Good afternoon, ladies and gentlemen, and welcome to Ennis 2013 Third Quarter Results Conference Call, hosted by Massimo Mundazzi, 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.
Good afternoon, ladies and gentlemen, and welcome to our Q3 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 and P, we finalized the sale of CMPC to CMPC of a 20% stake at Warrior4 in Mozambique. This sale realized a €3,000,000,000 net cash monetizing early our world class exploration success.
Concrete was another rewarding quarter in term of exploration with almost 700,000,000 barrels of resources added to the drilling rig. Production in the quarter was impacted by geopolitical factors with significant post merger events in Nigeria and Libya. In Gas and Power supply contract negotiations are progressing, while market conditions remain tough. In light 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 a rationalization of capacity in our chemical sector. Finally, having received the board approval, we are ready to start our buyback program. In terms of market conditions, Q3 2013
was quite
tough. The average Brent price was $110.4 per barrel, slightly up year on year. However, the euro percentage 6% versus U. S. Dollar to 1.32 dollars reducing as a result by 5 percent the euro denominated oil price.
Refining margins were particularly depressed. The Brent oral margin averaged $1.7 a barrel, down 77% year on year. On top of this, Italian gas demand was down 14% year on year and also demand for refined products continued to decline in the quarter versus last year. And now a few comments on our results. Adjusted operating profit was €3,440,000,000 down 15.7% versus the Q3 of 2020.
Exploration and production was down €419,000,000 due to the scenario effect and the 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 €1,170,000,000 down 29.4% versus the previous year. The decline was due to the reduced operating performance, an increase of almost 9 percentage points year on year in the group adjusted tax rate due to the greater contribution of the E and P division, which is typically subject to higher fiscal tax. Turning to E&P.
In Q3 2013, ENI's total production was down 3.8% versus last year, reflecting significant force majeure events in Nigeria and Libya and divestment made in 2020. The decline was partially offset by the new field start ups and continued ramp ups mainly in Russia, Algeria, Angola and Egypt. Operating profit was down 9.7% due to lower production and the scenario effects. And now Gas and Power. Energy Gas sales declined by CUB1 1,000,000,000 cubic meters 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 €356,000,000 €52,000,000 worse versus Q3 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 effect. Astar RNN, in the Q3 of 2013, the division reported an adjusted operating loss of €61,000,000 The reduction by €113,000,000 year on year was mainly due to the falling of the refining margin, which on the contrary was very high inter quarter of 2012.
On the other hand, we recorded an improved performance in our marketing business, notwithstanding the press 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 Veins 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 wholesale sector. And finally, the other businesses. Vasiles and our Chemical branch reported an adjusted operating loss of €111,000,000 improving by €62,000,000 from the Q3 of 2012.
It was thanks to the recovery of the cracking margin and the continuous improvement of our operations. Engineering and Construction segment reported an operating profit of €238,000,000 down 39% from the Q3 of 2020. Other activities in corporate posted an aggregate loss of $144,000,000 versus a loss of $104,000,000 in corresponding periods 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 $6,500,000,000 of which $3,000,000,000 from operating activities and $3,500,000,000 from divestment, quite all related to the Mozambique Farm out.
Capital expenditure for the quarter amounted to 3,100,000,000 dollars of which 83 percent in the E and P sector. Total CapEx up to September amounted to 9,000,000,000 dollars while on a yearly basis, we expect an overall amount broadly in line with 2012. As a result, after dividend, net financial debt at year end sorry, at September 2013 was down €1,400,000,000 resulting in a leverage of 24%. Before the Q and 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, any multiyear buyback program is projected to be a flexible tool aimed at contributing to a progressive dividend policy. The pace will be therefore strategic achievements and prevailing market conditions. Share purchases will begin in the next weeks. And now, I'm pleased to answer your question with the colleagues, Jose Claudio and Marco Veradez are here with me.
Please, we can start the Q and A session.
May I open the Q and A session, sir?
Yes, please.
Thank you. Ladies and gentlemen, the Q and A session is now open. Thank you. First question comes from Mr. Tipan Jodringham from Nomura International.
Mr. Jodringham, please.
Thank you. Good
afternoon, Jen. Three questions, please. Just firstly on the buyback and your comment on the 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 and perhaps how the relationship is evolving with Sonotrec going?
And then thirdly, with the Q2 results, you announced the Nenaid Marine discovery in the Congo. I was just wondering if there was a further update there. Thank you.
Okay. So I'll answer your question by back and then I'll to Claudio to answer the question about Algeria. So as far as the relationship between the buyback and the leverage, yes, you're right. But 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 in investing our cash in and the priority is the following: 1st, investment 2nd, dividend and 3rd, buyback.
And 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%, so in the range of between 10% 30%. We are still there. So no news on this respect. So I do not expect any kind of specific comment from the rating agencies.
Now on Algeria, we can say that after a difficult start up of the main projects that I remember are MLE, CASK and in Merck at the beginning of the year. Now I think that the ramp up is going quite well. We reached about 250 €250,000,000 tonne of cubic feet in MLE and Kafka and also LMEK is progressing very well. I've been just a few days ago in Algeria with the Chairman of Sonatruk to review all the projects and I think that from a relations point of view and from the also project point of view and new initiatives because we have some new initiatives in the shale gas with sauna truck, Everything is going very, very well. For Congo, as you know, we may be discovering the pre salt in a very shallow water close to the coast in Marine 12.
We are still in an appraisal phase, but after now we can say that we have discovered about 700,000,000 barrels of oil and resources with the potential to about €2,000,000,000 So it's really a giant discovery. We had in mind a fast track with an early production phase and then a full field development. And so I think that 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 Michaelis from Exane. Mr. De Michaelis, please.
Yes, good afternoon gentlemen. A 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?
And then the second question is, maybe you can get a bit of an update on Cascagun? And how do you see the pace of the ramp up here?
Okay. So I'll answer the
first question.
So yes, for sure, the level of the Brent 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 enough to us to go ahead buying back our shares.
So for cash again, as you know, we start up we have the start up in September and the start up was successful. We have 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.
These activities are expected to take several weeks. The oil and gas production remain shut in until we have all the elements identified because of the leaks. Restart of these facilities will be carried out only when full safety is guaranteed. Given the investigation are ongoing, we cannot disclose any further details.
Thank you.
Next question comes from Ms. Irene Himona from Societe Generale. Ms. General. Ms.
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 are the what is improving basically versus a year ago? Secondly, on Gas and Power, I mean, obviously, it's not sustainable to be losing €1,200,000,000 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.
Okay. So I'll answer the question about R and M and then strongly impacted by the very low refining margin. We experienced an average of $1.7 per barrel and these days we are 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 Q3 of 2012, we launched the Reparti conini campaign that is embedded in terms of numbers in the number of the Q3 of 2012.
And now I leave the ground to Marc.
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 underlining 2012 assuming all the renegotiations are closed where if they are enclosed, we will simply be postponing the advantage from the renegotiation. So 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 Gastera 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. So 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.
So what we have achieved with Sonatrack 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 the market that is shrinking in some sectors in power by 28% to 25% in Italy. So 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 comes from Mr. John Rigby from UBS. Mr. Rigby, please.
Yes. Thank you. I think one of my questions is for Marco and
the other one for Claudio, if that's
all right. So Marco, kind of I always kind of ask you about this. But going back to the previous question, if you were to sort of normalize for demand and or normalize for sort of contract pricing structure, how would each of those contribute to the restoration of your earnings? So if we were still operating under the existing pricing structure that you have now, but you weren't selling a portion of your volumes on the spot market and we're able to sell them sort of back to back into a restored demand scenario, How much different would your earnings be? And against normality, what are you having to sell on the spot market versus what would be your normal contractual demand?
And then secondly, just to Claudio, is it I mean your exploration success continues to be fairly extraordinary in the context of the other majors. Do you at some point sort of stand back and think, well, we have a bit of an embarrassment to riches here and we need to think about where our CapEx going forward needs to be spent and maybe start to optimize your sort of portfolio in terms of countries, regions, etcetera? And therefore, does that then prompt a degree of sort of portfolio management over the next couple of years just because you have so many options? Thanks.
Okay. I'll start John. I think what we're seeing now with the market deteriorating quite rapidly is there's not first, there's not a lot of volumes that we are selling directly at the hubs as a result of the Sonitrack agreement this year. That may change as that agreement expires at the end of next year. But 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, 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. So 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.
So 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. And 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? But 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, compensate you for the fairly large losses you've made through 20122013?
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, significantly for a long period of time. So yes, you should see some refractive 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 Gazprom Sonatrec Libyan and Italian equity gas are physically delivered in a country that doesn't have yet reverse flow.
So that's where we have the volume issue.
Great. Thank you.
So 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 discovered also oil. And we discover big field, giant field where we have a very important working interest. And that give us the flexibility for the future several choices to optimize our portfolio. As a first step, as you remark 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.
And that could be a trend also for the future to monetize and get value immediately on these assets. So that is the first point. We are starting also a restructuring of our portfolio and that is not the moment to disclose about this. But I think that in the future meetings next year we can give more color light about what we are doing.
Okay. Thank you.
Next question comes from Mr. Marc Blumfield from Deutsche Bank. Mr. Blumfield, please.
Thank you for taking my questions. 2, if I may. Firstly, just coming back to the share buyback. One of the 3 criteria you gave was that the dividend payment was fully covered. I just wondered 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 Q2. 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 are moving and if there were any major improvements elsewhere.
Thank you.
Okay, Matt. So as far as the yield price to sustain the current dividend, I guess that is the best place to comment on this will be the next strategy presentation when we'll present the to say an update an overall update on our
activity.
And then 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. So that gave us a strong contribution especially in the Q3. 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 in PSC and is where we have a strong share. So West Africa from an oil point of view, from discovery point of view and from production point of view is going quite well. The ongoing 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? And Claudio, could you update us on progress for some of the key startups for 2014 such as Goliath and Block 1506?
Thank you, Michele. Yes, I think finally we are seeing the early signs of some stabilization, particularly on the gas side. So yes, some encouraging signs of stabilization. That's not to say growth, but I would say that's what we see right now.
Great.
So for our projects, so next projects, so talking about 2014, we can just give you a few data about 2013, because in November, we'll start up Jasmin. Jasmin is quite important project for us because it's going to give us more than 30,000 barrels per day of equity. And then we have additional wells in Costa gas, 2 wells these years and additional wells next year and then we will have the full production in 2015. In Block 15 of 6, we confirmed a production startup in the Q4 in 2014 and that the same for Goliad. We have also other projects in the Yamal Peninsula, Rengalskoye, that will start at the end of 2014 and Iara as well will start in 2014.
So that is the main contribution for the next year.
Thank you.
Next question comes from Mr. Marc Koffler from Equaire. Mr. Koffler, please.
Hi. Afternoon, everyone. Thanks for taking my questions. 2, please. I'm sorry, I didn't really catch many of the projects you're referring to just since 2014.
So at the risk of either repeating itself, I don't need just if you could give a rough sort of expected contribution in terms of those new projects. That would be great. And then secondly, in the Upstream again in Egypt, there has been some recent reports about Demietta potentially starting up again towards year end. I'd be interested to get your view there. Thanks.
I'll start with Demietta. It's Marco here. We manage Demietta through our fifty-fifty joint venture Union Finosa Gas. I would comment by saying that we expect 2 cargoes of LNG to come before the end of the year, so limited at that.
So the contribution of these projects so when we talk about contribution in 2013, we don't just talk about new projects, but also ramp up of existing projects that just started. So we have in terms of peak oil in 2014, we have about 30,000 barrels per day coming between MLE and CASK and 14,000 barrels per day at the end of 2014 for Elmerca. Then we have for the block 1506 West Hub, we have a pea production 25,000 barrels per day. The contribution for 2013 is just for a few months. Then Angola LNG that we really hope that will start in a steady way in 2013 will give a contribution of about 24,000 barrels per day.
And other project in 2014 is okay Jasmine I said
is the
full year growing is about starting from 30,000 barrels per day to 38,000 barrels per day as a peak production. And then we have Goliath. Goliath has a pre production of about 55,000 per day, but we'll start at the end of the year. So we'll give the full contribution only in 2015. And then we have also the start up at the end of the year 20 14 of Jasmine that just for 2,000 barrels because it's just a short period.
Okay, great. Thanks very much.
Next question comes from Ms. Lydia Reinforce from Barclays. Ms. Reinforce, please.
Thank you. Two questions, if I could, please. Firstly, on Mozambique. Can you talk about how the condensate discovery there impacts your short process on the development schedule there? And whether you would look at accelerating that the development of that discovery ahead of some of the perhaps early discoveries?
And then secondly, in terms of the buyback program, you did talk about sort of the dividend should be covered, the balance sheet should be in 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 Agulia that has been done in the new area and the new zone of the Block 4, so in the southern area. We are in the early stage. We have to drill additional 2 private wells to understand exactly the lower section we cannot say anything at the moment.
Okay. And 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 and it will contribute as is case to our overall cash to shareholders. But for a greater view on this prospect, definitely the best time to comment on this would be next strategy presentation in February 2014.
Perfect. Thank you. Next question comes from Mr. Jason Kenney from Santander. Mr.
Kenney, please.
Hi, there. Just wanted to ask you a question about your position in Galp. And you have the option with Amarin or Amarin as an option with 5% stake. Could you tell me if you disclosed the closing date for that? And then maybe discuss whether you're actively looking to sell that stake perhaps with the 3.4% that's also standing on price?
Then secondly, just on the Gas and Power return to profitability outlook. I mean, should we really be modeling a positive underlying profit from Gas and Power within the next 2, 3 years? I know you've not commented specifically. There's a lot of detail about this, but just very broadly where you see us going to breakeven.
Okay. So I'll answer your question your first question about gas. Yes, definitely, you're correct. Amorim is retaining coal option to acquire 5%. This coal option will definitely expire by the end of this year.
And as far as the remaining 3.4% on which Amorim retained a right of first offer, I get that all I could do is to confirm that our intention is to dispose off as soon as possible these shares. And at the same comment there will be valid for the overall package respecting the rights retained by Amorim.
Hi, 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 to 2 year time lag in between the market deterioration happens and when it's fully captured and reflected in the prices we pay. And 2013 was certainly a weaker market than 2012. So only in 2014, 2015 we will be able to fully reflect that in the price negotiations. Okay.
Thanks.
Next question comes from Mr. Andreas Scauri from Mediobanca. Mr. Scauri, please.
Hi, good afternoon, everyone. A couple of questions for me. The first one refers to your joint venture of Seber Energia. I was wondering what are your plans for your 30 percent 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 expect in the Q4? Thank you.
Okay. So 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.
And Claudio about Libya? So Libya, the situation in Libya as you know is not very good. We are missing more than 120,000 barrels per day. So the production of today is 135,000 barrels per day against normal production this year of about 240,000 and a potential production of about 280,000 barrels per day. So we are really losing a lot of production.
We are losing more oil, more oil than gas. We are still sending to the domestic market about 7,000,000 cubic meter per day and we're sending to Green Stream 9,400,000 cubic meter per day. So 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 barrels, 135,000 barrels per day. So we I think that situation is unpredictable.
So we cannot say what is going to happen in the next days. But 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 any in term of hydrocarbon a transition phase. There are a lot of potentialities.
So we have just to look at that moment as a spot moment. But I'm sure that in the future, things will improve.
Thanks.
Next question comes from Mr. Neil 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 minus 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? And then just secondly, a question for Marco on Gas and Power. You 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.
Okay. So I'll answer your first question about R and M. The main reason why the Q3 has been better than the Q2 is because of the driving season that in Italy is in the summertime, so that's included in the Q3. So the very, very close delivery cost that is included in the marketing activity.
On the 2013 guidance, I think the 2 outstanding contracts are Statoil and Gastera. I think the results you see in this quarter do not reflect either of those. I think in I would be happy to successfully complete one of those which would bring upside to what you're seeing in the 9 months to date. But I would think I'd be overly optimistic to assume both. There's always a chance that you settle pre arbitration, but I think to assume that both are closed at this point would be overly optimistic.
Would you care to quantify the impact of neither as negotiated by end of year?
No. I think it would not even be helpful because it's 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 9 months of performance that exclude those 2. And I think you have what would be the guidance, which is last year's performance, which just to remind everyone is about minus €200,000,000 assuming both are closed. So I think in between those two numbers, you have the value of what these 2 collectively could be worth.
Great. Thank you.
Yeah.
Next question comes from Mr. Dario Miki from Banquetagros. Mr. Miki, 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 cash ground field isn't restarted soon. Is it true? Could you please quantify these penalties?
And the second question is about the negotiation for the disposal of 10%, 15% stake in the R4 in Mozambique? How are they going? So the first question is about cash again. So from a contractual point of view, there is no penalties if you are not able to reach the KCP by the end of September. What happened that joint venture cannot recover the cost incurred to reach after this date the KCP.
But there is any contract clear penalties. At the moment, honestly, we are not looking at the control discussing about a contractual issue with the Republic. All the inventory is focused to solve the problem of the leaks of the gas pipeline. So can you repeat on Mozambique, what you asked?
How are the negotiations?
Okay. Got it. So negotiation, I think that we cannot disclose anything because that is a commercial sensitive issue. What we said what also Carlos Caroni said that we have a very strong position in term of working interest. We want to be the leading partner, keep the operatorship and keep them and all the material stake in our joint venture.
But due to the so big large project, we in an opportunistic way, we will analyze I mean any proposal about this 10%, 15% maximum stake in the future. But I cannot say more about that. Thank you.
No more questions at the moment. Thank you. Next question comes from Mr. Andreas Kouri from Mediobanca. Mr.
Kouri, please.
Yes. Hi. A follow-up question. I know that it is something that you do not usually comment, but cite We saw a good trend of results in the Q3 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 Saipem and 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 results that Saipem commented yesterday. And secondly that definitely we will keep on supporting Saipem from a financial point of view.
Okay. Very clear. Thank you.
Next question comes from Mr. Elis Hassane from Citi. Mr. Hassane, please.
Yes. Good afternoon. Very quick question. At the beginning of the year, I think around the strategy presentation, you gave guidance on in the upstream on the unit margins, particularly around DD and A charges. You're expecting to see some escalation this year.
And I just note that that hasn't really happened. Is that a production Libya effect? Or is that inflation in DD and A still to come in the Q4?
So I think no, we I think that from a cost point of view, an overall cost point of view, I think that we optimize our cost in terms of operating cost and also D and A. So 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 the Pentagon in Libya where we were not able to develop the projects that we scheduled. So that creates a reduction in the overall costs and that is the main reason.
So as you look into the Q4, 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 will remain in the same range, I think.
Okay. Thank you very much.
Next question comes from Mr. Roberto Letizia from Equitasim. Mr. Letizia, please.
Yes. Thank you. Very briefly on the debt and the guidance you gave on the leverage flat at year end. I'm just asking if this guidance already include the effect of the buyback. I think it won't be very big, but is it included in the guidance already?
And 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.
Okay. So let me elaborate a bit on this. So what we are saying now that we are giving a guidance that would be around 0.25, so both in line with 2020. This guidance is taking account some, I would say, negative issue that rose in the very recent period. Definitely, the lower upstream production versus what we expected and what we said in June July.
2nd, yes, we are taking into consideration the fact that probably not all the negotiation will take place by the end of 2013. 3rd, we are taking into consideration a weaker downstream currently it appears worse than what could currently it 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.
No more questions at the moment. The control room confirmed there are no more questions.
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Thank you very much. Bye.
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