if I could. The first one, I'm sorry, she mentioned this earlier, but could I just check on how you're seeing the tax rate develop going forward? And then 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 in a lower oil price environment?
And then finally, just on the outlook statement and you talked about CapEx being down year on year. That is consistent with what you said at the Q2 stage. But I didn't know if incrementally you're expecting lower CapEx than you might have been 3 months ago. Thank you.
Okay. So tax rate. So tax rate, yes, we recorded a tax rate I would say a low tax rate in the Q3, just looking for the reference. So we experienced tax rate of 59.4 percent in the Q3 of 2014, much lower than the $64,600,000 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 and P that is close to the lower scenario and the higher contribution from the Italian activities, as you know, benefit a lower tax rate versus the average.
Thanks to the results so far achieved, I guess that in terms of guidance for the full year, the last time I mentioned a number in the range of 66% that will be equal to the one we experienced in 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 €11,000,000,000 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 €2,200,000,000 related to the disposal of the Russian asset of Residam and another $2,000,000,000 will come from the, I would say, the expiration of the convertible bond in NAM and GAAP in which we retain the right to repay the bondholders through shares. So this number I would say done.
And as far as the remaining part, the remaining around €6,000,000,000 in the next 4 years, I guess that the quality of the assets we are talking about, we had 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, many light oil give us the full confidence that this number can be achieved. And 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 €400,000,000 less than the number we announced in February.
Wonderful. Thank you very much.
Next question comes from Mr. Mark Kofflous from Jefferies. Mr. Kofflous, please.
Great. Yes, thanks. Good afternoon, everyone. I just had a quick question around the buyback particularly how you're thinking about repurchasing shares at the moment given the volatility in the oil market and the overall capital allocation process? Thanks.
Okay. So first of all, in principle, you remember that the our priority order in cash allocation, see 1st CapEx, 2nd dividend and 3rd buyback. And secondly, as far as CapEx and dividend, we release 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.
So 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 and maybe another deep thought internally on this respect will be taken looking at the number of the new full year plan that as you know will be announced in February 2015.
Great. Thanks very much.
Next question comes from Ms. Irene Harmon from SG. Ms. Harmon, please. I'm sorry, he is not available at the moment.
Next question comes from Mr. Thomas Edel from Credit Suisse. Mr. Thomas Edel, please.
Hi, good afternoon. Thanks for taking my questions and congrats on the drilling results. Two questions, please. 1, 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 pock environment, obviously, that looks even worse. And 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? Or would you actually use a bit of CapEx to fund that? 2nd question on my favorite topic, which is Mozambique.
I believe your neighbor in Mozambique may not mind bringing in the supermajor to let the whole project be developed jointly. Would you welcome this situation? And 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. So I leave the ground to Roberto to answer your question on my bones, Danviek, and I'll answer the question about dividend. So please, Roberto.
Okay. Thanks for this question. Let's start from the struggling resources, the one where as you mentioned, we are also discussing with Area 1 partners and in particular Anadarko as operator. Well, 1st 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 I mean, we are positive toward the reaching of NFID in the second half twenty fifteen. About the plants in Area 1, I can tell you that the first phase because clearly is a major development that will be done through different phases. And the first phase will envisage a parallel project of 2 trains, 5,000,000 tons each in both Area 4 and Area 1.
So we are for the first phase independent from Area 1. About Coral, you mentioned the FAD. Well, we can confirm that we started the process to reach FAD. That 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. And 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 Bayer, we have intense discussion, maybe Marco can elaborate more, but we have a short list of buyers.
And at that point, we will be 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 3 major consortia. So 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 early startup. So I can confirm more in deep discussions.
Can I if I can follow-up on the discussions? 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. And for you to make the economics to work maybe as well as when the oil price is $100 From your perspective, are you pushing for a better slope?
The forward markets haven't moved that much and we're talking about 2019, 2020 deliveries. We're talking about relatively small volumes in the scheme of global LNG demand at that time. So I don't think we're concerned at looking at the prompt part of the curve.
Okay. Thank you.
Okay. So as far as the dividend, Thomas, you may appreciate that the Q3 conference call is not typically the place to discuss the overall dividend policy. So I would say I would like to postpone the discussion by mid February next year when we let say deal with Indeep in this issue. I would like to remember in general terms that our dividend takes into consideration 2 parameters such as the oil price. So the oil price that we will see for the future of the date and the progress against our strategy.
So 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. So on this part of the equation as far as the result up to now, we feel quite happy.
Okay. Thank you.
Next question comes 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? I mean, even a range would be useful. And then secondly, on Mexico, I know 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 would be great.
About Congo, as I said earlier, we have very important discovery in terms of thickness, in terms of extension. So 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 NeNe, 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. So as far as Mexico, Antonio, do you want to or do you want to comment?
Mexico, of course, as everybody in the oil industry, we are looking at the opening of Mexico to foreign investors. We will evaluate Rodada Uno information. And after our assessment, we will decide which is the most attracting area for potential investment in the country. So this is what I can say today.
Okay. Thanks.
Next question comes from Mr. John Rigby from UBS. Mr. Rigby, please.
Yes. Hi. Thank you for taking questions. 2, I think the first one is for Marco, and I think I've asked this question before, but I just want to come back to it again. Is 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 Q3 changes through the winter period?
Or is the Q3 performance a relatively good indicator of what you'd expect over the next, let's say, 6 months or so? And then the second question, I guess, is for Massimo. But is there a point during the process of considering what you do with Saipem, during 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.
And I think from memory, you got to a point in the process through the STAM disposal when you took the view that you wouldn't consolidate it any further. It seems to me that going forward actually is a better snapshot of the underlying performance and financial status of the E and I Group to actually not include it within your financial statements anymore certainly but the ultimate decision is that you exit? Thanks.
John, 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 1st 9 months of the year, the EBIT is better by $1,200,000,000 compared to the previous year, whereas the overall yearly guidance we're giving is a break expect some deterioration as that one off retroactive element in 2013 disappears.
It doesn't have that much to do with the movements 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. And that's sort of implied 4Q is a good number for 1Q as well ex anything else happening? Is that reasonable?
We'll discuss that when we disclose 4Q, Q4.
Okay.
Okay. So Jonas, but as deconsolidation of Saipem, leaving aside for a while, I would say, the formal aspect the accounting principle and focusing the discussion about the rear 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. And then I would say start to I would say release the shares. So having this in mind, I would say that the process should follow this priority.
And as we retain the majority of the Board members inside them, I think that we'll be even formally obliged to consolidate the company.
And if you actually make an announcement that you were going to exit, could you then treat that as an asset held for sale and therefore deconsolidated in that fashion?
I don't know. It could be useful just to put the numbers on a different prospect. But I guess that since we retain the majority of the board members, we'd be obliged to 1st of all, from a point of view of responsibility, John, we'd be obliged to exercise the degree of guidance and control that pertain to the majority shareholders. And then we'll be anywhere responsible about the I would say the result Saipem as far as the main shareholder could be responsible for that.
Right. And just one follow-up on that. Is there enough representation on the Board of Saipem right now for the Board ex the E and I 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 references will have to step out of the room.
So I mean is there the technical capacity to do that on the Saipem border? Will that need to be reconstituted or changed in some way, shape or form do you think?
It's a quite complex matter. But I would say that in principle, this process will be for sure and will be rollout in taking, I would say, into consideration the different interest of both parties. So 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 sites and consolidating to the any consolidation.
Okay. All right. That's clear. Thanks, Maxime.
Next question comes from Mr. Andreas 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 investment of some €2,000,000,000 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 in the financing of this project in context of relationship with Gazprom and the Russian partner? Thank you.
Marco to answer.
Thanks for the question. So just to recap where the number stands. We have a 20% stake in the project and the project is assumed to be project financed by 3rd party institutions by 70%. So 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. So 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 comes from Ms. Irene Himona from SG. Please.
Yes. Good afternoon, Massimo. It's Irene Himona at SocGen. I had three quick questions. Firstly, Refining and Marketing.
The last time you had a profitable quarter was about 2012, and I think on a full year basis, not since 2,008. So when we look at the profit you made this quarter, how much was driven by your restructuring? How much was the macro, the refining margin? And what do you anticipate for the next couple of quarters? My second question is on cash again 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?
And 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 the 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. So I'll try to give some detail about refining and marketing and then about the gearing and I'll leave the floor to Antoine to answer the additional question about cash again. So as far as the result of the Q3 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. So definitely, it contributed to the final result. Giving you some, I would say, additional information, I would say that the overall €39,000,000 we've recorded in the 3rd quarter as a refining and marketing, this has been composed by around €150,000,000 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 terms 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 €150,000,000 in term of minus loss could be translated as an overall result in Refining and Marketing. So just to make the story short, we expect that by the end of this year a reduced loss in this business by $150,000,000 And now I'll leave the floor to Antonio to answer your question about cash flow.
Okay. So for 2016, the plan need to be confirmed by the operator. But the contribution of production will be fraction of the normal production rate of 373,000 barrels per day.
So what you're saying is the start up is to be confirmed, but 2016?
Yes, 2016, yes. Okay.
Thank you. Okay.
As far as the balance sheet at $80 Arena, I would say it will require a more detailed exercise that we, I would say, are going to perform in the overall full year plan. So I'm not in a position to give you now, I would say, a completed answer to your question. But let me say that you know that as far as GMP, the expectation in term of cash contribution remain 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 and P businesses as I just described. So I guess that the overall effect of these two components will take us in the better position to sustain even lower price.
But 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 Annie.