Good afternoon, ladies and gentlemen, 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 listen only mode. However, at the end of the call, you 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, welcome to our third quarter results conference call. Let's start off with the highlights. With the sale of Snam and Galp progressing, the new Eni 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 deconsolidation for a total of around EUR 11.1 billion. You should also bear in mind that this figure doesn't include the EUR 3.5 billion consideration from the completion of the sale of 30% of Snam to CDP, and further that deconsolidation from Snam in the region of EUR 1 billion. Our business is increasingly focused on an E&P division, which in the third 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 GasTerra. On the commercial front, we continue to grow in our target markets with 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 refinery and marketing, while benefiting from the current spike in refining margins, we continue to work on reducing overall capacity with an agreement to reconvert our Venice plant into a green refinery and on cost cutting, which we expect to total almost EUR 100 million 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 Asian market. Now, I will take you through our Q3 results in more detail. In the third quarter 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 one year ago. The European refining scenario was also supported with an average Brent/Urals margin of $7.35 a barrel, almost a threefold increase from the third quarter 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 Snam 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 2011 results in order to facilitate the year-on-year comparison. In the third quarter 2012, adjusted operating profit from continuing operation was EUR 4.36 billion, up 2.2% from the third quarter 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 55%. In the third quarter 2012, adjusted net profit from continuing operation was EUR 1.78 billion, increasing by 3.1% from the corresponding period of the previous year. In the third quarter 2012, Eni's reported liquid and gas production of 1,718,000 barrel of oil equivalent per day 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 Libyan production, as well as the start-up and ramp-up of new fields in Australia and Russia. These positives were partially offset by the shutdown of the Elgin-Franklin field in the U.K. and the impact of unexpected production standstills, in particular in the Gulf of Mexico due to hurricanes, in addition to mature field declines. In the third quarter of 2012, the Exploration and Production division reported an adjusted operating profit of EUR 4.3 billion, representing an increase of EUR 422 million from the third quarter 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 third quarter of 2012 were 18.8 BCM, an increase of 8.7% from the third quarter of 2011. The better performance was due to increased volume 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 EUR 354 million, owing to deteriorating competitive environment, partially offset by the cost benefits of supplier 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 are already addressing through further renegotiations. Gas and Power results also reflect a sharply lower contribution from international transport, down from EUR 104 million to EUR 50 million due to the divestment of the company's interest in TENP and Transitgas executed at the end of 2011.
Let's now take a look at gas and power-adjusted pro forma EBITDA. Compared to EBIT, this metric shows a deterioration versus Q3 2011, 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 reflect the divestment of the company's interest in TAG, as well as those in TENP and Transitgas. In the third quarter of 2012, the refining and marketing division reported improved operating results amounting to EUR 51 million, up by EUR 49 million from the earlier quarter. This increase reflected a 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 lower demand of products due to the current economic downturn.
Lower product demand also impacted result in the marketing business, where we reacted to the difficult scenario with a high-profile promotion during summer weekends. In the quarter, the chemical division reported an adjusted operating loss of EUR 173 million, increasing by EUR 96 million from the. The escalating cost of oil-based feedstock, 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 third quarter to EUR 386 million. Other activities and corporate showed an aggregate loss of EUR 106 million versus EUR 146 million in the previous year. Net cash generated by operating activities was EUR 1.9 billion in the quarter. Cash outflows in the quarter include dividend payments of EUR 2 billion, which reflect the payment of the interim 2012 dividend.
Capital expenditure amounted to EUR 3.2 billion and mainly relates to the continuing development of oil and gas reserves and the upgrading of the Saipem offshore vessels and drilling units. Disposals of assets mainly regard the divestment of a 5% interest in Galp for an amount close to EUR 590 million, the sale of 5% of Snam for EUR 612 million, 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 EUR 9.9 billion in the quarter. As a result, net financial debt at 30 September 2012 was down by EUR 7.3 billion from June 30, 2012. Thank you for your attention. Now, with Claudio Descalzi and Umberto Vergine, we are ready to answer to your questions.
Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. First question comes from Mr. Theepan Jeganathan from Nomura International. Mr. Jeganathan, please.
Thank you. Good afternoon. A few questions, please. Alessandro, you talk about in the press release, the 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. Then moving on to gas marketing, clearly still very difficult markets. Could you just talk about your thoughts 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 question you have raised. Then I pass to my friend Umberto Vergine for the appropriate answer to the question relating to gas business. 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 an appropriate debt-to-equity ratio could be in the range between 20% and 25%, which more or less is the average of debt-to-equity ratio of most of the companies in our peers group. This is what we deem appropriate, 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.
As you know, as you have realized from our third quarter 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, as well as some other minor disposals in the last part of the year. Predominantly because of the strong cash flow generated by the recurring operation, which we expect 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. Eni is currently involved in several discussion with the 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. We expect that some of this 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. 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 at the shareholders' meeting. As far as the buyback policy is concerned, this will be announced in more detail when we will present our next four-year plan at the next strategy presentation in early March 2013.
Okay. Thank you very much.
Next question come from Mr. Iain Reid from Jefferies. Mr. Reid, please.
Hi. Morning. Sorry, afternoon, gentlemen. Can I ask another question about the marketing supply contracts? I think Mr. Scaroni 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. Scaroni that was made in front of the Italian 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. Just one other point on this. Given your expectation for the renegotiations which are currently taking place, what's your view on the recovery of the business into profit going into 2030? 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. The ability to bring back the supply cost to the market price is the key to achieve these results. Of course, as you can understand, this is a game played by two players, us and the supplier. Our intention is to use all the contractual means to achieve these results.
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. This, of course, comes a lot on the result on the renegotiation of Gazprom. The same achievement with the current renegotiation will impact our 2013 results.
Okay. Thanks very much.
Next question come from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Thank you. Just a couple of questions, actually. One is just to go back, sorry to labor 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. 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 in order to remove this kind of volatility?
I guess following up on Iain'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. Descalzi said at the E&P seminar recently, that his expectation was that there would 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?
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, pet chem, try and realize some of the benefits you talk about to finally bring these businesses back to profit? Thanks.
On the gas contract, you are right. We have two ways to achieve a market reflectivity in our contract. One 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, namely the P0 that qualifies the fixed element of the formula. Depending on the type of contract and the structure of the contract, we are applying either one or the other strategy or both at the same time.
Well, as far as the question relating to CapEx, of course, we can provide the guidance as we already did in our press release with reference to 2012, Jon. 2013 is concerned, now we are preparing our new estimates for both 2013 and the subsequent years. I believe that it is too early to provide a specific guidance on what we are targeting for next year. However, since most of the spending relates to the upstream, we can already anticipate that we don't see any specific reason why 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 a bit, if I take a quick glance back through my model, I might be wrong, 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. Taking into account obviously the prevailing market, when should we expect to see something that we, as outsiders, can judge as being progress towards, at least starting to stem some of these losses?
You are right. We have already announced at our strategy presentation, more specifically, all over the last few months with a specific press release, I believe that what we have already announced confirms the intention of Eni to perform a complete downturn in our petrochemical business. For sure, these moves can be divided into two big groups. One, which affect predominantly the cost optimization, and the other one, readdressing the business into the production of those products which are capable to provide a higher return compared to what we are producing so far. 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, I am referring to those action which has already delivered some cost reduction and efficiency. Unfortunately, this positive effect has been destroyed by the negative market environment. The most significant effects 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 plants we are realizing in Sardinia. This will be capable to provide a significant return only as from 2014 onwards. Still, let me say, one year of suffering, after that, we expect a significant downturn in the earning generation.
Thank you, Sandro.
Next question come 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? Why is it going the other way? Second one, you mentioned likely divestment of Galp stake by end 2013. Could you provide some more details on your plans? Is offloading the stake in the market an option? Thank you.
First, upstream. The lower realization in Q3 versus Q2 are mainly due to two effects. One, the weakness of some condensate prices and crude with high enough content. Secondly, some light sweet Mediterranean crudes. As far as Eni, in particularly, we have lower realization price in Libya with Zueitina condensate in NC 41, in Egypt, in Abu Madi and El Qar'a. That are the main reason of the lower realization for our crude.
Well, with respect to Galp, you have mentioned, you have remembered that in one of our previous statement, we have committed ourself based on your statement, that we will sell our residual stake in Galp within the end of 2013. Well, for sure, we are committed to monetize our stake in Galp as soon as possible. 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. Let me emphasize one issue. Since today, our financial situation has been improved dramatically as a consequence of the disposal of Snam 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's stake, and Galp as well.
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. A market transaction based on this demonstration of interest, a market transaction could be easily realized very soon. Since the benchmark is the prevailing market price, today, this doesn't satisfy our minimum expectation.
Thank you.
Next question come 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 & Power, 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 demands. The second question was on E&P. You clearly had high margins volume offstream this quarter, the Gulf of Mexico, also Elgin-Franklin. I was wondering how quickly you thought you could resume these volumes. Thank you.
On the Gas & 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 renegotiation, particularly in those that are directly supplying gas in Northern Europe. The issue of the demand, that is a big 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.
Talking about Elgin-Franklin, as you know, the operation has been successful. The Well G4 has been killed and now completely under control. In November, the same thing also on the other Well G5. I think that our expectation is to resume production on this field in the first quarter. You know that we are not the operator, and we are only in contact with Total, that is running all the operation, is also the interface with the authority in U.K. That is our expectation.
For the Gulf of Mexico field?
For the Gulf of Mexico field, I think that we are practically complete to about 95%, and by the end of the year, we can reach 100%, so we resume completely our production.
Thank you.
Next question come from Mr. Houtan Yazhari from Bank of America Merrill Lynch. Mr. Yazhari, please.
Hi there, gentlemen. Just a couple of questions. Let's start with Kashagan. Maybe a quick update in terms of 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. Then also, just to go back to the pet chems business. 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 petrochemical capacity and the ability to export there with an innate cost advantage on the natural gas side, that had 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? Is that just unfeasible given political pressures? Thank you.
Thank you. Kashagan, there is no major news with respect to 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 forecast to finish completely all the mechanical completion of the first train by year end.
The commissioning as well is continuing, and the weekly progress is in line with the budget. We are still confident that we can reach this target of end of March, and absolutely, we are sure that we can reach the contract read target, that is 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 Daniele Ferrari, the Managing Director of Versalis, he will provide you with the detailed answer to your question.
Yes, Mr. Yazhari. Let me come back to the petrochemical description of the strategy that Alessandro read before. What we are trying to do is especially to reemphasize our business on the olefin, polyolefin side, and try to maximize the output of our cracker more on the heavier fraction or call it co-products, which are the most valuable for us, and which are the ones that will not be available when you crack gas molecules like the United States market. We do realize that the shale gas in the United States is going to create a lot of capacity. It's generating capacity on products that we are not going to compete with because we couldn't do it. 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 future.
Maximize the revenue that will come from international expansion, new products, biorefinery system that we use to convert all the existing 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 your question.
Yes. Thank you very much.
Next question comes from Mr. Oswald Clint from Sanford C. 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, somebody 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, et cetera? Or is it two separate divisions separately having these discussions? The second question, just on Iraq, if you could just let us know what the volumes were in the third quarter, and also 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. On the commercial side, the matters are very separated.
Iraq. For Iraq, respect to last year, Iraq is doing quite well because respect to 2011, we add about 11,000, 12,000 barrel per day. The budget for Iraq this year is of about 18,000 barrel per day. The rehabilitation process is progressing. Now we are producing about 260,000 barrel per day, and we hope that in 2013, we can increase this figure at about 350,000 barrel per day, in line with our budget.
Okay. Thank you.
Next question comes from Miss Irene Himona from Societe Generale. Ms. Himona, please.
Yes, good afternoon. I had three short questions. First of all, Libya, if you can please update us on what we should expect for full year production from Libya. Secondly, the tax rate in Q3 was below expectations. Again, if you can remind us of your guidance for the full year on tax. Also on depreciation, I note the nine-month depreciation charge was up about 22%. Is that the right sort of level for the full year? Thank you.
First, Libya. This quarter, we have a good production, about 250,000 barrel per day, a little bit more. We think that we can confirm our outlook for the 2012 of 240,000 barrel per day because we push to the year end some maintenance program. That is the update on Libya. As I already said a few days ago, we are working on NOC in very positive, constructive way on six big projects. Six big project that are related mainly to gas and condensate, some oil, that we hope that we can perform in the next full year plan.
For tax rate.
Tax rate, you are right, Himona. Our tax rate in the first quarter, tax rate adjusted was 54%, significantly lower compared either to the second quarter or to the corresponding quarter of last year. The main reason why the tax rate was so low in the third quarter, the most important reason are predominantly two. The first relates to the income from associates. The amount of dividends distributed by associate in the third quarter was significantly higher compared to both the third quarter of last year and the second quarter. You know that dividends are under the participation exemption rules, so they are almost without any taxation effect.
In the third quarter, 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 third quarter, which are taxed normally at a lower tax rate. These are the two most important reason why the tax rate in the third 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 effect like the dividends, which I had mentioned before. For the full year, our guidance remains in the region of 60%, as we already announced previously.
This 60% will be a little bit higher compared to 2020 level, since of course, we expect a higher contribution from the earnings generating in Libya, where the local tax rate is significantly higher than the average tax rate, in particular of the upstream business.
Thank you.
Excuse me.
Depreciation.
As far as depreciation is concerned, yes, you're right. We have already accounted for a quite important increase, both in the third quarter compared to last year and in the nine-month period. This, of course, relates to the startup of new projects. Project which has been realized in the recent years, which carry normally a higher depreciation compared to the previous project. It was expected, it was absolutely in line with our expectation. 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. Andrea Scauri from Mediobanca. Mr. Scauri, 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 for additional wells, when you expect the exploration is going to be finished. Thank you.
We just finished today, the well that we are drilling on Mamba South East 2, 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. Now we're going to move the rig to drill Coral 2. Coral 2. Coral is the reservoir entirely in the Area 4. That is the second well, and I think that there is still space to drill an additional well for the end of the year. That is the update on this.
Okay, thank you. If I may, are there chances to see a further increase in the 73 million cubic feet of resources in place that you announced recently?
That is our hope. 73 is really a big figure. That is our hope. Now we are testing because with the last well, we increase not with the risk other reserves, always in the limit of 72, 73. At the moment, our action is to really be sure about the 73. Now we are more or less at 65, and we are to de-risk the other at 73. We have this hope, especially with the future steps. As you know, by March, April, we finish the Mamba campaign and Coral, we start a new campaign, the South
Without a prospect, new fresh prospects that we really hope can increase the amount of resources found until now.
Okay, thank you.
No more question at the moment. Ladies and gentlemen, I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. 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, seems to have been quite a weak cash conversion during the 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. The second question was just around take-or-pay liabilities, if there was any guidance that you could give around that at this stage. Thank you.
Well, you are right. The third quarter, the cash flow generated by, let me say, recurring operation was a little bit disappointing. At the same time, we are extremely confident that this situation will be improved, My sentence is already supported on what is already happened during the month of October. In particular, in the third quarter, I believe that it is useful to remember that the third quarter 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 quite important portion of the gas purchased is addressed to the gas storage in view of the new thermal season. We incur a liability, we have to pay our supplier, but in the meantime, we have no proceeds generated by the disposal.
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 & Power Division. As already announced, also Saipem, which we consolidate with the integral criterion. Saipem has already announced that it has experienced quite significant increase in the working capital in the third quarter, also Saipem is expecting to reverse significantly this situation in the last quarter of the year. All in all, the third quarter had been disappointing, because affected by all seasonal or extraordinary elements, which are due to be reversed completely in the last part of the year.
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 minimum 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 third quarter has been also negatively affected by a payment to one of our supplier, GasTerra, as a consequence of the arbitration proceeding, which has been published within the end of September. 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 been provided by Umberto. I am not so confident to provide a specific figure because it will depend a lot on the volumes of the sales that we'll be realizing the last quarter of the year. You know that sales volume also can be significantly affected by, for example, the weather conditions during the last part of the year. Could be also affected by 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. 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 question at the moment.
Great. If there are no more questions, perhaps we can bring the conference to a close. 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 calling in.