Good afternoon, ladies and gentlemen, and welcome to Annie'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.
Okay.
The conference is now open. Good afternoon, ladies and gentlemen, and Welcome to Ennis 2013 First Quarter Results Conference Call, hosted by Massimo Mondazzi, Chief Financial Officer. And for the duration of the call, you will be in listen only mode. However, at the end of the call, you will have the opportunity to ask questions. I'm now handing you over to Joao to begin today's conference.
Thank you.
Okay. Good afternoon, ladies and gentlemen, and welcome to our Q1 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 and 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 shuttling of Melita 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 4 quarter disruption now largely resolved and assuming no further shut ins, we confirm full year production guidance. Growth will be driven by our expected start ups and ramp ups, which are broadly on track. At the same time, we have continued to consolidate our long term growth prospects. Exploration discoveries amounted to around 600,000,000 Boe of resources and we have secured promising new opportunities including our shale gas block in China.
In Gas and Power, 1st 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. Meanwhile, our supply costs do not yet include the expected benefits of negotiations. On the positive side, we are performing well in resilient segments such as LNG, retail and new structured products and supply side negotiation are progressing constructively. We continue to expect to close a significant part of them in 2013.
On this basis, 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 results from a combination of cost efficiencies, margin enhancement initiatives and slightly better benchmark margins, although demand for refined products and chemicals remains weak. And now on to our results. In the Q1 of 2013, the market environment was mixed. The average Brent price was $112.6 per barrel, slightly up versus last quarter, but down 5% year on year.
Refining margins remain volatile. The Brent Url margin 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 Q1 of 2013, Eni reported adjusted operating profit of €3,790,000,000 down 36% compared to Q1 2012 excluding NAM's contribution in a like for like comparison. The decline was mainly due to E and P, which delivered lower production volumes in a weaker pricing environment And Gas and Power were year on year comparison was affected by falling sale prices and one off gain record 1,000,000 in the Q1 2012. Adjusted net profit on the Q1 2013 amounted to €1,430,000,000 down by 39%, excluding NAM contribution, driven by a weaker operating performance and the expected increase in the consolidated tax rate up to by 5% respect to the previous period, mainly reflecting the higher contribution in E and P to group results. Turning to E and P. In the Q1 of 2013, Ennis liquid and gas production was down by 4.9% year on year to 1,600,000 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 Carajara Mac and gas disposals and unplanned facility downtime. These decreases were partially offset by continuing production start ups and ramp ups, particularly in Russia, Egypt and Angola. And in Q1, we also saw the startups of feed 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 and P operating profit was affected by lower average realizations down by 7.7% in dollar terms. Unit operational costs were higher also reflecting the temporary shortfall in volumes, leading to an adjusted operating profit of €4,000,000,000 for the quarter.
And now Gas and Power. In the Q1 of 2013, despite the contraction in European demand, Ennis gas sale of 29,500,000,000 cubic meter were in line with the Q1 of 2012 excluding the impact of gas disposal. Sales volumes in Italian market amounted to 12,500,000,000 cubic meter, an increase of 3% for the same quarter a year ago. Higher volumes sold to wholesalers and at the app 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 sales outside Europe were stronger driven by LNG in the Far Eastern.
In the context of broadly stable volumes, marketing results declined significantly owing to the increased competitive pressure and the retroactive portion of the gas from the negotiation included in the Q3 of 2012. Turning now to International Transport. Operating profit was down by 15%, reflecting lower transported volumes. Overall, Gas and Power reported an operating loss of €148,000,000 compared to a profit of around €1,000,000,000 in the Q1 2012. As you may recall, a number of our Gas and Power activities are not consolidated in the EBIT.
Income from this associated in the Q1 amounted to €30,000,000 compared to around €100,000,000 in the Q1 of 2012. This reduction reflects reduced union of Enoza Gas profitability owing to the shortage of feed gas for the Damietta LNG plant in Egypt and the impact of gas disposal. In the Q1 of 2013, refining and marketing business reported an adjusted operating loss of €152,000,000 an improvement of €72,000,000 on the Q1 of 2012. In refining, throughputs continue to be low driven by the partial temporary closure of the JLR refinery as part of our strategy to contain overcapacity. Improved results reflected recovery in refining margin in the Matera area and continuing progress on our efficiency targets.
With regard to marketing, volumes were impacted by continuing decline in oil products demand minus 6% versus the Q1 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 €63,000,000 in the Q1, a significant improvement from the €169,000,000 it lost in the same quarters last year. Thanks to higher cracking margins and early benefits from the restructuring plan. The Engineering and Construction segment reported a lower adjusted operating profit, which was down by 46% to €204,000,000 Other activities and corporate results were broadly in line with those of the Q1 of last year with an aggregate loss of €137,000,000 Net cash generated by the operating activities amounted to €2,800,000,000 It was impacted by working capital movements for €500,000,000 reflecting increased commercial credits, particularly in Saipem and Gas and Power.
This is partially a seasonal effect driven by the Gas and Power Retail segment. That said, we confirm guidance for working capital to only begin to release cash from 2014. Capital expenditure amounted to €3,120,000,000 mainly related to the continuing development of oil and gas reserves and exploration projects. The group also incurred expenditure of 0.11 €1,000,000,000 to finance joint venture projects and equity investees. Net financial debt at 31st March 2013 was slightly up of $500,000,000 from December 31, 2012.
Our leverage decreased from $0.25 to $0.24 due to an increased group total equity. Thank you for your attention. And now I am pleased together with Sal de Descartes and Marco Bela 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 and A.
Yes, sir. Ladies and gentlemen, I'd like to remind you that the Q and A session is now open. Thank you very much. The question comes from Mr. Tipan Jotlingan from Nomura.
Mr. Jotlingan, please.
Yeah. Hi, good afternoon. Thank you for taking the questions. Three areas, please. Firstly, just come back to the refining and marketing result.
Relative to the margins you
showed sort of sequentially, it
seemed as sort of it seemed as sort of underlying profitability sort of fell. So I was wondering if you could give make any comments around that and perhaps give an outlook for the performance of R and M for 2013 if margins are to remain unchanged from Q1 levels? Secondly, in terms of project start ups, I think you referred to Angola, but you didn't really talk about cash again. There have been some reports perhaps of possible delays there. If you could talk about that, that would be great.
Where we are in the commissioning process will need to be achieved? And then lastly, again, sort of a 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. So I'll start answering your question about Refining and Marketing. As I said, the result we achieved in the Q1 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'm 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 Q1 of 2013 is showing this kind of improvement.
And as far as the EBIT guideline in the for the full year. I would say that what we expect to have for refining and marketing is something that would be minus €120,000,000 in term of EBITDA that would be cash neutral or something positive in term of EBITDA. And maybe before handing over to Claudio, just to allow him to answer about Kashagan. As far as Galpaznam, 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, maximize the value of our shareholders.
Thank you, Massimo. So let me say a few words about our state of our projects and then I will talk to you and collaborate about cash again. So if you remember in our strategy presentation, we presented 8 main start ups for this year. All in all, our project development is on track with no major delays. And just to talk about project that started in the Q1, I remember MLE and Elmerca and recently CASK.
And the contribution of these three projects in Algeria will be on about an average of 35,000 barrels per day in the next three quarters. Then we add Invenetuela the startup of Kunin5 that will give a contribution is not a contribution of 3,000 barrels per day, but almost 1 year ahead of schedule. And then we have we got recently Abu Phase 3 that started production in early April that will give a contribution of about 7,000 barrels per day in the next three quarters. Now talking about Qashagan and the status of Cashagan. So the onshore facilities have been completed.
Montren has been handover to production. Dynamic tests are in progress and the facilities will be ready to receive a first oil by June. The A Island, which will provide the initial production to the project has already been Andover to operations. The island critical component have been already tested. And the 1st offshore processing train will be pressurized with sweet gas in June.
Then the final dynamic commissioning activity will be carried out. So 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 Andover will be completed. So what we think and on average the contribution of cash again for us in the equity production for 2013 will be between 10,050,000 barrels
per day.
Okay. Sorry, Thipan. Just to complete your question about the result in NREIM. I forgot to say that comparing the result of Q1 2013 versus the Q4 2012, the difference is due to the seasonality of the result being the Q1 of every year typically the worst one. So having said that, I confirm that the R and M result for 20 13 is expected to be better than in 2012.
Okay. Perfect. Pleden, could I missed the contribution from cash. Did you 10% to 15%, 15%
10% to 15%,
15% to 15%, 15%
on average for the year.
Okay. Thank you. Thank you. Thanks very much.
Next question comes from Mr. Alessandro Demicali from Exane. Mr. Demicali, please.
Yes. Good afternoon, gentlemen. So 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 Q1, you need quite an impressive growth in the next kind of three quarters. Claudio, you have highlighted the start ups and so on.
But maybe you can give us some kind of more indication of what you're seeing in Nigeria, what you're seeing in the base production at the moment?
[SPEAKER ARAVINDA GALAPPATTHIGE:] Okay. So as you said, we confirm our growth. And if you remember at $90 our growth was above 3% and $110 we confirm a growth above 2%. So just to give you a general picture about so the main contributor. So first of all, I want to highlight that what we lost in the Q1 coming from existing production that had been impacted by exceptional events.
And talking about Libya, you know that we have a shutdown of 10 days and then a not easy ramp up and we lost 30,000 barrels per day on average compared to Q1 and more and about 60,000 barrel per day compared to the Q4 2012. Now every bin has been restored and the production is about 260,000 barrels per day. And really to confirm our growth, we need to keep this average production in Libya. For Nigeria, we lost 20,000 barrels per day in Q1 that's because of 3 different EBIT events is bunkering, is sabotage and flooding. So sabotage, bunkering sorry, sabotage and flooding affected our pipeline, our network and the network has been restored.
So 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 that arises in average between 48,000 barrels per day. That is still there, but the rest has been restored. Then 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 that started in the Q1 will give a contribution existing production plus the ramp up.
And then we So the existing production plus the ramp up. And then we have the new projects. The new project, we have new Angola LNG. We have WAFA in filling and we have a series of projects that we already presented that to give a contribution of about sorry, I'll tell you exactly other on about 65,000 barrels per day. So 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 Q1 production. So overall, we are absolutely in a good shape to confirm our growth.
So just to follow-up, what you're saying now is you have no contingencies left, yes?
No. We have still some contingency, but very few because we had to use our contingencies in the Q1. So our possible critical points come from Nigeria. That is we have to be clear still a possible critical issue. But we the flooding was an attritional event and the flooding caused most of the losses that we had.
So 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. That there are the 2 possible countries where we can have issue in the future. So 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 Saliti. Mr. Syme, please.
Yeah. Good afternoon. Can I ask two questions? One just on the E and P side. Did you see a significant under lift in the quarter if you look at the production sold versus the volumes produced?
There seems to be quite a big difference. And 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? And is there more to it?
And how do you think that evolves?
Okay. So just to talk about the first question, I think that there is no big difference about production and sold and sales. It's clear that when you have to compare sales and production you have to have a longer period because the over and under lifting is something that you can compensate on the year length. So that is not absolutely critical issue. So the neta is not we sell production, our gas production to in terms of E and P production to Egas.
And then Egas has a contract with them, Uniofinoza Gas to sell to send gas to the LNG plant. So what I'm saying that the gas domestic consumption is not in our hand. What we are discussing with the minister and with the AGPC is the possibility to develop some of our gas for the Mieta, but that is in the medium long term.
Okay. So you think in the meantime 2013 there will be no export volumes or very limited export volumes?
I cannot exclude that is really between the relationship between Reno Antinosa Gas and Egas. So and the gas and 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 the aim to find a solution for Daimlera. But that is not in our hand as a E and P side.
Okay. And then so were there any exports in Q1 of LNG from UF Gas?
No. No? No. No. Okay.
Thank you very much.
Next question comes from Mr. Michele Delavigna from Goldman Sachs. Mr. Delavigna, please.
Hi, good evening. Thank you for taking my questions. There were 2 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? And 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 4th quarter of 2012 that has been around 63%, 64 percent for the full year. I'd like to remind that this tax rate was related to a $90 Brent scenario knowing that higher price with higher volumes and value produced in countries such as Italy and other countries with lower tax rate will help us to reduce the tax rate and exactly what's happened in the Q1 of 2013.
Okay. For FIDs, until now we got 2 FIDs. One is for the full development of Dubeir field. The other is for Adelbergen that is a field in Gulf of Mexico. And the following FIDs will be the Block 1506 West hub Phase 2, what we call Phase 2.
That is a second in addition of FID. Considering the new discoveries that we had in the last year in the Block 15six, because we already sanctioned the well established. Now we have to sanction a Phase 2, because we have to add to the cluster other structures. Then we have to sanction Jan Creek Complex in Indonesia, really approved and sanctioned by the government. Now we have to pass to the technical sanction.
And the Block 1506 East Hub and then the 2 fields in Russia, Yaro Yakmulsky and Uyghurigonsky Phase 2. And the last one is the offshore field in Italy in CCD Argo Cluster that by the end of the year that are the main FIDs.
Thank you.
Next question comes from Mr. Martin Ratz from Morgan Stanley. Mr. Ratz, please.
Hi, good afternoon. I think most of my questions have already been answered, but there's one thing I just sort of just wanted to clarify. In the statement, it says that you're confirming growth and profitability targets for 20 13. And of course, the risk of target absorption will be higher this year than last year. But otherwise, when I think about E and I's profitability targets, they're as far as I know all sort of a few years out like 2015, 2016, 2017 and towards the end of the decade.
What in a second, what profitability targets for 2013 are you reconfirming?
So I thought because the line was not very good. So the first question is about production this year compared to last year. Is that correct?
No, no, no. Look, I can quickly repeat the question. There is only one. In the statement, it says that you're confirming targets for growth and profitability for 2013. But 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 are confirming besides the obvious one that production will be higher than last year?
Martin, 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 a question.
Okay. So that's the full extent of that comment? Yes. Okay. Thanks.
Next question comes from Ms. Irene Shimona from Anni. Ms. Shimona, please.
Hi. Irene Shimona from SocGen. I had a couple of questions, please. So 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.
So there's clearly demand distraction continuing in that market. So just a sense of one versus the other. My second question on the Gas and Power EBIT guidance. I mean are you prepared to say for 2013 given that the contract has 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, Arida. As far as the R and M, the EBIT we achieved in the Q1 of 2013 that is around 150 negative has been driven by the refining. So the negative is made by refinery and retail and wholesale are more or less at breakeven.
Okay.
Irina on Gas and Power, 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. So I think that's what we're prepared to say at the moment. Of course, the PSV is deteriorating has deteriorated. Now the liquid hub price in Italy is in fact below Northern hubs. And as we said previously, this is putting pressure on the commercial margins, but it's also somewhat making the discussion with suppliers a little easier.
Thanks very 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% to 80% of your gas supply will be hub linked?
And 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 time line do you have for drilling of the exploration prospect in the southern part of the block? Thanks.
Thanks, Mitian. 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 2020 for the full year and even worse for 2014. So 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.
So from Mozambique, Mamba, you know that we are so far we have completed the successful drilling of 9 wells, out of which 6 have been tested. So the exploration phase and the appraisal phase of number has been completed. Now we are already started all the study to arrive as soon as possible to the plan of development, especially before the straddle 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. And that will be I think that we are going to drill these wells and then we for a while we stop the exploration campaign.
We have to reassess all the data for the following. So that is what is happening in the area for exploration.
Thank you.
Next question comes from Mr. Houtan Yazar from Merrill Lynch. Mr. Yazar, 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 reasonably recently.
Are you thinking is the buyback moving up in importance in management's view? Or is it something you're going to wait until 2014 when we see
what we said in terms of buyback was something different. We never linked the buyback with the disposal. We said that the buyback will be the decision about the buyback that Dow is assumed I would say after summer will be based on the Brent price we will experience at that time. And second, the degree of completion on our strategy as far as 2013, 2014 is concerned. I mean, the increase in NPE production and the status of the gas supply contract renegotiation.
So we never linked the buyback with the disposal of value. Value.
Understood. Thank you.
Next questions come from Mr. John Rigby from UBS. Mr. Rigby, please.
Yes. Thank you. Can we just go back to Gas and 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 in commercial is doing to earnings? And And maybe also if you're trying to be relatively smart about what you do with your gas I.
E. Sort of 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, John. I would assume that the numbers right now reflect the regulated price, which is an official price where the PSP 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. So 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. And maybe just ask a follow-up and ask in a different way. Are your supply contracts that are originally targeted recently where you have some flexibility about where you sell, were they profitable into commercial users in Northern Europe?
I would say yes. Although you have to keep always 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.
Then I think we can wrap everything up. We're available for further questions on the Investor Relations number if you want. Thank you.