Good afternoon, ladies and gentlemen, and welcome to Annie's Third Quarter Results Conference Call hosted by Mr. Massimo Mondazzi, Chief Financial Officer. For the duration of the call, you will be on listen only mode. I will now hand you over to your host to begin today's conference. Thank you.
Good afternoon and welcome to Eni's 9 months results. Before turning to our results, I would like to highlight Eni's new mission. We are determined to contribute to the achievement of the UN Sustainable Development Goals and bring about the just energy transition. The new mission is the foundation of the company's business model, which focuses on long term inclusive development for our company and its host countries, considering all the sustainable development goals. In line with this mission, we already taken a number of commitments over the medium long term, including 0 net carbon emissions for the upstream by 2,030.
At the next strategy presentation beginning of 2020, we will provide a further update on our targets and energy transition path. And now the result. In the 1st 9 months of 2019, we continue to consolidate our strategy and enhance our cash generation. We generated €9,400,000,000 of operating cash flow, 5% growth versus 2018 notwithstanding the lower oil and gas scenario. With CapEx at €5,600,000,000 we generated underlying organic free cash flow before working capital of $3,800,000,000 which more than covers the full year dividend and buyback.
Leverage was 25% at the end of September following the closing the acquisition of 20% stake in ADNOC Refining and the payment of the interim dividend in the quarter. The 2019 share buyback continues with purchases for 2 thirds of the planned $400,000,000 target already completed. Upstream production increased to EUR 1,850,000 BOE, up 2% the same price and perimeter. Thanks to our start ups in Algeria, Egypt, Norway, the new field in Mexico and the ramp up of ZOAR. Exploration continues to create new opportunities for future developments.
During the 9 months, we discovered 650,000,000 BOE of equity resources at the exploration cost of $1.1 per barrel. In the coming months, we plan further exploration activities in Mexico, Egypt, Norway and Angola. Gas and Power performance was robust notwithstanding the lower LNG price level, thanks to gas price volatility and the growth in the retail customer base. In downstream, we posted strong marketing result, while refining has been impacted by the narrowing of crude differentials. Chemical results were impacted by weak product demand and by worsening of elastomer and styrenic margins.
On renewables, we have 150 megawatt under construction and we are targeting to have 190 megawatts of capacity by year end. Before turning to the results, I would like to highlight our key strategic achievements this year. Starting with Angola, a country which plays a key role in any strategy 5 main fields. In line with our fast in 5 main fields. In line with our fast track development approach, we are planning to put into production Agogo by year end, just 8 months from its discovery, thanks to its proximity to the existing Ndoma FPSO.
The development strategy envisages a phased approach. The early production expected oil flow rate is 20,000 BOE, about 7 in our share, with wells connected by a subsea tieback to the West hub existing subsea facilities. We are planning a second phase for early production incorporating Turning to Norway. Turning to Norway, Borr Energia with the announced acquisition of Exxon's upstream asset continues to expand its material and diversified portfolio of oil and gas producing asset, development projects and attractive exploration licenses. For Energia, we become the 2nd largest E and P company in Norway with total reserves and resources of around 1,900,000,000 BOE.
Total production is expected to be around 300,000 BOE per day at year end 2019, growing organically to more than 350,000 boe per day in 2023 as the company invest about US7 $1,000,000,000 in development projects such as Johan Castberg, Baldurix and Grande in the period of 2023. The new acquired portfolio is a strategic feat for Var Energies and will add interest in more than 20 producing fields in the North Sea and Norwegian Sea, allowing the extraction of commercial as well as logistical synergies. The breakeven of the new acquired asset is around 20 $4 per barrel and brings Var Energi overall breakeven down to around $27 per barrel. Overall OpEx per barrel benefits for around $1 from the deal and will fall to $9 per barrel. The acquired portfolio also contains 2 projects for CO2 emission reduction of around 1,100,000 ton per annum from a CCS plant in Sleipner as well as the wind farm in Norway.
Finally, the carbon intensity of the acquired production is half the AENE's existing portfolio, averaging at around 10 tons CO2 equivalent per 1,000 BOE in the next 10 years. This deal is self financed, is free cash flow accretive for Var Energi and underpins a growing dividend to Var Energi shareholders in the coming years. The deal has an effective date 1st January 2019 and is expected to be completed in the Q4 this year. In Abu Dhabi, we achieved another strategic result with the completion of the acquisition of 20% stake in ADNOC Refining. This deal increases our overall refining capacity by 35% and offers a number of advantages, a state of the art technology plant and the ambitious investment plan that will lead Ruiz to be the 2nd largest refining complex in the world.
It is located near asset producing all types of crudes along with low cost of natural gas, about 1 third of the European levels. It is efficient and flexible and able to process crudes at low cost. This will allow it to benefit from the application of the IMO regulation. It is in a geographically central position ideal for trading activities and additionally it strengthens the relationship with ADNOC along the value chain. Furthermore, the new developments are expected to be entirely self financed by the revenues of the refinery.
This asset will be equity accounted and will contribute to our cash flow, thanks to an attractive dividend distribution policy. In the Upstream Gasia concession, wherein he is currently involved as a technical leader with a participating interest of 25%, we recently took the final investment decision for the Dalma gas development that will start up in 2022 with a peak gross production of about 50,000 boe per day. And now back to the quarter results. In upstream, we recorded our highest ever production in Q3. Our growth was 6% year on year adjusted for price and portfolio.
This impressive growth was driven by startups in Egypt, Algeria, Norway and Mexico and the continued ramp up of ZOAR and projects in Libya and Ghana. Production in the 9 months reached 1,850,000 BOE plus 2%, thanks to the same effects. 9 months EBIT declined by 17%, mainly as a result of the weaker scenario, which accounted for €1,500,000,000 In particular, scenario affected the result as follows: lower oil price for around $1,200,000,000 lower gas prices mainly in Europe for a total of around $700,000,000 of which more than $500,000,000 in the 3rd quarter and positive ForEx for around 400,000,000 On a comparable basis, upstream EBIT in the 9 months grew by 7%, thanks to the increased volumes and better mix supported by the quality of new production. Moving to mid downstream. Gas and Power 9 months EBIT was robust at €511,000,000 In particular, the Midgas GLP reached €349,000,000 mainly thanks to an effective optimization of our portfolio of European gas assets, which benefited from the volatile market.
The positive gas performance has offset the lower result from LNG in the low global price scenario. Retail delivered an EBIT €162,000,000 almost 50% higher versus last year, thanks to commercial initiatives and efficiency. The refining and marketing result grew to the marketing that was the driver, sorry, the result with the contribution of €552,000,000 Whilst in refining, the narrow differential between Urals and Brent was only partially offset by the higher CERM, our margin. Finally, the Jela Bio plant is ramping up, whilst the AEST restart is now expected early next year. Versalis, the chemical business, was impacted by a depressed scenario for elastomers as styrenics that accounted for half of the 9 months losses.
As commented in the Q2, the Priolo offset accounted for the remaining losses. Coming to the consolidated financial results. Cash flow from operations before working capital at €9,400,000,000 was 5% higher than last year, driven by industrial performance improvements that accounting for 600,000,000 dollars a weaker scenario for negative €900,000,000 and remaining positive contribution coming from the IFRS 16 first application and other one off effects. This cash generation of €9,400,000,000 more than covered the 9 months CapEx of €5,600,000,000 and the 2019 shareholder remuneration including both full year dividend and €400,000,000 of buyback. Working capital that increased in the 3rd quarter in line with our assumption is expected to recover in the Q4 confirming the full year guidance for cash absorption of few €100,000,000 The group's net adjusted result was €2,300,000,000 in the 9 months.
And finally, a brief summary of our full year guidance. We confirm our production guidance in the range of 1.87000000 BOE per day and upgrade our exploration target to 700,000,000 BOE from 600,000,000 BOE previously. Following the solid result of Gas and Power so far, we are also upgrading the full year EBIT guidance by $100,000,000 to $600,000,000 In Refining and Marketing, the crude differential in 2019 has been lower than our budget expectations and determines a revision of this year pro form a EBIT guidance to €400,000,000 Cash flow from operations is growing in line with our 2019 guidance of €12,800,000,000 at budget scenario. The main difference between the budget and current scenario is the lower gas price, which will impact the full year for around minus 800,000,000 dollars In term of CapEx, we confirm that we expect to be below our initial target of 8,000,000,000 dollars And finally, leverage at 25% at the end of September is expected to return towards 20% in the coming quarters. And now I'm ready to answer any question you may have together with my colleagues.
Ladies and gentlemen, we will now begin the question and answer session. One moment for the first question please. The first question is from Mr. Alessandro Pozzi of Mediobanca.
Good morning all. The first question is on the I and M. I believe the new guidance includes a contribution from ADNOC. I was wondering if you can maybe talk about how much you have there for ADNOC. The second one, I believe the DD and A went a little bit up in Q3.
I was wondering even on a above an adjusted basis, if that is the right number to use going forward? That's all for me.
Okay. I confirm that in the guidance, we are already including the first contribution from ADNOC that is expected in the range of €50,000,000 And as far as the D and A, our D and A are in the range of $10,000,000 $11 per barrel. We expect this number remain steady in the future. On
ADNOC, the EUR 50,000,000 is mainly in Q4, I guess?
Yes, yes.
Okay. Thank you.
The next question is from Biraj Borkhataria of Royal Bank of Canada. Please go ahead.
Hi, thanks for taking my questions. I just wanted to clarify on your cash flow guidance. Did you say that as we mark to market for European gas prices, we should take €800,000,000 off the €12,800,000,000 cash flow guidance? That will be the first question. Just a bit of clarity on that.
And then on VAR Energy, could you say anything about the CapEx associated with the new assets acquired? Because I think previously you've talked about €8,000,000,000 spend over a 5 year period for the previous portfolio, but what are the new assets at? Thank you.
Okay. So I don't have the breakdown. Talking about the CapEx of our energy, I don't have the breakdown per asset. But what we expect 100 percent is an expenditure in the range of $7,000,000,000 to develop the final stage of Yancaster, Balderix and Grande. So this is the order of magnitude.
And in term of cash flow from operational guidance, yes, I said that the 12,800,000,000 was based on the budget scenario. And the current scenario is more or less in line as far as the oil, while the gas mainly the European gas, so I'm talking about the PSV and TTF as well as the NBP is much lower as you have seen from the numbers. And we expect that using the current scenario, we are going to lose €800,000,000 of euros out of the cash flow from operations. So all in all, today with the current scenario, we expect as a cash flow from operation something in the range of EUR 12,000,000,000 slightly low than EUR 12,000,000,000. Thanks.
That's same
period that you show in the slide same period that you show in the slide, I. E, out to 2023?
Yes. EUR 7,000,000,000, 2023. Got
it. Thank you.
The next question is from Irene Himona of SocGen. Please go ahead.
Thank you. Good morning, Wimal. Just first one to clarify, if you can, please. You mentioned the ADNOC contribution this year is EUR 50,000,000. Would that be the dividend you expect or share of net income as an equity affiliate?
And secondly, on Var Energies, there's some guidance you can provide on full year 2019 dividend receipts, please? Thank you.
Okay. As far as the VorEnergi dividend received in 2019, so in 2019, VorEnergi distributed 1 point $7,000,000,000 So 70% is our share. And as far as the ADNOC contribution, I said EUR 50,000,000 mainly in the 4th quarter, but due to the fact that the overall result is expected to be negative for ADNOC refinery this year because of the restart of the FCC that took place this year. Definitely, there will be no dividend that remain expected starting from 2020.
Thank you.
The next question is from Jason Gammel of Jefferies. Please go ahead.
Thanks very much. Good morning, Massimo. I also had questions on Var Energy. I believe that the Exxon transaction was fully funded with that. Please correct me if I'm wrong on that.
So can you talk a little bit about what the balance sheet leverage now looks like for VAR? Anything related to net debt to capital or the debt relative to cash from operations? And then the second question, are you able to speak to who retained the abandonment liability on the Exxon assets in that transaction? Thank you.
So in terms of liability, I would say the amount of liability is not a big number and there's not a big issue on the valuation. If I remember correctly, we expect to start to spend a material amount of money from 2,033 on. So definitely in the next 10 years, we don't have any kind of significant material expenditure in our radar screen. And the other question was about the FARC. Oh, I don't have with me the detailed balance sheet structure, but definitely I can confirm that the acquisition is fully funded by the company throughout NRBL.
So I would say more than if it could help you more than measuring the effect in term of balance sheet, definitely, it should be measured the amount of debt should be measured on the relevance of the reserves underlying the financing that definitely are enough to justify the full finance of the purchase price. But anyway, I'll let you know the composition of the balance sheet later on.
Okay.
Thank you, Massimo.
The next question is from Thomas Adolff from Credit Suisse. Please go ahead.
Good morning. I've got three questions, please. Just firstly on VAR as well. Could you perhaps comment how much VAR contributed to the bottom line in the Q3 as well as in the 1st 9 months of the year. And once the Exxon deal is completed, Perhaps since you're doubling the business, you can also comment on what sort of a dividend we can expect from VAR next year.
We did see a special dividend in 2019. Secondly, just on ZO, on a gross basis, the 2.7 Bcf per day of production you're seeing at the moment, Is that the ceiling for the domestic market? And what does it take to get you to the 3.2? Do you need to have the Damietta liquefaction facility available for exports? And then finally, just a question the green refinery in Gela, 750,000 tons of biodiesel.
Perhaps you can comment a bit on the potential profitability of this facility because 750,000 is quite substantial if we take Neste's profitability, but presumably you're not processing as much second generation feedstock as Neste. Any color on that would be great. Thank you.
Okay, Thomas. So I give you the answer to the first question and then I leave the room to my colleagues to answer the following one. So in term of contribution from more energy to our cash flow in the 3rd quarter, the answer is 0 because all the dividend you remember that we the way we consolidate such equity account. So Net income? Net income?
Net income?
To the
dividend. So the contribution in the 3rd quarter is 0 because we distributed the company distributed the full dividend in the 1st and second quarter. And the amount our share in euro we received is €540,000,000 1st quarter and the same amount in the 2nd quarter. In term of how the Exxon asset acquisition could be could help, could be accretive in the dividend distribution. In the following year, we expect that the additional contribution could be starting from 2020 in the range of EUR 100,000,000 growing up later on in line with the production growth.
And then I leave the floor to Alessandro Pulitti to maybe together with Cristo Signoretto talking about Amietta to answer the Zol question. And then I leave the floor to Richie to answer your question about the green refinery.
Okay. Good morning. So current production potential from Zohr is 2.7 Bcf per day. And by the end of the year, with the completion of the 14th 15th producer well, we will reach a potential of around EUR 3,000,000,000 standard could be fit per day in terms of potential. And at the beginning of 2020, we will then be ready to produce even EUR 3,200,000,000 standard cubic feet per day.
This is the situation regarding production capacity from the Zohr field. Then I leave the floor to Christian.
Well, on Damietta, I mean, I think we have said it many times, so we are actively engaged with all the party involved, so the government and NATURGE to get the plant up and running and solve the long standing issues on the arbitration. And to answer your question, clearly, I mean, adding Dermetta, let's say, in production would surely, let's say, reduce the risk of oversupplying the country even if, let's say, the demand is robust and the export to labor countries has restarted. But surely, Damietta will reduce that risk.
Just to complete the answer about the production. So the one that has been mentioned by Alessandro is the capacity. Up to now, we got a contribution in 100% that has been in the range of 2.3%, 2.4%. Percent. And we expect that even in the Q4, the production will remain slightly the same because of the over supply that we see today in the market.
We see a growing demand domestically speaking and we see by definition a positive effect from the Daimlera restart that we sincerely expect not so long in time. And then I leave the floor to Ricci to answer your question about Gela. Good morning. We expect
a significant contribution by the green refinery of Gela. And because mainly we are seeing an increase in the market over HVO in parallel with the increasing of the obligation due to the Red Directive European Red Directive and mainly for the Red 2 starting from 2021. And just in this week, in the European government, they are discussing for possible further improvement of the obligation of green fuels in parallel with the ambition to anticipate the decarbonization to 2,030. So we expect a good market and so the high production of JERA refinery that is 7 50 kilotons per year, the feedstock. The HVO is the yields, the 70%, 75% of the yields.
That is there is a market.
Thank you. Just can I go back to the first question on VAR, just to clarify the answer you gave? So as far as the dividend is concerned, you received €1,000,000,000 in 2019. What can we expect from Var Energi in 2020 now that the business is substantially bigger following the acquisition of Exxon's assets? Thank you.
The expectation would be to receive a dividend that should be in the range of 100%, €900,000,000 €950,000,000 So 70% of that number is the reasonable expectation in 2020. And as I said, especially because of the production increase from Johan Castel, the starting up of Balderics, we expect a growing production from 2020 to such amount of dividend later we see an increase in such amount of dividend later on. Thank you.
The next question is from Martin Ratz of Morgan Stanley. Please go ahead.
Yes, good morning. I've got 2 small ones, if I may. In the production guidance, there's a reference to Venezuela and you say that some of the uncertainty range of the production guidance is due to some uncertainty in the country. And I was wondering if you could give an update and perhaps some commentary about about what you're seeing in Venezuela and anything you can say to shine some light on what the production outlook could be there. And also in the result, there is a reference to a €330,000,000 payment, a one off payment related to the settlement of arbitration.
I was wondering what that is and also whether that number is in the cash flow statement included in the working capital changes that you mentioned? I just want to make sure that we don't correct for it twice.
Yes. The arbitration with the Pascagoul arbitration, this is a part of the working capital change. And as far as Venezuela, so we guess we said that in our production guidance, we embedded a production in the range of 40,000 BOE per day that correspond more or less to 370, 380 standard cubic feet, 1,000,000 of cubic feet per day. Today, we are running a bit lower than this. So instead of a 40, we are 36, 37.
So that's the reason why we kept the guidance unchanged. In term of so by definition, the revenue today are lower than expected, so less than the EUR 300,000,000 per year dollars sorry, per year. And in term of how much of this revenue are cashed in, in 2019, we expect to cash in more or less 25% of this number. So very much in line with the expectation we had since the budget time.
Okay. Thank you.
The final question is from Christian Malek of JPMorgan. Please go ahead, sir.
Hi, thanks for taking my questions. First of all, so 2, please, one downstream. What are the key drivers that will generate the €260,000,000 of EBIT into Q4 and to sort of meet the guidance around €400,000,000 just around IMO? I mean, how quick does ENI's business sort of adapt to the fuel specification requirements? What proportion of ENI's E and P oil production is light, low sulfur?
And I guess the question is how material could the benefit be if IMO widens the light heavy crude spreads? And the second question is around your buyback framework. Beyond the €400,000,000 commitment for 2019, how do you think about the leverage oil price thresholds? You've obviously got €400,000,000 per annum on a €60,000,000 to €65 Brent, €800,000,000 per annum above €65,000,000 But just given the volatility sub-sixty, I'd just like to understand how we should think about the sort of buyback outlook in periods if it was below 60? Thank
you. Okay. So I give you the answer about the buyback and then I leave the floor to Richie to answer your question about the expectation about the 4 quarter result in R and M. So you remember that we linked our buyback to the level of Brent as well as the leverage. So now end of September, our leverage is in the range of 25% because of the peak of the cash out.
I mentioned the 20 percent stake in other refinery payment as well as the interim dividend payment that took place in September. So the expectation would be to see a reduction in such leverage by year end by definition. And we see the leverage back in the range of 20% in the coming quarters. So as we said that the buyback policy was based on the steady expectation forward. About the buyback, I would say nothing changed versus the moment in which we launched the buyback.
So we feel confident that the leverage would be in the money in term of buyback. In term of oil price, it will be more precise when we present we will present the strategy presentation, could be second half of February twenty twenty. But probably if you see the forward curve today, you will have an indication about what the oil price we assume will be. So by definition, higher than today speaking with today numbers higher than $60 per barrel.
And then I leave the floor to Pinot Ricci. About the IMO regulation and now we are seeing the effect on the spread. In fact, the spread between the low sulfur and high sulfur fuel oil is increasing and is reaching $150 That is a very, very significant spread. As for the gasoil fuel oil, the difference is continuously now more than $300 per tons. With this spread, it is mandatory to produce a low sulfur fuel oil.
And in our system, S refining that produce Losulfo fuel oil and the incoming starting of the EST in Sanazzaro, we cover all the conversion to low sulfur fuel oil or 0 high sulfur fuel oil. In the Q4, we expect to complete the new arrangement for the production of the 0.5% sulfur fuel oil and for the distribution of the market of the new product. And the result of the refining system in the Q4 is expected more or less in breakeven or slightly positive.
Brilliant. Thank you.
The final question is from Massimo Bonizole of Equita. Please go ahead.
Good afternoon. Two questions left. You had the stronger results in marketing in R and M division. If you can give us some color on that performance considering the flat volumes in retail? The second question, you mentioned at the beginning of the presentation the new mission of VNI on sustainability and energy transition.
I don't want to spoil your new strategy presentation, but should we expect some sizable increase in CapEx from the EUR 33,000,000,000 you announced in March this year for the 4 year plan?
Okay. So I'll leave the floor to Pinarichi to answer your question About
the marketing, the good results are EUR 450,000,000 not EUR 550,000,000 EUR 450,000,000, very, very good, driven by the retailer, both Italian and abroad retailer and mainly drive in the summer season due to many, many factors. First of all, we have a booster, the sale of our premium product, Any Diesel Plus that includes the 15% of HVO. And we have an increase of the sale compared with the past year of more than 30%. And the second, we are adding to the service station a lot of services, non oil, that are contributing to the overall result. The margin are maintaining in all period very good and the overall combination of this boosted the result.
Okay. So in term of mission, I would say, you said you don't want to spoil it. But in summary, I think it would be fair saying that in February, March, when we are going to present a new mission, you will see clear idea about how to get how to reach the transition complying with the emission target. So clear idea about how to get there, but I would say no CapEx increase as far as the next 4 years maneuver.
Good. Thank you.
Mr. Mondati, there are no more questions registered, sir.
Okay. Thank you very much, everyone. Bye bye.