Good afternoon, ladies and gentlemen, welcome to Eni's 2013 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 am now handing you over to your host to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen, welcome to our third quarter results. Before I take you through the financial results, let me give you a summary of the main highlights of the quarter and few words about the market environment. Highlights first. In E&P, we finalized the sale of CNPC to CNPC of a 20% stake of Area 4 in Mozambique. This sale realized a EUR 3 billion net cash, monetizing early our world-class exploration success. Q3 was another rewarding quarter in term of exploration, with almost 700 million barrels of resources added to the drilling team. Production in the quarter was impacted by geopolitical factors, with significant force majeure events in Nigeria and Libya. In gas and power, supply contract negotiations are progressing while market conditions remain tough.
In line with our plan, we are continuing to expand our retail base, particularly in Europe, and we recorded good results from our trading and LNG businesses. In Downstream, we are continuing to aggressively reshape our business. Around 13% of our refining capacity has been permanently taken offline. In addition, we are progressing with the rationalization of capacity in our chemical sector. Having received the board approval, we are ready to start our buyback program. In term of market conditions, third quarter 2013 was quite tough. The average Brent price was $110.40 per barrel, slightly up year-on-year. The euro appreciated 6% versus U.S. dollar to 1.32, reducing as a result by 5% the euro-denominated oil price. Refining margins were particularly depressed. The Brent-Ural margin averaged $1.70 a barrel, down 77% year-on-year.
On top of this, Italian gas demand was down 14% year-on-year, also demand for refined products continued to decline in the quarter versus last year. Now, few comments on our results. Adjusted operating profit was EUR 3.44 billion, down 15.7% versus the third quarter of 2012. Exploration and production was down EUR 419 million, due to the scenario effect and extraordinary disruptions of production. Refining and marketing and gas and power divisions reported deeper losses as a result of the continued deterioration of market conditions. Adjusted net profit was EUR 1.17 billion, down 29.4% versus the previous year. The decline was due to the reduced operating performance and an increase of almost nine percentage points year-on-year in the group adjusted tax rate due to the greater contribution of the E&P division, which is typically subject to higher fiscal take.
Turning to E&P, in third quarter 2013, Eni's total production was down 3.8% versus last year, reflecting significant force majeure events in Nigeria and Libya and the divestment made in 2012. The decline was partially offset by the new field start up and continuing ramp-ups mainly in Russia, Algeria, Angola, and Egypt. Operating profit was down 9.7% due to lower production and the scenario effects. Now, Gas and Power. Eni's gas sale declined by 1 billion cubic meter to 17.8 because of the ongoing downturn in demand. Sales in Italy reported a slight increase up to 2.9% due to higher spot sales offsetting continued lower supplies to the power generation segment. International sales decreased by 9.1% as a result of increased competitive pressure in the industrial segment.
Gas and Power division reported deeper losses of EUR 356 million, EUR 52 million worse versus third quarter of 2012 due to the continued deterioration in sales price and margins, reflecting weak demand, oversupply, and increasing competitive pressures. It's worth mentioning that our results benefited only partially from certain price revisions at long-term supply contracts, some of which are still pending and therefore delaying the recognition of the associated economic effects. As far as R&M, in the third quarter of 2013, the division reported an adjusted operating loss of EUR 61 million. The reduction by EUR 113 million year-on-year was mainly due to the falling of the refining margin, which, on the contrary, was very high in the third quarter of 2012. On the other hand, we recorded an improved performance in our marketing business, notwithstanding depressed market environment.
Refining throughput declined by 12%, in particular due to the scheduled standstill of those refineries most exposed to the ongoing industry downturn and the shutdown of Venice plant for its conversion to a green refinery. Overall, sales declined by 6.6% year-on-year, driven by the fall in retail sales in Italy, that was partially compensated by an increase in Europe and in the wood sales sector. Finally, the other businesses. Versalis, our chemical branch, reported an adjusted operating loss of EUR 111 million, improving by EUR 62 million from the third quarter of 2012. It was thanks to the recovery of the cracking margin and the continuous improvement of our operations. Engineering construction segment reported an operating profit of EUR 238 million, down 39% from the third quarter of 2012.
Other activities and corporate posted an aggregate loss of EUR 144 million versus a loss of EUR 104 million in corresponding period of last year, mainly due to one-off higher insurance claims. Turning now to the debt. Net cash generated by operating activities and disposals amounted over to EUR 6.5 billion, of which EUR 3 billion from operating activities and EUR 3.5 billion from divestment, quite all related to the Mozambique farm out. Capital expenditure for the quarter amounted to EUR 3.1 billion, of which 83% in the E&P sector. Total CapEx up to September amounted to EUR 9 billion, while on a yearly basis, we expect an overall amount broadly in line with 2012. As a result, after dividend, net financial debt at September 2013 was down EUR 1.4 billion, resulting in a leverage of 24%. Before the Q&A session, a few words on buyback.
Considering the strong fundamentals of our businesses, our board has approved the start of our buyback program. As we presented in March, Eni's multi-year buyback program is projected to be a flexible tool aimed at contributing to a progressive dividend policy. The pace will be therefore a function of our strategic achievements and prevailing market conditions. Share purchases will begin in the next weeks. Now I'm pleased to answer your question with colleagues, Claudio and Marco Alverà that are here with me.
Please, we can start the Q&A session.
May I open the Q&A session, sir?
Yes, please.
Thank you. Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. First question comes from Mr. Theepan Jothilingam from Nomura International. Mr. Jothilingam, please.
Thank you. Good afternoon, gents. Three questions, please. Just firstly on the buyback and your comment on a satisfactory level of leverage. Could you just expand on that, where you think that the upper end of that range would be, particularly in relation to the credit rating? Secondly, just in terms of Algeria, if you could perhaps tell us where we are in the ramp-up of assets there, perhaps how the relationship is evolving with Sonatrach. Thirdly, with the Q2 results, you announced the Nené Marine discovery in The Congo. I was just wondering if there was a further update there. Thank you.
Okay. I'll answer your question about buyback, then I'll hand you to Claudio to answer the question about Algeria. As far as the relationship between the buyback and the leverage, yes, you're right. Let me expand a little bit more, maybe recapping what we already said, starting from the strategy presentation we presented last March. During the strategy presentation, we said that we have a priority to invest our cash in, and the priority is the following: first investment, second dividend, and third buyback. Definitely, we said that this, I would say, allocation would have been looked together with the level of the leverage that you remember has been fixed up to 30%, in the range of between 10% and 30%. We are still there, no news on this respect.
I do not expect any kind of specific comment from the rating agencies.
On Algeria. We can say that after a difficult start, half of the main projects, that I remember, are MLE, CAFC, and El Merk at the beginning of the year. I think that the ramp-up is going quite well. We reach about 250 million standard cubic feet in MLE and CAFC, and also El Merk is progressing very well. I've been just a few days ago in Algeria with the chairman of Sonatrach to review all the projects, and I think that from a relations point of view and from the project point of view and new initiatives, because we have some new initiatives in the shale gas with Sonatrach, everything is going very well. For Congo, as you know, we made a discovery in the pre-salt in a very shallow water close to the coast in Marine XII.
We are still in appraisal phase, up to now, we can say that we have discovered about 700 million barrels of oil resources with the potential to
About 2 billion. It's really a giant discovery. We had in mind a fast track with an early production phase, then a full field development. I think that is absolutely very good news from exploration point of view.
May I go ahead with the next question?
Yes, please.
Next question comes from Mr. Alejandro De Michelis from Exane. Mr. De Michelis, please.
Yes. Good afternoon, gentlemen. Couple of questions. Coming back to the buyback, Massimo. I think if we go back to the discussion in March, I think Mr. Scaroni was saying that there was also a level of the oil price that will determine whether the buyback would be on and off. Could you confirm what kind of level of oil price we're talking about here? The second question is, maybe we can get a bit of an update on Kashagan, and how do you see the pace of the ramp-up here?
Okay. I'll answer the first question. Yes, for sure, the level of the current price is one of the key issue we are looking at in order to launch the buyback. There is no specific threshold I would like to comment. It goes without saying that the current level is enough to us to go ahead buying back our shares.
For Kashagan, as you know, we had the startup in September. The startup was successful. We had no problem in the overall process and on critical components such as rotating machinery and the sulfur process units. A part which is not usually supposed to be critical, the gas transport pipeline, had leakage problems. Leaks were immediately identified and segregated with no environmental impact. Joint venture experts are investigating the root cause of the leaks. This activity is expected to take several weeks. The oil and gas production remain shut in until we have all the elements to identify the cause of the leaks. Restart of the facilities will be carried out only when full safety is guaranteed. Given the investigation is ongoing, we cannot disclose any further details.
Okay, thank you.
Next question comes from Miss Irene Himona from Societe Generale. Miss Himona, please.
Thank you. Good afternoon. I had two questions, please. Firstly, on refining and marketing, where the quarterly loss was certainly below expectations, can you talk a little bit about the split of refining versus marketing this quarter and what is improving basically versus a year ago? Secondly, on gas and power, obviously it's not sustainable to be losing EUR 1.2 billion a year. Can you give us some sense of once you renegotiate the big contracts, what is your view of sort of normalized profitability in that business? Thank you.
I'll answer the question about R&M and leave the ground to Marco for the second question. Secondly, the report is strongly impacted by the very low refining margin. We experience an average of $1.70 per barrel, and these days we are leaving even a lower level of margin. On top of this, I commented that the marketing performance being better than the quarter in 2012 because of the level of margin, but as I also remember that in the third quarter of 2012, we launched the Riparti con Eni campaign that is embedded in term of numbers in the number of the third quarter 2012. Now I leave the ground to Marco.
Thank you, Massimo. On gas and power, I would say we are on track on the negotiations as we had outlined, and we confirm what was our previous guidance. Just as a reminder, that was to close 2013 broadly in line with underlying 2012, assuming all the renegotiations are closed, where if they aren't closed, we will simply be postponing the advantage from the renegotiation. I don't think we will be closing all the negotiations. You heard at the last quarter we announced the initiation of an arbitration with Statoil, and negotiations are progressing, I would say, positively on the GasTerra contract. I would sum up confirming what we have previously said, that on the price front, we have sufficient provisions in the contracts to stabilize the prices to a level where we restore profitability.
The other arbitrations that have been awarded all go in the direction of claiming that these take-or-pay contracts have, let's say, no clause in them that should be forcing a long-term loss.
Where I think the issue is on the timing of these negotiations, because from a pricing perspective, they all have a backward-looking formula. We can only assume that we will recover the 2014 deterioration and 2013 deterioration that we're seeing into the future. From a volume side, there are no specific volume questions. What we have achieved with Sonatrach in 2013 is really what is enabling us not to go into take-or-pay or further take-or-pay situation, notwithstanding a significant drop in volumes that Massimo has just mentioned, because we're facing with a market that is shrinking in some sectors in power, by 20%-25% in Italy. I would say on the price front, over time, we will recover profitability, certainly.
On the volume side, it's a continuation of playing our portfolio within the different contracts, taking into consideration that there's no volume clause per se in the contracts.
Thank you.
Next question come from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Yeah. Thank you. I think one of my questions is for Marco and the other one for Claudio, if that's all right. Marco, I always ask you about this, but going back to the previous question, if you were to normalize for demand, and/or normalize for contract pricing structure, how would each of those contribute to the restoration of your earnings? Against normality, what are you having to sell on the spot market versus what would be your normal contractual demand?
Secondly, just to Claudio, your exploration success continues to be fairly extraordinary in the context of the other majors. Do you at some point stand back and think, well, we have a bit of an embarrassment of riches here, and we need to think about where our CapEx going forward needs to be spent and maybe start to optimize your portfolio in terms of countries, regions, et cetera. Therefore, does that then prompt a degree of portfolio management over the next couple of years just because you have so many options? Thanks.
Okay. I'll start, Jon. I think what we're seeing now with the market deteriorating quite rapidly is, first, there's not a lot of volumes that we are selling directly at the hubs as a result of the Sonatrach agreement this year. That may change as that agreement expires at the end of next year. We don't see that much of a difference in selling directly to customers and in selling onto the hub, as the price signaling effect of the PSV becoming a real hub has been very rapid. Not only the regulator has, on the retail side, decided over time to introduce the PSV as the reference, but I would say 100% of our industrial customers are asking for a PSV type component into the contract structure, whether it's in reference terms or in absolute price level terms. This is what we have on the pricing front.
There's not that much of a gap between sales onto the market and sales to end users. What we do expect as the market tightens up, hopefully eventually, is to see more value recognized for the quite unique flexibility that we have in the portfolio. The reference Massimo made to trading before is really a portfolio optimization profits, where we move profits from what was historically a customer B2B activity to a more, let's say, advanced portfolio optimization activity.
Right. Just to follow up on that, are there two elements to any settlement going forward, i.e., one that stabilizes your profitability at the sort of levels that you've described, I think, in the strategy presentation back in March, Also, were you alluding to some catch up as we've seen historically at some point as and when those contracts are agreed, i.e., to compensate you for the fairly large losses you've made through 2012 and 2013?
I would say yes, they do have retroactive, as you know, benefits, and we do expect to recover the losses. I would say particularly with Statoil, the numbers at play are significant because we have been out of the money significantly for a long period of time. Yes, you should see some retroactive compensation going forward as those numbers are settled. I wouldn't say there's an absolute level on the pricing front that we target, and I would say from the volume front, really the only problem is in Italy because of the lack of reverse flow and because of the gas from Sonatrach, Libyan and Italian equity gas are physically delivered in a country that doesn't have yet reverse flow. That's where we have the volume issue.
Okay. All right. Thank you.
Exploration. I think exploration, you're right, is really doing very well. We are continuously growing our asset resource base and it's not only gas, it's also we discover a lot of also oil. We discover big field, giant field, where we have a very important working interest. That give us the flexibility for the future and the several choices to optimize our portfolio. As a first step, we are reducing our working interest in some giant projects where we own 70% or 60% or 50% in the recent discoveries. That could be a trend also for the future to monetize and get value immediately on these assets. That is the first point. We are starting also a restructuring of our portfolio, and that is not the moment to disclose about this.
I think that in the future meetings next year, we can give more color and light about what we are doing.
Okay. Thank you.
Next question comes from Mr. Mark Bloomfield from Deutsche Bank. Mr. Bloomfield, please.
Thank you for taking my questions. Two, if I may. Firstly, just coming back to the share buyback. One of the three criteria you gave was that the dividend payment was fully covered. I just wonder if you can give us any sense of what oil price you think is needed to achieve that in 2014. Second question, just turning to production in West Africa. Volumes, both oil and gas, looked pretty strong this quarter relative to the second quarter. Appreciate we've now got some volumes or had some volumes from Angola LNG. Perhaps you can walk us through the other moving parts there. Just give us a sense of where Nigeria volumes were moving and if there were any major improvements elsewhere. Thank you.
Okay, Mark. As far as the oil price to sustain the current dividend goes, I guess that the best place to comment on this would be the next strategy presentation when we'll present an overall update on our activity.
Claudio, about Nigeria?
About Nigeria, about West Africa generally speaking, and production. West Africa is doing quite well. We increased production in Congo, where we're now producing close to 110,000 barrels per day, and that is oil, just oil. That gave a strong contribution, especially in the third quarter. We increased production in Nigeria, but in the offshore. That has been offset by the losses that we had in the onshore, but the offshore has a very important value of PSC and is where we have a strong share. West Africa from the oil point of view, from discovery point of view, and from production point of view, is going quite well. The Angola LNG, as you know, we are missing a lot of production and about 15,000 barrels per day. That is the only critical point, we can say, in the West Africa production.
Thanks.
Next question comes from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.
Good afternoon. Thank you for taking my questions. First of all, Marco, I was wondering if you could tell us if you see any sign of demand stabilizing in Italy on either gas or on the oil product side. Claudio, could you update us on progress for some of the key startups for 2014, such as Goliat and Block 1506?
Thank you, Michele. Yes. I think finally we are seeing the early signs of some stabilization, particularly on the gas side. Yes, some encouraging signs of stabilization. That's not to say growth, but I would say that's what we see right now.
Great.
For our projects, so next projects, if we're talking about 2014, we can just give you a few data about 2013, because in November, we'll start up Jasmine. Jasmine is a quite important project for us because it's going to give us more than 30,000 barrels per day of equity. Then we have additional wells in CAFC Gas, two wells this year and additional wells next year, and then we will have the full production in 2015. In Block 1506, we confirmed the production start up in the fourth quarter in 2014. That the same for Goliat. We have also other projects in Yamal Peninsula, Wrangel Sea, that will start at the end of 2014. [inaudible] as well, will start in 2014. That is the main contribution for the next year.
Thank you.
Next question comes from Mr. Marc Kofler from Macquarie. Mr. Kofler, please.
Oh, hi. Afternoon, everyone. Thanks for taking my questions. Just two, please. I'm sorry, I didn't really catch many of the projects you were referring to just now for 2014. At the risk of either repeating yourself, or I don't know, just you give a rough sort of expected contribution in terms of those new projects, that would be great. Secondly, in the upstream again, in Egypt, there has been some recent reports about Damietta potentially starting up again towards year-end. I'd be interested to get your view there. Thanks.
I'll start with Damietta. It's Marco here. We manage Damietta through our 50/50 joint venture, Union Fenosa Gas.
I would comment by saying that we expect two cargoes of LNG to come before the end of the year. Limited at that.
For the contribution of these projects, when we talk about contribution 2014, we don't just talk about new project, but also ramp up of the existing project that just started. We have in term of peak oil in 2014, we have about 30,000 barrel per day coming between Emily and Cabaça, and 14,000 barrel per day at the end of 2014 for Almirante. We have for the Block 1506 West Hub, we have a peak production of 25,000 barrel per day. The contribution for 2014 is just for a few months. Angola LNG that we really hope that will start in a steady way in 2014, will give a contribution of about 24,000 barrel per day. Other project in 2014 is, Jasmine, I said, the fully rolling is about starting from 30,000 barrel per day to 38,000 barrel per day as a peak production.
We have Goliat. Goliat has a peak production of about 55,000 per day, will start at the end of the year. Will give the full contribution only in 2015. We have also the start up at the end of the year 2014 of Jasmine. That just for a few thousand barrel because it's just a short period.
Okay, great. Thanks very much.
Next question comes from Miss Lydia Rainforth from Barclays. Miss Rainforth, please.
Thank you. Two questions, if I could, please. Firstly, on Mozambique, can you talk about how the condensate discovery there impacts your thought process on the development schedule there, and whether you would look at accelerating the development of that discovery ahead of some of the perhaps earlier discoveries? Secondly, in terms of the buyback program, you did talk about the dividend should be covered, the balance sheet should be within a good state, which it is at the moment. Does that mean that any divestments that you would consider when you talked about monetizing the exploration portfolio, that those would be returned to shareholders in the form of an accelerated version of the buyback over and above what you set out within the, sort of what the company can do on an operational basis? Thank you.
Mozambique, I think that you are referring to the last discovery of Coral that has been done in the new area, in the new zone of the Area 4, so in the southern area. We are in the early stage. We have to drill additional two appraisal wells to understand exactly the lower section of this reservoir in terms of liquid or condensate of quality of these hydrocarbons. We cannot say anything at the moment.
Okay, as far as your second question, Lydia, yes, for sure. As already said by Claudio, the portfolio management will become definitely part of our cash management in the future, it will contribute, as is the case, to our overall cash to shareholders. For greater view on this prospect, definitely the best time to comment on this will be next strategy presentation in February 2014.
Perfect. Thank you.
Next question comes from Mr. Jason Kenny from Santander. Mr. Kenny, please.
Hi there. Just wanted to ask you a question about your position in Galp. I understand you have the option with Amorim, or Amorim has an option with 5% stake. Could you tell me if you've disclosed a closing date for the option then? Maybe discuss whether you're actively looking to sell that stake, perhaps with the 3.4% that's also standing on rights. Secondly, just on the gas and power return to profitability outlook, should we really be modeling a positive underlying profit from gas and power within the next two, three years? I know you've not commented specifically. There's a lot of detail about this, but just very broadly where you see us getting break even on this.
Okay, I'll answer your first question about Galp. Yes, technically, you are correct. Amorim is retaining a call option to acquire 5%. This call option will definitely expire by the end of this year. As far as the remaining 3.4% on which Amorim retain a right of first offer, I guess that all I could do is to confirm that our intention is to dispose of as soon as possible these shares. The same comment will be valid for the overall package respecting the rights retaining by Amorim. Marco?
On gas and power outlook, I would say the timing for the new guidance will certainly be around the February presentation.
It's fair to say that because of the retroactive nature of the price negotiations we talked about, there's probably a 1-2 year time lag in between the market deterioration happens and when it's fully captured and reflected in the prices we pay. 2013 was certainly a weaker market than 2012. Only in 2014, 2015, we will be able to fully reflect that in the price negotiations.
Okay, thanks.
Next question comes from Mr. Andrea Scauri from Mediobanca. Mr. Scauri, please.
Hi, good afternoon, everyone. A couple of questions from me. The first one refers to your joint venture, SeverEnergia. I was wondering, what are your plans for your 30% stake that you have there? If you're going to sell this stake or it is core? Second question, could you please provide us an update on the situation in Libya? What is the situation there, and what is the missing production that, according to the current situation, you're expecting in fourth quarter? Thank you.
As far as the Russian asset, due to the fact that there is a current transaction on this asset, we would prefer not to comment on this.
Claudio, what about Libya?
Libya. The situation in Libya, as you know, is not very good. We are missing more than 120,000 barrel per day. The production of today is 135,000 barrel per day against a normal production this year of about 240 and a potential production of about 280,000 barrel per day. We are really losing a lot of production. We are losing more oil than gas. We are still sending to the domestic market about 7 million cubic meter per day, and we are sending to GreenStream 9.4 million cubic meter per day. We hope that Wafa, that is the desert, South Desert asset that is producing most of the gas for the domestic, and oil and condensate, we can restart in the next weeks.
If that not happen, I think that our average production for the next quarter in Libya will be around 130,000-135,000 barrel per day. I think that situation unpredictable, so we cannot say what is going to happen in the next days. We are optimistic, I can say, for the medium-long term, because it's clear that there is a process. We are in a transition process. This country for 50 years gave a lot to Eni in term of hydrocarbon and production. Now is in a transition phase. There are a lot of potentiality. We have just to look at that moment as a spot moment. I'm sure that in the future, things will improve.
Okay, thanks.
Next question comes from Mr. Neill Morton from Investec. Mr. Morton, please.
Good afternoon. I had two follow-ups on earlier questions. Firstly, in refining and marketing, if I look at the result in Q2, it was a loss of EUR -174. I'm still struggling to understand that if refining got worse in Q3 versus Q2, where that improvement in profits has come from. Is it simply marketing or is it perhaps also trading? Secondly, a question for Marco on gas and power. You've reiterated your full year 2013 guidance, assuming contract renegotiations are successful. Would you care to give full year guidance, assuming there are no renegotiated contracts by end of year? Thank you.
I'll answer your first question about R&M. The main reason why the third quarter has been better than the second quarter is because of the driving season that in Italy is in the summertime, so including the third quarter. The very close delivery cost is included in the marketing activity.
On the 2013 guidance, I think the two outstanding contracts are Statoil and GasTerra. I think the results you see in this quarter do not reflect either of those. I think I would be happy to successfully complete one of those, which would bring upside to what you're seeing in the nine months to date. I would think it would be overly optimistic to assume both. There's always a chance that you settle pre-arbitration, I think to assume that both are closed, at this point, would be overly optimistic.
Would you care to quantify the impact if neither is negotiated by end of year?
No, I think it would not even be helpful because the lump sum impact is a combination of so many factors that I wouldn't do it, but it also wouldn't be helpful. I think you have nine months of performance that exclude those two.
I think you have what would be the guidance, which is last year's performance, which just to remind everyone, is about minus EUR 200 million, assuming both are closed. I think in between those two numbers, you have the value of what these two collectively could be worth.
Great. Thank you.
Yes.
Next question comes from Mr. Dario Michi from Banca Akros. Mr. Michi, please.
Hi, good afternoon, everyone. I would like to ask the following questions. According to local press, there could be some penalties if production in the Kashagan field isn't restarted soon. Is it true? Could you please quantify these penalties? The second question is about the negotiation for the disposal of a 10%-15% stake in the Area 4 in Mozambique. How are they going?
The first question about Kashagan. From a contractual point of view, there is no penalties if you are not able to reach the KCPE by the end of September. What happened that the joint venture cannot recover the cost incurred to reach after this date, the KCPE, but there isn't any contract clear penalties. At the moment, honestly, we are not looking at the contract, discussing about contractual issue with the Republic. All the joint venture is focused to solve the problem of the leaks of the gas pipeline. Sorry, can you repeat on Mozambique, what you asked?
How are the negotiations going?
Negotiation. I think that we cannot disclose anything because that is a commercial sensitive issue. What we said, what also Paolo Scaroni said, that we have a very strong position in term of working interest, and we want to be the leading partner, keep the operatorship, and keep all the material stake in our joint venture. Due to the so big, large project, we, in an opportunistic way, we will analyze any proposal about this 10, 15% maximum stake in the future. I cannot say more about that. Thank you.
No more question at the moment. Ladies and gentlemen, I like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. Next question come from Mr. Andrea Scauri from Mediobanca. Mr. Scauri, please.
Yes. A follow-up question. I know that it is something that you do not usually comment, Saipem. We saw a good trend of results in third quarter that might suggest an inflection point for Saipem. I was wondering if you could comment, what are your plans for Saipem, if there is an update on your view on Saipem, in terms of potential deconsolidation of these assets or what else? Thank you.
Andrea, as you know, we spoke at length in the recent past about what we call the unbalanced position of Eni and Saipem, this unbalanced position is still there. On top of that, I would say that we don't have anything to add, unless that we are very pleased about the result that Saipem committed yesterday. Secondly, that definitely we will keep on supporting Saipem from a financial point of view.
Okay, very clear. Thank you.
Next question come from Mr. Ellis Essien from Citi. Mr. Essien, please.
Yeah, good afternoon. Very quick question. At the beginning of the year, I think around the strategy presentation, you gave guidance in the upstream on unit margins, particularly around DD&A charges, expecting to see some escalation this year. I just note that that hasn't really happened. Is that a production lever effect, or is that inflation in DD&A still to come in the fourth quarter?
I think that from a cost point of view, an overall cost point of view, I think that we optimize our cost in term of operating cost, also DD&A. We didn't reach at the moment the value that we forecast for different reasons. Also because there are some delays. We have some delays in some projects and some disruption, for example, in Libya, where we were not able to develop the projects that we schedule. That create a reduction in the overall cost. That is the main reason.
As you look into the fourth quarter, do you expect to see a significant change?
No, because as I said, the main reason was Libya and what we couldn't develop in Libya. I think that we'll remain in the same range, I think.
Okay. Thank you very much.
The next question comes from Mr. Roberto Letizia from Equita SIM. Mr. Letizia, please.
Thank you. Very briefly on the debt and the guidance you gave on the leverage flat at year-end. I am just asking if this guidance already includes the effects of the buyback. I think it won't be very big, but is it included in the guidance already? If it includes the effect of any gas and power gas contract renegotiation and any additional disposal that could happen by year-end. Thank you.
Let me elaborate a bit on this. What we are saying now is that we are giving a guidance that will be around 0.25, good in line with 2020. This guidance is taking into account some, I would say, negative issue that rose in the very recent period. Technically, the lower upstream production versus what we expected and what we said in June, in July. Second, yes, we are taking into consideration the fact that probably not all the negotiation will take place by the end of 2013. Third, we are taking into consideration a weaker downstream environment that has been some way shown by these days, and even an exchange rate that currently appears worse than what could have been projected by June, July. Having said that, as far as the disposals, no, we are not including any specific additional disposal in this guidance.
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Thank you very much. Bye.
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