Good afternoon, ladies and gentlemen, and welcome to Eni's 2012 Third Quarter Results Conference Call, hosted by Alessandro Bernini, Chief Financial Officer. For the duration of the call, you will be in a listen only mode. However, at the end of the call, you will have 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 3rd quarter results conference call. Let's start off with the highlights. With the sale of Snam and Galp progressing, the new EI is starting to emerge. Our balance sheet at the end of Q3 is stronger benefiting from cash inflows from the disposals of 5% of Snam reported as an equity transaction and 5% of Galp and that the consolidation for a total of around €11,100,000,000 You should also be reminded that this figure doesn't include the €3,500,000,000 consideration from the completion of the sale of 30% of Snam to CDP and further debt consolidation from Snam in the region of €1,000,000,000 Our business is increasingly focused on an E and P division, which in the 3rd quarter continued to show strong performances driven by the ramp up of Libyan production and exceptional exploration success. Looking at the Gas and Power, Refining and Marketing and Chemicals, we are making good progress on our plans to tackle challenging market conditions.
In Gas and Power, we are working on the renegotiation of our supply costs and have opened negotiations with counterparties including Statoil and Gastera. On the commercial front, we continue to grow in our target markets with the sales in France, Germany and Austria up by 43% year on year and to focus on higher margin segments such as retail and international LNG. In refining and marketing, while benefiting from the current spike in refining margins, we continue to work on reducing overall capacity, having an agreement to reconvert our Danish plant into a green refinery and on cost cutting, which we expect to total almost €100,000,000 by year end 2012. Lastly, we are working to improve our chemical footprint in the context of a very weak market. In particular, in the quarter, we have signed joint ventures agreements leveraging on our elastomer expertise to grow our presence in the favorable Asia market.
And now I will take you through our Q3 results in more detail. In the Q3 of 2012, the market environment was broadly positive. The Brent price averaged $109.6 a barrel in the quarter, up 1% versus last quarter and down over 3% year on year. The appreciation of the dollar versus the euro continued also in this quarter, up over 2% versus last quarter and over 11% compared to 1 year ago. The European refining scenario was also supported with an average Brent Urals margin of 7.30 $5 a barrel, almost a 3 fold increase from the Q3 of 2011.
Turning now to our results. You should remember that following the divestment of Snam, the regulated businesses in Italy have been deconsolidated from Gas and Power results and represented as discontinued operations in accordance with the applicable reporting standards. Consequently, margins generated by transaction between SNAP and any group companies are considered as a part of the EBIT adjusted and net income adjusted from continuing operations. Whilst margins generated by transaction between Snam and third parties have been classified as discontinuing operation. The same reporting standard has been applied also to Q3 twenty twenty level results in order to facilitate the year on year comparison.
In the Q3 of 2012, adjusted operating profit from continuing operation was €4,360,000,000 up 2.2% from the Q3 2011. The result reflected a better operating performance reported by the Exploration and Production division, up 10.8% due to an ongoing production recovery in Libya. The refining and marketing division improved its results supported by a positive trading environment and efficiency and optimization gains. These increases were partially offset by a larger operating loss incurred in Gas and Power, down by 50 5%. In the Q3 of 2012, adjusted net profit from continuing operation was €1,780,000,000 increasing by 3.1% from the corresponding period of the previous year.
In the Q3 was calculated assuming a new conversion rate of gas to barrels equivalent, which added 9,000 of barrel of oil equivalent per day to Q3 production. On a comparable basis, I. E. When excluding the effect of the new gas conversion rate, production increased by 16% in the quarter. The performance was driven by an ongoing recovery in lithium production as well as the startup and ramp up of new fields in Australia and Russia.
These positives were partially offset by the shutdown of Elgin Franklin field in the UK and the impact of unexpected production of standstill in particular in the Gulf of Mexico due to hurricanes in addition to mature field declines. In the Q3 of 2012, the exploration and production division reported an adjusted operating profit of €4,300,000,000 representing an increase of €422,000,000 from the Q3 of 2011, up by 10.8%. Turning now to Gas and Power. Despite sluggish gas demand and rising competitive pressure, sales of natural gas from the Q3 of 2012 were 18.8 Bcm, an increase of 8.7% from the Q3 of 2011. A better performance was due to increased volumes sold in European and international markets.
This was partially offset by lower sales on the Italian market, in particular in the power generation segment. Despite the increase in volumes, adjusted operating losses in the marketing segment increased by 18% to €354,000,000 owing to deteriorating competitive environment, partially offset by the cost benefits of supply renegotiation and the increase in Libyan volumes. This number doesn't include the negative effects of price revisions with certain long term gas suppliers pertaining to previous reporting periods as these have been presented as special items. It does however reflect temporarily inflated supply costs for these contracts, an issue which we have which we are already addressing through further renegotiations. Gas and power results also reflect a sharply lower contribution from international transport, down from €104,000,000 to €50,000,000 due to the divestment of the company's interest in temp and transit gas executed at the end of 2011.
Let's now take a look at Gas and Power adjusted pro form a EBITDA. Compared to EBIT, this metric shows a deterioration versus Q3, twenty eleven, mainly caused by the lower contribution from associates. You should note that the marketing segment is impacted by the reclassification of Galp in assets available for sale, while international transport results reflected the divestment of the company's interest in Tug as well as those intent in transit gas. In the Q3 of 2012, the refining and marketing division reported improved operating results amounted to €51,000,000 up by €49,000,000 from the year 9 earlier quarter. This increase reflected the recovery in refining margins and gains achieved on efficiency and optimization measures.
These positives were partially offset by shrinking price differentials between light and heavy crudes that impacted the profitability at complex refineries and the lower demand of products due to the current economic downturn. Lower product demand also impacted the result in the marketing business, where we reacted to the difficult scenario with an high profile promotion during summer weekends. In the quarter, the Chemical division reported an adjusted operating loss of €173,000,000 increasing by €96,000,000 from the 3 year period. The escalating cost of oil based feedstock oil against a backdrop of weak product demand led to a negative benchmark margin of cracking. Saipem reported a solid operating performance up by 15.9% in the 3rd quarter to €386,000,000 Other activities in corporate showed an aggregate loss of 106,000,000 versus €146,000,000 in the previous year.
Net cash generated by operating activities was €1,900,000,000 in the quarter. Cash outflows in the quarter include dividend payments of €2,000,000,000 which reflected the payment of the interim 2012 dividend. Capital expenditure amounted to €3,200,000,000 and mainly relates to the continuing development of oil and gas reserves and the upgrading of the cycle offshore vessels and the drilling units. Disposals of assets mainly regarded a divestment of a 5% interest in Galp for an amount close to €590,000,000 the sale of 5% of Znam for €612,000,000 and other minor non strategic assets. The change in net debt was impacted by other items including the refinancing of the intercompany loan by Snam for around €9,900,000,000 in the quarter.
As a result, net financial debt at 30 September 2012 was down by €7,300,000,000 from June 30, 2012. Thank you for your attention. And now with the Claudio Descalce and on Claudio to Virginie, we are ready to answer
from Nomura International. Mr. Jotlingham, please.
Thank you. Good afternoon. A few questions, please. Alessandro, you talked about in the press release a debt equity ratio in line with other majors. I was just wondering if you could provide a little bit more color what the appropriate level you think for ENI is given your credit rating.
Secondly, just in that context, I was wondering where you thought your debt equity ratio would be at the end of this year? And then moving on to gas marketing, clearly still very difficult markets. Could you just talk about your thoughts of on if or how and when you may go about potentially renegotiating contracts over the next 12 months? Thank you.
I will answer to the first two questions you have raised and then I pass to my friend Humberto Vergina for the appropriate answer to the question relating to gas business. So as far as what we deem appropriate in terms of leverage after having disposed Snam and when we will have realized the disposal of the residual stake, we believe that inappropriate debt to equity ratio could be in the range between 20% 25%, which more or less is almost the average of debt to equity ratio of most of the companies in our peers group. So this is what we deem appropriate, but for sure we have the possibility to achieve a better ratio. Thanks also to the disposal of the other investment that we have to realize, I'm referring to Galp in particular. Then as you know, as you have realized from our Q3 report, we have a debt to equity ratio of 0.32 by the end of September and thanks to the monetization of the 30% stake that we have sold to CDP, it as well as some other minor disposals in the last part of the year, but predominantly because of the strong cash flow generated by the recurring operation, which we expected to achieve in the last part of the year, we expect that the debt to equity ratio will be much lower compared to the level existing by the end of September.
Okay. If, how and when we are going to renegotiate? Kenny is currently involved in several discussions with this supplier in order to guarantee constantly that the cost of gas is competitive. In 2012, this will relate to a significant portion of our portfolio and it is equivalent to 30% in volume. And we expect that some of these renegotiation will be closed by the end of the year.
In 2013, our contract will allow us to renegotiate another 40% of our portfolio.
Right. And just coming back then, if gearing does go below those levels, your preference would be to use the buyback to return cash to shareholders rather than any further rebasing of the dividend. Is that right?
Buyback is one of the element, which the Board has already proposed to the shareholders meeting. But as far as the buyback policy is concerned, this will be more will be announced in more detail when we will present our next 4 year plan at the next strategy presentation in early March 2013.
Okay. Thank you very much.
Next question comes from Mr. Ian Reid from Jefferies. Mr. Reid, please.
Hi, morning sorry afternoon, gentlemen. Can I ask another question about the marketing supply contracts? I think Mr. Scarone was talking a few weeks ago, perhaps a more radical solution to the gas supply contracts, potentially assigning them to some other company or maybe even the government itself. Is this something which you are discussing internally and perhaps with the government?
The statement of Mr. Scarone that was made in front of the Toronto Parliament reflected the need of recognizing the value of the security of supply. And therefore, the cost associated with this value, particularly at the time when the marketing is moving very rapidly.
Okay. And just one other point on this. Given your expectation for the renegotiations that are currently taking place, what's your view on the recovery of the business into profit going into 2013? Do you think that's reasonable given your expectation of where prices might end up?
This year we are extremely busy on the activity of renegotiation And the ability to bring back the supply cost to the market price is the key to achieve this result. Of course, as you can understand that this is a game played by 2 players, that are us and the supplier. So our intention is to use all the contractual means to achieve this result.
And if you achieve that, you'll be back in profit in marketing sometime in 2013. Is that what you're
saying? You see our guidance is to improve in operating profit compared to 2011. And this, of course, comes a lot on the result under negotiation of Gazprom. The same achievement with the renegotiation linked to our 2017 results.
Okay. Thanks very much.
Next question comes from Mr. John Rigby from UBS. Mr. Rigby, please.
Yeah. Thank you. Just a couple of questions actually. One is just to go back, sorry, to label the point on these gas contracts. Isn't the issue that you have structural is that you're selling on a part an indexation partly to spot and you're buying on an indexation to oil.
So ultimately, wouldn't the best solution and is this the way you're going be to rebase everything so that you're buying and selling on the same basis and remove that basis risk. Is that sort of ultimately where you would like to go on this? And then we'll need to remove this kind of volatility. And I guess following up on Ian's question is, are we to understand that at some point or other there will be adjustments made in terms of catch up that will restore on average the level of profitability for the Gas and Power business, although it will be lumpy. So let's say 2013 late 2013 or 2014, some sort of catch up that will make the average for 2012, 2013 something more recognizable for us to look at.
The second question is just on CapEx. I think Mr. Scalsi said at the E and P seminar recently that his expectation was that there will be a sort of slowly rising CapEx figure, but nothing outstanding sort of based on this year's but rising a little. How should we understand this as you see it right now, the CapEx burden for the rest of the business? Is that I guess with the removal of Snam optically it will be lower.
But what are we seeing around the rest of the business? And is there more CapEx to come in the downstream businesses, refining and marketing, petchem, try and realize some of the benefits you talk about to finally bring these businesses back to profit?
Thanks. Okay. On the gas contract, you are right. We have 2 ways to achieve a market reflectivity in our contract. 1 is to introduce more element that link directly the price to the spot market prices.
The other one is to work on the formula oil link and need a P0 that qualifies the fixed element of the formula. Depending on the type of concept and the structure of the concept, we are applying either one or the other strategy or both at the same time.
Well, as far as CapEx, the question relating to CapEx, of course, we can provide the guidance as we have we already did in our press release with reference to 2012, John. As far as 2013 is concerned, now we are preparing our new estimates for both 2013 and subsequent year. So I believe that it is too early to provide a specific guidance on what we are targeting for next year. But however, since cost of the spending relates to the upstream, we can already anticipate that we don't see any specific reason why the number the amount of the spending for next year should be significantly different compared to what we are forecasting for 2012. As far as any particular transaction, the sale transaction affecting other businesses, presently we are not targeting any major transaction in this respect.
Right. Can I just follow-up on I tried to hint at it, but on if I take a quick glance back through my model, I might be wrong, but it looks to me that the petrochemicals earnings were just about the worst quarterly earnings figure you've recorded in that business and yet there is an ongoing restructuring? I mean, when should we expect to see taking into account obviously the prevailing market, but when should we expect to see something that we as outsiders can judge as being progressed towards at least starting to stem some of these losses?
You are right. We have already announced at our strategy presentation. But more specifically, all over the last few months with a specific press release, it is I believe that what we have already announced confirm the intention of any to perform a complete downturn in our petrochemical business. For sure, these moves can be divided into 2 big groups. 1 which depends which affect predominantly the cost optimization and the other one readdressing the business into the production on those products which are capable to provide a higher return compared to what we are producing so far.
And as well as expanding the activity outside the Italian territory and this has been confirmed through the signature of joint venture in particular with other operators in the Far East market. The effect of those actions partially have been already realized and I am referring to those action which has already delivered some reduction, some cost reduction and efficiency. Unfortunately, these positive effects have been destroyed by the negative market environment. But the most significant effect are expected not starting probably something in 2013, but more significantly from 2014 onwards, because from 2014 onwards some of the initiatives, which are presently under realization. I am referring to, for example, to the new biochemical plans we are realizing in Sardinia, these will be capable to provide a significant return only as from 2014 onwards.
So still let me say 1 year of sufferance, but after that we expect a significant downturn in the earning generation.
Thank you, Sandra.
Next question comes from Mr. Nitin Sharma from JPMorgan. Mr. Sharma, please.
Afternoon, gentlemen. Two questions, if I may. First one on upstream. Could you please explain the decline in liquid realizations in this quarter despite the increase in benchmarks? So why is it going the other way?
And second one, you mentioned likely divestment of Galp stake by end 2013. Could you provide some more details on your plans? And is offloading the stake in the market an option? Thank you.
So first upstream, the lower realization in Q3 versus Q2 are mainly due to 2 effects. 1, the weakness of some condensate prices and crude with high naphtha content and so mainly caused by low demand in the petchem. And secondly, some light sweet Mediterranean crudes. So as far as any in particularly, we have lower realization lower realization price in Libya with duetina condensate in NC 41 in Egypt, in Abu Madi and in Q4. So that are the main reason of the lower realization for our
crude. Well, with respect to Gulf, you have mentioned, you have remembered that in one of our previous statement, we have committed ourselves based on your statement that we will sell our residual stake in Galp within the end of 2013. Well, it is for sure we are committed to monetize our stake in Galp as soon as possible. But only to the extent we will be in a position to realize a consideration which satisfy our minimum expectation. And this depends of course on the market value of Galp shares.
But let me emphasize one issue. Since today, our financial situation has been improved dramatically as a consequence of the disposal of ZAM shares and thanks to the reimbursement of the loans that we have previously granted to Snam, now we are not in a hurry to monetize nor Snam stake and Galp as well. And only to the extent, I repeat, it will be possible to realize a consideration capable to satisfy at least our minimum expectation, then we will proceed. Otherwise, since the investment is granting a quite remarkable return, we will keep it. However, just to give you an update, we have received quite recently a lot of interest from many financial institutions, so potential financial investors And a market transaction based on this demonstration of interest and market transaction could be easily realized very soon.
But since the benchmark is the prevailing market price, Today, this doesn't satisfy our minimum expectation.
Thank you. Next question comes from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.
Hi. Thank you for the presentation. I had two quick questions. For the first one, sorry to go back to Gas and Power, but what we've seen in the last couple of months is strengthening in the spot gas prices in Northern Europe. And I was wondering if that would help the business reducing the spread to the cost on your long term contracts or if to see a recovery in marketing you really need to see a recovery in European and in particular in Italian demand?
And then the second question was on E and P. You clearly had high margins volume upstream this quarter, the Gulf of Mexico also egging Franklin. I was wondering how quickly you thought you could resume these volumes? Thank you.
On the Gas and Power, the increase in spot in the Northern Europe is one of the phenomenon that as we said before, we will try to reflect in our contract negotiations, particularly in those that are directly supplying us in Northern New York. The issue of the demand that is a criticality of these times is valid both in Europe and in Italy. The impact of the lower demand, of course, has a peculiar impact on the creation of spread between the long term contract and the market prices.
Okay. So talking about Elgin Franklin, as you know the operation has been successful. The well G4 has been killed and now completely under control. And in the I think in November the same thing also on other well G5. So I think that our expectation is to resume production on this field in the Q1.
But you know that we are not the operator and we are all in contact with Total that is running All the operation is also the interface with the authority in the U. K. That is our expectation.
And for the Gulf of Mexico field?
No. For the Gulf of Mexico field, I think that we are practically completely at 5%. And by the end of the year, we can reach 100% of but we resume completely our production.
Thank you.
Next question comes from Mr. Houtan Yazari from Bank of America Merrill Lynch. Mr. Yazari, please.
Hi there, gentlemen. Just a couple of questions. Let's start with cash again. Maybe a quick update in terms of whether where you are there? How comfortable you are about a March startup as you recently guided?
And how much cash contribution we can expect from this in 2013? And then also just to go back to the petchem's business, I mean, you have some pretty ambitious plans there in terms of cutting costs and the like. However, if we start to look towards the United States, the increase in petrochemicals capacity and the ability to export there with an innate cost advantage on the natural gas side. That has to be a threat in the longer term. How do you feel about this?
And at what stage would you consider shutting down your petrochemical operations? Or is that just unfeasible given political pressures? Thank you.
Thank you. Cash again, there is no major news expected what I presented just 10 days ago during the upstream seminar. I can say that we continue the mechanical completion is going ahead and we focus to finish completely all the mechanical completion of the first time by the year end. And so and the commissioning as well is continuing and all the weekly progress is in line with the budget. So we are still confident that we can reach this target of end of March.
And absolutely, we are sure that we can reach the target the contract orig target that is by production by the end of June. So far so good in terms of respecting our budget targets.
With reference to your question relating to the petrochemical business, Since there is with us Daniela Ferrari, the Managing Director of Versalis, He will provide you with the detailed answer to your question.
Yes, Mr. Iazzari. Let me come back to the petrochemical description of the strategy that Alessandro did before. What we are trying to do is do do is essentially to deemphasize our business on the olefin polyolefin side and try to maximize the output of our cracker more on the heavier fraction of call it co products, are the most valuable for us and which are the one that will not be available when you crack gas molecule like the United States market. So we do realize that the shale scale in United States is going to create a lot of capacity, but it's generating capacity on products that we are not going to compete with because we couldn't do it.
So we just target our strategy towards reducing our exposure on the products we cannot compete like polyethylene coming from Middle East or United States in the future and maximize the revenue that will come from international expansion, new products, biorefinery system that we use to convert ordinary shifting petrochemicals unit and elastomers and styrenics, which are the products we feel more strongly about and which are the products we have based our technology for the joint venture that Alessandro was mentioning before. I hope I answered the speed of your question.
Yes. Thank you very much. Next question comes from Mr. Oswald Clint from Sanford Bernstein. Mr.
Clint, please.
Yes. Thank you very much. Can I ask just on the Gas and Power business? Is there a limit in terms of how far you can push gas something like Gazprom on the long term contracts versus your ambitions to be ever present in the Russian upstream and part of projects like South Stream, etcetera? Or is it 2 separate divisions separately having these discussions?
And then the second question just on Iraq. If you could just let us know what the volumes were in the Q3? And also if you have, have you started recovering some of the early CapEx from that development? Thank you.
Well, we treat the matter of the renegotiation independently from other business. With Gazprom, we don't have upstream activity anyway. Of course, the general partnership is always behind the company relationship. But on the commercial side, the matters are very separate.
So for Iraq with respect to last year, Iraq is doing quite well because with respect to 2018. We add about say 11,000, 12,000 barrels per day. So the budget for Iraq this year is of about 18,000 barrels per day. And the project the rehabilitation project is progressing. Now we are producing about 260,000 barrels per day.
And we hope that in 350,000 barrels per day in line with our $350,000 per day in line with our budget.
Okay. Thank you.
Next question comes from Ms. Irene Himona from Societe Generale. Ms. Himona, please.
Yes. Good afternoon. I had 3 short questions. So first of all, Libya, if you can please update us on what we should expect for full year production from Libya? And then secondly, the tax rate in Q3 was below expectations.
Again, if you can remind us of your guidance for the full year on tax. And also on depreciation, I note the 9 month depreciation charge was up about 22%. Is that the right sort of level for the full year? Thank you.
So first to Libya. This quarter we have a wood production of about 250,000 barrels per day a little bit more. We think that we can confirm our outlook for the 2012 or 240,000 barrels per day because we pushed to the AR and some maintenance program. So that is the update on Libya. And we are as I already said a few days ago, we are working on NSE in a very positive and constructive way on 6 big projects.
And 6 big projects that are related mainly to gas and condensate some oil that we hope that we can perform in the next 4 year plan. Core tax rate.
Tax rate, you are right. Haimo, our tax rate in the 4th quarter was tax rate adjusted was 54% significantly lower compared either to the 2nd quarter or to the corresponding quarter of last year. The main reason why the tax rate was so low in the Q3, the most important reason are predominantly 2. The first relates to the income from associates, the amount of which the amount of dividends distributed by associate in the Q3 was significantly higher compared to both the Q3 of last year and the Q2. And you know that dividends are under the participation exemption rules.
So they are almost without any taxation effect. And then in the Q3, there was also a contribution of the fair value evaluation of some currency derivatives, which by the way supported also the lower financial charge in the Q3, which are taxed normally at a lower tax rate. And these are the two most important reason why the tax rate in the 3rd quarter was significantly lower compared to the normal adjusted tax rate. As far as what we expect for the full year, I believe that is useful to remember that the tax rate can fluctuate over the quarter because of some, let me say, extraordinary, I would say, effect like the dividends which I had mentioned before. But for the full year, our guidance remains in the region of 60% as we already announced previously.
Since there will be and this 60% will be a little bit higher compared to 20 level since of course we expect a higher contribution from the earnings generating in Libya where the tax rate, local tax rate is significantly higher than the average tax rate of the in particular of the upstream business.
Thank you.
Excuse me, depreciation. As far as depreciation, depreciation is concerned, yes, you're right. We have already accounted for a quite important increase both in the Q3 compared to last year and in the 9 month period. And this, of course, relates to the startup of new projects, project which has been realized in the recent years, which carry normally in the higher depreciation compared to the previous project. So it is it was expected.
It was in line absolutely in line with our expectation and what we have registered so far is expected to be almost in line also for the rest of the year.
Okay. Thank you very much.
Next question comes from Mr. Andreas Kouri from Mediobanca. Mr. Kouri, please.
Yes, good afternoon. A question on Mozambique, if I may. I was wondering if you could provide an update on the exploration activity on the back of the latest upstream seminar when you said that you are in your plans to drill 4 additional wells, when you expect the exploration is going to be finished? Thank you.
So we just finished today the well that we are drilling on Mamba South East 2 that we tested. That is the first test that we are performing in the area has been very successful. We have not yet issued the press release, but it's really more than confirming the quality of the reservoir. And now we're going to move the rig for to drill Coral II. Coral II Coral is a reservoir entirely in the Area 4.
So that is the second well. And I think that we can there is still space to drill an additional price for the end of the year. That is the update on this.
Okay. Thank you. And if I may, are there chances to see a further increase in the 70,000,000,000 cubic feet of resources in place that you announced recently?
That is our hope. But 73 is really a big figure. So that is our hope. And now we are testing because with this at the last well we increased not with the risk other reserves always in the limit of 70 2, 73. But at the moment, our action is to really to be sure about the 73.
Now we are more or less at 65 and we are to de risk the other at 73. So we have this hope especially with the future steps. As you know, by March April, we finished the Mamba campaign in Coral and then we start a new campaign that surrounds with other prospects, new fresh prospects that I we really hope that can increase the amount of resources found until now.
Okay. Thank you.
No more questions at the moment. Next question comes from Mr. Rahim Karim from Barclays. Mr. Karim, please.
Good afternoon, gentlemen. Two questions, if I may. The first was just around the cash flow statement for the quarter. It seems to have been quite a weak cash conversion during 3Q. Just wondering if there was anything specific that you would draw to our attention perhaps around working capital and how that might evolve over the course of 4Q?
And the second question was just around take or pay liabilities, if there is any guidance that you could give around that at this stage? Thank you.
Well, you are right. In the 3rd quarter, the cash flow generated by, let's say, recurring operation was a little bit disappointing. But at the same time, we are extremely confident that this situation will be improved and my sentence is already supported on what is already happened during the month of October. In particular, the above in the Q3, I believe that it is useful to remember that the Q3 is traditionally lower in terms of cash generation, in particular because of the lower cash generated by our Gas and Power division. Since during the summer season, a portion quite important portion of the gas purchased is addressed to the gas storage in view of the new thermal season.
So we have we incur a liability. We have to pay our supplier. But in the meantime, we have no proceeds generated by the disposal. Then of course, this situation is due to change in the last quarter because traditionally the last quarter of the year is quite important in terms of sales volume and the cash flow generated by the normal sales of the Gas and Power division. Then as already announced also Saipem, which we consolidate with the integral criterion.
Saipem has already announced that has experienced quite significant increase in the working capital in the Q3. But also Saipem is expecting to reverse significantly this situation in the last quarter of the year. So all in all, the Q3 has been disappointing, but because affected by all seasonal or extraordinary elements, which are due to be reversed completely in the last part of the year. So we are confident as I already mentioned in another previous answer to another question that the last quarter will be extremely important in terms of cash flow generated by the recurring operations.
On gas, despite having reduced 2012 minuteimum contractual quantity by our renegotiation. We still expect to incur some take or pay repayments in 2012, mainly due to the significant demand reduction, particularly in Italy. These extra take or pay volume are anyway within the figure that we will be able to recover within the full life of the contract.
Just to complete, excuse me, just to come back for a while to my previous sentence. The Q3 has been also negatively affected by a payment to 1 of our supplier Gasterra as a consequence of the arbitration proceeding which has been published by the end of within the end of September. And as a consequence of this arbitration proceeding, we had to pay within the end of September the relevant amount, which was a quite remarkable amount of money.
Perfect. If I could just press you, is there a number that you could provide in terms of the take or pay liability that we can expect for the end of the year? I understand you'll be able to recoup that in future years. But just to help us model the cash flow, is there a number that you're able to give us?
Well, I will integrate the answer which has provided by Humberto. I am not so confident to provide a specific figure because it will depend a lot on the volumes of the sales that will be realized in the last quarter of the year. And you know that sales volume are also can be significantly affected by the for example, the weather conditions during the last part of the year and could be also affected by the ongoing the already ongoing renegotiation, which normally affect both prices, but also as well as the minimum quantity that we have to pay to our supplier. So I repeat, we expect to face a payment within the end of the year in terms of take or pay, but it is too early to provide a number which could be significantly modified thanks to the elements which I mentioned before.
Okay, perfect. Thank you very much.
No more questions at the moment.
Great. If there are no more questions perhaps we can bring the conference to a close. And if you have any questions at a later date, feel free to call us on the Investor Relations number. Thank you.
Ladies and gentlemen, the conference call is over. Thank you for holding