Good afternoon, ladies and gentlemen, welcome to Eni's 2013 first 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 your host to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen, and welcome to our first quarter results conference call. Before I take you through the financial results, let me give you a summary of the main highlights of the quarter. In E&P, production was impacted by a number of temporary issues, mainly in Libya and Nigeria. In Libya, while the situation remains challenging, production has been restored after the shutting of Mellitah, and now we are back in the region of 260,000 BOE per day. In Nigeria, we have repaired pipelines damaged in the last year floods, although force majeure in the swamp area remains in place. With fourth quarter disruption now largely resolved and assuming no further shut-ins, we confirm full year production guidance. Growth will be driven by our expected startups and ramp-ups, which are broadly on track.
We have continued to consolidate our long-term growth prospects. Exploration discoveries amounted to around 600 million BOE of resources, and we have secured promising new opportunities, including our shale gas block in China. In Gas & Power, first quarter result reflected the deteriorating competitive environment. In Italy, demand has continued to fall by 5% in the quarter, driving up prices lower than those in Northern Europe. Our supply costs do not yet include the expected benefits of the negotiations. We are performing well in resilient segments such as LNG, retail, and new structure products, and supply side negotiation are progressing constructively. We continue to expect to close a significant part of them in 2013.
We confirm our previous guidance of full year EBIT in line with the underlying 2012, which, as you may recall, was not a positive number. The downstream businesses have shown improved result from a combination of cost efficiencies, margin enhancement initiatives, and slightly better benchmark margins, although demand for refined products and chemicals remains weak. Now, on to our results. In the first quarter of 2013, the market environment was mixed. The average Brent price was $112.60 per barrel, slightly up versus last quarter, but down 5% year-on-year. Refining margins remained volatile. The Brent-Urals spread rebounded to $4.3 per barrel, over 50% higher than last quarter and 32% higher year-on-year, but still below breakeven levels. The euro appreciated versus U.S. dollar and was at 1.32 for Q1.
In the first quarter of 2013, Eni reported adjusted operating profit of €3.79 billion, down 36% compared to Q1 2012, excluding Snam's contribution in a like-for-like comparison. The decline was mainly due to E&P, which delivered lower production volumes in a weaker pricing environment. In Gas & Power, where year-on-year comparison was affected by falling sale prices and one-off gain recorded in the first quarter 2012. Adjusted net profit on the first quarter 2013 amounted to €1.43 billion, down by 39%, excluding Snam contribution, driven by a weaker operating performance and the expected increase in the consolidated tax rate up to 5% respect to the previous period, mainly reflecting the higher contribution in E&P to group results. Turning to E&P, in the first quarter of 2013, Eni's liquid and gas production was down by 4.9% year-on-year to 1.6 million BOE per day.
As well as the temporary disruption in Libya and Nigeria, their year-on-year comparison is affected by the shutdown at the Elgin-Franklin field in U.K., which restarted in March 2013, the impact on the Karachaganak and gas disposals, and unplanned facility downtime. These decreases were partially offset by continuing production startups and ramp-ups, particularly in Russia, Egypt, and Angola. In Q1, we also saw the startups of field in Algeria and Venezuela, providing a small contribution in the quarter, but paving the way for future ramp-ups. As well as lower production volumes, E&P operating profit was affected by lower average realizations, down by 7.7% in dollar terms. Unit operation costs were higher, also reflecting the temporary shortfall in volumes, leading to an adjusted operating profit of EUR 4 billion for the quarter. Now, Gas & Power.
In the first quarter of 2013, despite the contraction in European demand, Eni's gas sale of 29.5 billion cubic meter were in line with the first quarter of 2012, excluding the impact of gas disposal. Sales volumes in Italian market amounted to 12.5 billion cubic meter, an increase of 3% for the same quarter a year ago. Higher volumes sold to wholesalers and at the hub, more than compensated lower consumption by industrial and retail clients, hit by the economic downturn. Sales in Europe fell by 7%, net of the disposal of Galp, while sale outside Europe were strong, driven by LNG in the Far East. In the context of broadly stable volumes, marketing results declined significantly owing to the increased competitive pressure and the retroactive portion of the Gazprom renegotiation included in the first quarter 2012.
Turning now to international transport, operating profit was down by 15%, reflecting lower transported volumes. Overall, Gas & Power reported an operating loss of EUR 148 million compared to a profit of around EUR 1 billion in the first quarter of 2012. As you may recall, a number of our Gas & Power activities are not consolidated in the EBIT. Income from this associate in the first quarter amount to EUR 30 million compared to around EUR 100 million in the first quarter of 2012. This reduction reflects reduced Unión Fenosa Gas profitability owing to the shortage of feed gas for the Damietta LNG plant in Egypt and the impact of Galp disposal. In the first quarter of 2013, the Refining & Marketing business reported an adjusted operating loss of EUR 152 million, an improvement of EUR 72 million on the first quarter of 2012.
In refining, throughputs continue to be low, driven by the partial temporary closure of the Gela refinery as part of our strategy to contain overcapacity. Improved results reflected a recovery in refining margin in the Mediterranean area and continuing progress on our efficiency targets. With regard to marketing, volumes were impacted by continuing decline in oil products demand, -6% versus the first quarter of 2012. In this context, results benefited from an increased focus on margins in our retail and wholesale segments. Versalis reduced its adjusted operating losses to EUR 63 million in the first quarter, a significant improvement from the EUR 169 million it lost in the same quarter last year, thanks to higher cracking margins and early benefits from the restructuring plan. The Engineering & Construction segment reported a lower adjusted operating profit, which was down by 46% to EUR 204 million.
Other activities and corporate results were broadly in line with those of the first quarter of last year, with an aggregate loss of EUR 137 million. Net cash generated by the operating activities amounted to EUR 2.8 billion. It was impacted by working capital movements for EUR 500 million, reflecting increased commercial credits, particularly in Saipem and Gas & Power. This is partially a seasonal effect, driven by the Gas & Power retail segment. That said, we confirm guidance for working capital to only begin to release cash from 2014. Capital expenditure amounting to EUR 3.12 billion, mainly related to the continuing development of oil and gas reserves and exploration projects. The group also incurred expenditure of EUR 0.11 billion to finance joint venture projects and equity investees. Net financial debt as 31st of March 2013 was slightly up of EUR 0.5 billion from December 31st 2012.
Our leverage decreased from 0.25 to 0.24 due to an increased group total equity. Thank you for your attention. Now I am pleased together with Claudio Descalzi and Marco Alverà to answer any question you may have.
Operator, we will be pleased to take questions now.
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Great. Our apologies for the difficult start. Please, let's proceed to Q&A.
Yes, sir. Ladies and gentlemen, I'd like to remind you that the Q&A session is now open. To register for your question, please press star followed by one. To cancel the reservation, press star followed by two. Thank you very much. The question comes from Mr. Jothilingam from Nomura. Mr. Jothilingam, please.
Yeah. Hi, good afternoon. Thank you for taking the questions. Three areas, please. Firstly, coming back to the refining and marketing result. Relative to the margins you show sequentially, seemed as underlying profitability sort of fell. I was wondering if you could make any comments around that, and perhaps give an outlook for the performance of R&M for 2013, if margins are to remain unchanged from Q1 levels. Secondly, in terms of project startups, I think you referred to Angola, but you didn't really talk about Kashagan. There have been some reports, perhaps of possible delays there. If you could talk about that would be great. Where we are in the commissioning process, what needs to be achieved. Lastly, again, a sort of question in the market is, could you talk about any update in terms of further sell downs, either in Galp or in Snam?
Thank you.
Okay. I will start answering your question about refining and marketing. As I said, the result we achieved in the first quarter 2013 has been, I would say, some way helped by the improving scenario and the effect of the restructuring process that maybe you may recall has been at length described during the strategy presentation. I am pleased to say that this restructuring plan is going ahead a little bit faster than expected. That's the reason why the result we achieved in the first quarter 2013 is showing this kind of improvement. As far as the EBIT guideline for the full year, I would say that what we expect to have for refining and marketing is something that would be EUR 120 million in terms of EBIT, that would be cash neutral or something positive in terms of EBITDA.
Maybe before handing over to Claudio, just to allow him to answer about Kashagan. As far as Galp and Snam, you probably understand that because of the sensibility of this issue, I wouldn't like to give you any further detail unless confirming our willingness to sell down these shares, maximizing the value of our shareholders.
Thank you, Massimo. Let me say a few word about our state of our project, and then I will talk to you and elaborate about Kashagan. If you remember in our strategy presentation, we presented the eight main startups for this year. All in all, our project development is on track with no major delays. Just to talk about project that started in the first quarter, I remember MLE and El Merk, and recently CAFC. The contribution of these three projects in Algeria will be about an average 35,000 barrel per day in the next three quarters. We had, in Venezuela, the startup of Junín 5 that will give a contribution of 3,000 barrel per day, but almost one year ahead of schedule.
We got recently Abu Phase 3 that started production in early April that will give a contribution of about 7,000 barrel per day in the next three quarters. Now talking about Kashagan and the status of Kashagan. The onshore facilities have been completed. One train has been handed over to production. Dynamic tests are in progress, and the facility will be ready to receive the first oil by June. The A island, which will provide the initial production to the project, has already been handed over to operations. The island critical component have been already tested, and the first offshore processing train will be pressurized with sweet gas in June. The final dynamic commissioning activity will be carried out.
We expect the facility to be completed and fully commissioned around mid-year, I mean June, and the production will start in the following weeks, when the handover will be completed. What we think on average, the contribution of Kashagan for us in equity production for 2013 will be between 10,000 and 15,000 barrel per day.
Okay. Sorry, Theepan. Just to complete your question about the result in R&M, I forgot to say that comparing the result of first quarter 2013 versus the fourth quarter 2012, the difference is due to the seasonality of the result, being the first quarter of every year typically the worst one. Having said that, I confirm that the R&M result for 2013 is expected to be better than in 2012.
Okay, perfect. Claudio, I missed the contribution from Kashagan. Did you say 10 to 15, one-five?
10 to 15, one-five.
Okay.
On average for the year.
Thank you. Thanks very much.
Next question comes from Mr. Alessandro De Micheli from Exane. Mr. De Micheli, please.
Yes, good afternoon, gentlemen. A couple of questions. You reiterate your guidance on production for growth this year, but given what we have seen in terms of the one-off on the first quarter, you need quite an impressive growth in the next three quarters. Claudio, you have highlighted the startups and so on, but maybe you can give us some more indication of what you're seeing in Nigeria, what you're seeing in the base production at the moment.
Okay. As you said, we confirm our growth. If you remember, at $90, our growth was above 3%, and at $110, we confirm a growth above 2%. Just to give you a general picture about the main contributor. First of all, I want to highlight that what we lost in the first quarter coming from existing production that had been impacted by exceptional event. Talking about Libya, you know that we had a shutdown of 10 days, and then a not easy ramp up, and we lost 30,000 barrel per day on average compared to first quarter, and about 60,000 barrel per day compared to the fourth quarter 2012. Now everything has been restored, and the production is about 260,000 barrel per day. Really to confirm our growth, we need to keep this average production in Libya.
For Nigeria, we lost 20,000 barrel per day in the first quarter. That because of three different heavy events, is bunkering, is sabotage, and flooding. Sabotage, bunkering Sorry, sabotage and flooding impacted our pipeline, our network, and the network is being restored. We recover most of this production. What remain uncertain in Nigeria is our swamp area, because as you know, we shut down all the production. It rises on average between 4,000 and 8,000 barrel per day. That is still there, but the rest has been restored. We have the ramp up. The ramp up of the field that started at the end of 2012, and the ramp up of the field is starting the first quarter will give a contribution on average of 85,000 barrel per day. That is another important contribution that we already, so the existing production plus the ramp up.
We have the new projects. The new project, we have new Angola LNG, we have Wafa infilling, and we have a series of project that we already presented to give a contribution of about 20 Sorry, I tell you exactly. Other, about 65,000 barrel per day. That's overall, plus the contingency that we had because on the growth, we had a 42,000 barrel contingency. It's clear that we use part of this contingency to compensate the first quarter production. Overall, we are absolutely in a good shape to confirm our growth.
Just to follow up, what you're saying now is you have no contingencies left, yeah?
No, we are still some contingency, but very few because we had to use our contingency in the first quarter. Our possible critical points come from Nigeria. That is, we have to be clear, is still a possible critical issue. The flooding was an exceptional event. The flooding caused most of the losses that we had. Now everything has been repaired and the production restarted. Libya, so far so good, and I think that the production in Libya is quite strong. There are the two possible country where we can have issue in the future. For the rest, I think that our growth is in line, and I repeat, we can confirm our guidance.
That's very clear. Thank you.
Next question comes from Mr. Alastair Syme from Citi. Mr. Syme, please.
Good afternoon. Can I ask two questions? One, just on the E&P side, did you see a significant underlift in the quarter? If you look at the production sold versus the volumes produced, it seemed to be quite a big difference. Secondly, can I just clarify on Egypt, you referenced the Damietta issue. Is this just an issue of not being able to push domestic gas into export volumes? Is there more to it, and how do you think that evolves?
Just to talk about the first question, I think that there is no big difference about the production and sold and the sales. It's clear that when you have to compare sales and production, you have to have a longer period because the over-underlifting is something that you can compensate on the year length. That is not absolutely a critical issue. For Damietta, we sell production, our gas production in term of E&P production to EGAS, and then EGAS has a contract with Unión Fenosa Gas to send gas to the LNG plant. What I'm saying that the gas domestic consumption is not in our hand. What we are discussing with the minister and with the EGPC is the possibility to develop some our gas for Damietta, but that is in the medium-long term.
Okay. You think in the meantime, 2013, there will be no export volumes or very limited export volumes?
I cannot exclude. That is really the relationship between Unión Fenosa Gas and EGAS. The state gas company. I cannot exclude that. I know that there are continuous talking between the two parties, and it's clear that with aim to find a solution for Damietta. That is not in our hand as an Eni G&P side.
Okay. Were there any exports in first quarter of LNG from Unión Fenosa Gas?
No.
No.
I don't think so.
Thank you very much.
Next question come from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.
Hi, good evening. Thank you for taking my questions. They were two really. The first one is, I was wondering with a lower tax this quarter than what you were hinting at the Q4, whether that means that there is possibly going to be a lower tax for the full year. The second question for Claudio is what are the key FIDs that you guys intend to take for this year?
Okay, Michele, as far as the tax rate is concerned, I confirm the guideline that we gave to you during the fourth quarter 2012, that it's been around 63%-64% for the full year. I'd like to remind that this tax rate was related to a $90 Brent scenario, knowing that a higher price with higher volumes and value produced in countries such as Italy and other country with lower tax rate will help us to reduce the tax rate and exactly what happened in the first quarter of 2013.
Okay. For FIDs, until now we got 2 FIDs. One is for the full development of Zubair field. The other is for Heidelberg, that is a field in the Gulf of Mexico. The following FIDs will be the Block 15/06 West Hub Phase 2, what we call Phase 2. That is a second and an additional FID, considering the new discoveries that we had in the last year in the Block 15/06. We already sanctioned the West Hub, now we have to sanction a Phase 2 because we have to add to the cluster other structures. We have to sanction Jangkrik Complex in Indonesia, really approved and sanctioned by the government. Now we have to pass to the technical sanction. The Block 15/06 East Hub, the 2 fields in Russia, Yaro-Yakhinskoye, and Ust-Balykskoye Phase 2.
The last one is the offshore field in Italy in Argo Cassiopea cluster by the end of the year. Those are the main FIDs.
Thank you.
Next question comes from Mr. Martijn Rats from Morgan Stanley. Mr. Rats, please.
Hi, good afternoon. To be honest, most of my questions have already been answered. There's one thing I just wanted to clarify. In a statement it says that you're confirming growth and profitability targets for 2013. Of course, there is the target of production will be higher this year than last year. Otherwise, when I think about Eni's profitability targets, they're, as far as I know, all a few years out, like 2015, 2016, 2017, and towards the end of the decade. Exactly what profitability targets for 2013 are you reconfirming?
I thought because the line was not very good. The first question is about production this year compared to last year's. That's correct?
No, no.
I cannot hear very well.
I can quickly repeat the question. There is only one. In the statement, it says that you're confirming targets-
Okay
for growth and profitability for 2013. As far as I'm aware, most of Eni's targets are all a few years out. I was wondering if you could just quickly summarize which are actually the targets for 2013 that you're confirming, besides the obvious one, that production will be higher than last year.
Martijn, it's Marco speaking. If you talk about the statement, you may be referring to the Gas and Power EBIT guidance that we are reconfirming as the same we gave when we announced the 2012 results a few months back, which was of an EBIT in line with underlying profitability that we had last year in Gas and Power. I'm not sure, though, this was the question.
Okay, that's the full extent of that comment?
Yeah.
Okay, thanks.
Next question come from Ms. Irene Himona from Eni. Ms. Himona, please.
Hi, Irene Himona from Société Générale. I had a couple of questions, please. First of all, on refining and marketing. I wonder if you can give us a sense of the performance of refining versus marketing, because I note that although the refining margin was up quite strongly, your retail sales are down quite substantially in both Italy and overseas. There's clearly demand destruction continuing in that market. Just a sense of one versus the other. My second question on the Gas & Power EBIT guidance. Are you prepared to say for 2013, given that the contracts have not as yet been renegotiated, given that we've seen the level of the loss in Q1, are you prepared to say what you would expect in the full year if the contracts are not actually fully renegotiated by year-end? Thank you.
Okay, Irene. As far as the R&M, the EBIT we achieved in the first quarter 2013, that is around EUR 150 negative, is being driven by the refining. The negative is made by refinery, and retail and wholesale are more or less at breakeven.
Okay. Thank you.
Irene, on Gas & Power Division, I think what we're prepared to say is, having confirmed the guidance, which means we're committing to an equal result as we had in 2012, excluding the one-offs. The renegotiations are all underway. It would be early to speculate on which exactly, and on what terms we expect to close. What I can say is that there's quite good traction on these discussions. As you know, all the discussions are open at this point. Based on the individual closing of these negotiations, we will have volatility in quarterly performance, as the effects are all retroactive to basically January 2013, or in some cases even October 2012. I think that's what we're prepared to say at the moment. Of course, the PSV is deteriorating, has deteriorated.
The liquid hub price in Italy is, in fact, below northern hubs. As we said previously, this is putting pressure on the commercial margins. It's also somewhat making the discussion with suppliers a little easier.
Thanks so much.
Next question comes from Mr. Nitin Sharma from JPMorgan. Mr. Sharma, please.
Hi. Afternoon. Two questions, if I may. First one on the ongoing negotiation for gas supply contracts. Could you give us some more details on the direction of these discussions? Specifically, will it be correct to assume post-completion of the present round of renegotiations, pricing of about 70%-80% of your gas supply will be hub linked? Second one, Claudio, could you please give us some more details on the next step in Area 4? Obviously, you've announced the completion of appraisal plan today. Specifically, what sort of timeline do you have for drilling of the exploration prospect in the southern part of the block? Thanks.
Thanks, Nitin. I think it's fair, as you pointed out, to assume there will be more than one round. As you may know, these contracts tend to be looking backwards, so the reference periods that we're looking at right now don't necessarily reflect the commercial outlook we have for the full year, and even worse for 2014. There will be multiple rounds of negotiation. I would stick to the targets we gave to have over the medium term, actually 100% of our supply costs linked to hub levels, which does not mean they will be hub indexed, but at the level basis, I think that's a fair assumption to make, yes.
From Mozambique, Mamba, you know that so far we have completed successfully drilling of nine wells, out of which six have been tested. The exploration phase and the appraisal phase on Mamba has been completed. Now we are already started all the study to arrive as soon as possible to the plan of development, especially for the stranded area, but also for the other area completely, entirely in the Area 4. We have still one well that we start drilling back-to-back, and we think we are going to finish by August, September in the south part of the block, targeting different kind of horizons. That will be, I think that we are going to drill these wells then for a while, we stop the exploration campaign. We have to reassess all the data for the following.
That is what is happening in the area for exploration.
Thank you.
Next question comes from Mr. Hootan Yazhari from Merrill Lynch. Mr. Yazhari, please.
Thank you. Good afternoon. Just a quick question. You addressed a little bit earlier, that you're obviously not prepared to comment on the timings of the disposal of your residual stakes in Galp and Snam. Nevertheless, I just wanted to get an indication of how urgent you see these in light of the buyback targets that you put out at the strategy day recently. Are you thinking, is the buyback moving up in importance in management's view, or is this something you're going to wait until 2014 when we see the reversal of the working capital buildups that you alluded to? Thank you.
If you remember, what we said in terms of buyback was something different. We never linked the buyback with the disposal. We said that the decision about the buyback that now is assumed, I would say after summer, will be based on the Brent price we will experience that time. Second, the degree of completion on our strategy as far as 2013, 2014 is concerned. I mean, the increase in E&P production and the status of the gas supply contract renegotiation. We never linked the buyback with the disposal of Galp-Snam. We are not in a hurry. We are just waiting the way, the better timing to realize the disposal in order to maximize the value.
Understood. Thank you.
Next questions come from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Yeah, thank you. Could we just go back to Gas & Power a minute? Are you able to give a little more color on the way that earnings fall or split between commercial and domestic within Italy so we get some idea of the damage that the PSV.
linkage and commercial is doing to earnings. Maybe also, if you're trying to be relatively smart about what you do with your gas, i.e., selling it in or out of Italy, how earnings are moving between Italian earnings in the segment and non-Italian earnings in the segment? Thanks.
Thanks, Jon. I would assume that the numbers right now reflect the regulated price, which is an official price where the PSV does not have an impact, as that is mainly oil-linked, although that will increase over time as stated by the regulator. That is for what regards the residential regulated tariffs. Regarding Italian versus Europe, I think as I say, the hubs converge, even though right now the PSV has been below the northern hubs converging, also the prices will converge. From a commercial perspective, the margins you can expect are similar or are beginning to be similar. This is for, let's say, the current sales we're making. Although in the portfolio, it's fair to say we also have historical sales that are oil-linked. This is before the PSV really became a reference point in the liquid market only last year. This was probably the case.
We are working to position ourselves in the premium segments, increasing the retail number of customers, and you saw there's a firm commitment on that. We're also increasing LNG sales, and we're also targeting more sophisticated products through the integration of our commercial operations with our trading operations. We're now able to offer the flexibility that the customers are asking, and they're beginning to be willing to pay a premium for this.
Right. Can I maybe just ask a follow-up and ask in a different way? Are your supply contracts that are originally targeted for Italy, where you have some flexibility about where you sell, were they profitable into commercial users in Northern Europe?
I would say yes, although there are transport costs associated with those contracts that you won't recover, once that gas that was destined for Italy is sold outside of Italy. The other consideration I would make is that this is only applicable for the Norwegian and for the Dutch contracts. The other contracts that are physically delivered in Italy, because there's no reverse flow capacity out of Italy, cannot be physically moved outside of Italy.
Okay, understood. Thank you.
Great. Are there any more questions from the conference call?
No more question at the moment.
I think we can wrap everything up. We're available for further questions on the investor relations number if you want. Thank you.