Good afternoon, ladies and gentlemen, and welcome to Eni'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. However, at the end of the call, you will have the opportunity to ask questions by pressing star and one on your touch-tone telephone. I will now hand you over to your host to begin today's conference. Thank you.
Good afternoon, welcome to Eni's nine 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 a 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've already taken a number of commitments over the medium long term, including zero net carbon emissions for the upstream by 2030. At the next strategy presentation, beginning of 2020, we will provide a further update on our targets and energy transition path. Now, the results. In the first nine months of 2019, we continued to consolidate our strategy and enhance our cash generation.
We generated EUR 9.4 billion of operating cash flow, 5% growth versus 2018, notwithstanding the lower oil and gas scenario. With CapEx at EUR 5.6 billion, we generated underlying organic free cash flow before working capital of EUR 3.8 billion, 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 two-third of the planned EUR 400 million target already completed. Upstream production increased to 1.85 million BOE, up 2% at the same price and perimeter. Thanks to our startups in Algeria, Egypt, Norway, the new field in Mexico, and the ramp-up of Zohr. Exploration continues to create new opportunities for future developments.
During the nine months, we discovered 650 million 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. 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 styrene margins. On renewables, we have 150 MW under construction, and we are targeting to have 190 MW 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 Eni strategy for organic growth.
Our exploration team has discovered, in the last 18 months, around 2 billion barrel of oil in place in Block 15/06, in five main fields. In line with our fast-track development approach, we are planning to put into production Agogo by year-end, just eight months from its discovery, thanks to its proximity to the existing N'Goma FPSO. The development strategy envisages a phased approach. The early production expected oil flow rate is 20,000 BOE, about seven in our share, with wells connected via subsea tieback to the West Hub existing subsea facilities. We are planning a second phase for early production, incorporating two producing wells and two injectors, whilst evaluating the full field development. Turning to Norway, Vår Energi, with the announced acquisition of Exxon's upstream asset, continues to expand its material and diversify portfolio of oil and gas producing asset, development projects, and attractive exploration licenses.
Vår Energi will become the second-largest E&P company in Norway with total reserves and resources of around 1.9 billion 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 EUR 7 billion in development projects such as Johan Castberg, Balder/Ringhorne, and Grane in the period of 2023. The new acquired portfolio is a strategic fit for Vår Energi 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 EUR 24 per barrel and brings Vår Energi overall breakeven down to around EUR 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 two projects for CO2 emission reduction of around 1.1 million tonnes per annum from a CCS plant in Sleipner, as well as the wind farm in Norway. The carbon intensity of the acquired production is half the Eni's existing portfolio, averaging at around 10 tonnes CO2 equivalent per thousand BOE in the next 10 years. This deal is self-financed, is free cash flow accretive for Vår Energi, and underpins a growing dividend to Vår Energi shareholders in the coming years. The deal has an effective date first January 2019, and is expected to be completed in the fourth quarter 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 this to be the second-largest refining complex in the world. It is located near asset, producing all types of crudes, along with low cost of natural gas, about one-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 Ghasha concession, where Eni 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. Now back to the quarter results. In upstream, we recorded our highest ever production in a Q3. Our growth was 6% year-over-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 Zohr and projects in Libya and Ghana. Production in the nine months reached 1.85 million BOE + 2% thanks to the same effects. Nine months EBIT declined by 17%, mainly as a result of the weaker scenario, which accounted for EUR 1.5 billion. In particular, scenario affected the result as follows.
Lower oil price for around EUR 1.2 billion, lower gas prices, mainly in Europe, for a total of around EUR 700 million, of which more than EUR 500 million in the third quarter, and positive ForEx for around EUR 400 million. On a comparable basis, upstream EBIT in the nine months grew by 7% thanks to the increased volumes and better mix supported by the quality of new production. Moving to mid downstream. Gas & Power nine months EBIT was robust at EUR 511 million. In particular, the mid gas G&P reached EUR 349 million, 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 a low global price scenario. Retail delivered an EBIT of EUR 162 million, 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 of the result with a contribution of EUR 552 million. In refining, the narrow differential between Urals and Brent was only partially offset by the higher SERM, our margin. Finally, the Gela Bio plant is ramping up, whilst the EST restart is now expected early next year. Versalis, the chemical business, was impacted by a depressed scenario for elastomers and styrenics that accounted for half of the nine-month losses. As commented in the second quarter, the Priolo upset accounted for the remaining losses. Coming to the consolidated financial results.
Cash flow from operations before working capital at EUR 9.4 billion was 5% higher than last year, driven by the industrial performance improvements that accounting for EUR 0.6 billion, a weaker scenario for EUR -0.9 billion, and remaining positive contribution coming from the IFRS 16 first application and other one-off effects. This cash generation of EUR 9.4 billion more than covered the nine-month CapEx of EUR 5.6 billion. The 2019 shareholder remuneration, including both the full-year dividend and EUR 400 of buyback. Working capital that increased in the third quarter, in line with our assumption, is expected to recover in the fourth quarter, confirming the full-year guidance for cash absorption of a few hundred million euro. The group's net adjusted result was EUR 2.3 billion in the nine months. Finally, a brief summary of our full-year guidance.
We confirm our production guidance in the range of 1.87 million-1.88 million BOE per day, and upgrade our exploration target to 700 million BOE from 600 million BOE previously. Following the solid result of Gas & Power so far, we are also upgrading the full-year EBIT guidance by EUR 100 million to EUR 600 million. In Refining & Marketing, the crude differential in 2019 has been lower than our budget expectations and determines a revision of this year pro forma EBIT guidance to EUR 400 million. Cash flow from operations is growing in line with our 2019 guidance of EUR 12.8 billion 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 EUR -800 million. In term of CapEx, we confirm that we expect to be below our initial target of EUR 8 billion.
Finally, leverage at 25% at the end of September is expected to return towards 20% in the coming quarters. 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. Please go ahead.
Good morning, all. The first question is on the IMO. 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&A went a little bit up in Q3. I was wondering, even on a barrel-adjusted basis, if that is the right number to use going forward. That's all for me.
I confirm that in the guidance, we are already including the first contribution from ADNOC, that is expecting the range of EUR 50 million. As far as the DD&A, our DD&A are in the range of EUR 10, EUR 11 per barrel. We expect this number remain steady in the future.
On the ADNOC, the EUR 50 million is mainly in Q4, I guess.
Yes.
All right. 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 EUR 800 million off the EUR 12.8 billion cash flow guidance? That will be the first question. Just a bit of clarity on that. On Vår Energi, could you say anything about the CapEx associated with the new assets acquired? Because I think previously you've talked about EUR 8 million spend over a five-year period for the previous portfolio. What do the new assets add? Thank you.
Okay, I don't have the breakdown. Talking about the CapEx of Vår Energi, I don't have the breakdown per asset. What we expect, 100% is an expenditure in the range of EUR 7 billion to develop the final stage of Johan Castberg, Balder and Ringhorne, and Grane. This is the order of magnitude. In terms of cash flow from operation guidance, yes, I said that the EUR 12.8 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. We expect that using the current scenario, we are going to lose EUR 800 million out of the cash flow from operation.
All in all, today with the current scenario, we expect as a cash flow from operation, something in the range of EUR 12 billion, slightly low than EUR 12 billion.
Thanks. That's very clear. Just a quick follow-up on the CapEx. That EUR 7 billion, is that on the same period that you show in the slide, i.e., out to 2023?
Yeah, EUR 7 billion, 2023.
Got it. Thank you.
The next question is from Irene Himona of Société Générale . Please go ahead.
Thank you. Good morning, Massimo. Just first want to clarify, if you can, please. You mentioned the ADNOC contribution this year is EUR 50 million. Would that be the dividend you expect or a share of net income as an equity affiliate? Secondly, on Vår Energi, is there some guidance you can provide on full year 2019 dividend receipts, please? Thank you.
Okay. As far as the Vår Energi dividend received in 2019. In 2019, Vår Energi distributed EUR 1.7 billion. 70% is our share. As far as the ADNOC contribution, I said EUR 50 million, mainly in the fourth quarter, but due to the fact that the overall result is expected to be negative for ADNOC Refining 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 have questions on Vår Energi. I believe that the Exxon transaction was fully funded with that. Please correct me if I'm wrong on that. Can you talk a little bit about what the balance sheet leverage now looks like for Vår? Anything related to net debt to capital or the debt relative to cash from operations. The second question, are you able to speak to who retained the abandonment liability on the Exxon assets in that transaction? Thank you.
In terms of liability, I would say, the amount of liability is not a big number, and there is not a big issue on the evaluation. If I remember correctly, we expect to start to spend a material amount of money from 2033 on. Definitely in the next 10 years, we do not have any kind of significant material expenditure in our radar screen. The other question was about the I do not have with me the detailed balance sheet structure, but definitely I can confirm that the acquisition is fully funded by the company throughout RBL. I would say if it could help you more than measuring the effect in terms of balance sheet, definitely 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.
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.
Morning. I've got three questions, please. Firstly on Vår as well, could you perhaps comment how much Vår contributed to the bottom line in the third quarter as well as in the first nine months of the year? 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 Vår next year. We did see a special dividend in 2019. Secondly, on Zohr, on a growth basis, the 2.7 Bcf today of production you're seeing at the moment, is that the ceiling for the domestic market? What does it take to get you to the 3.2? Do you need to have the Damietta liquefaction facility available for exports? Finally, a question on 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. Presumably, you're not processing as much second generation feedstock as Neste. Any color on that would be great. Thank you.
Okay, Thomas. I give you the answer to the first question, and then I leave the room to my colleagues to answer the following one. In term of contribution from Vår Energi to our cash flow in the third quarter, the answer is zero because all the dividend, you remember that the way we consolidate such a participation is throughout the equity account.
Net income?
Cash flow to the dividend.
Yeah.
The contribution in the third quarter is zero because the company distributed the full dividend the first and second quarter. The amount, our share in euro we received is EUR 540 first quarter and the same amount in the second quarter. In term of how the Exxon asset acquisition 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 million, growing up later on, in line with the production growth. I leave the floor to Alessandro Puliti to answer, maybe together with Cristian Signoretto, talking about Damietta to answer the Zohr question. I leave the floor to Ricci to answer your question about the green refinery.
Okay, good morning. Current production potential from Zohr is 2.7 Bcf per day, and by the end of the year, with the completion of the 14th and the 15th producer well, we will reach a potential of around 3 billion standard cubic feet per day in terms of potential. At the beginning of 2020, we will then be ready to produce even 3.2 billion standard cubic feet per day. This is the situation regarding production capacity from the Zohr field. I leave the floor to Cristian.
On Damietta, I think we have said it many times. We are actively engaged with all the parties involved, so the government and Naturgy, to get the plant up and running and solve the longstanding issues on the arbitration. To answer your question clearly, adding Damietta, let's say, in production would surely reduce the risk of oversupplying the country, even if the demand is robust and the export to neighbor countries has restarted. Surely Damietta will reduce that risk.
Just to complete the answer about the production. 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. We expect that even in the fourth quarter, the production will remain slightly the same because of the oversupply that we see today in the market. We see a growing demand, domestically speaking, and we see, by definition, a positive effect from the Damietta restart that we sincerely expect not so long in time. I leave the floor to Ricci to answer your question about Gela.
Good morning. Because mainly we are seeing an increase in the market of HVO, in parallel with the increasing of the obligation due to the European RED Directive, mainly for the RED II starting from 2021. 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 2030. We expect a good market, and so the high production of Gela refinery, that is 750 kT per year, the feedstock, the HVO is the 70%, 75% of the heat. There is a market.
Thank you. Just can I go back to the first question on Vår, just to clarify the answer you gave. As far as the dividend is concerned, you received EUR 1 billion in 2019. What can we expect from Vår Energy 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%, EUR 900 million and EUR 150 million. 70% of that number is the reasonable expectation in 2020. As I said, especially because of the production increase from Johan Castberg, the starting up of Balder/Ringhorne , we expect a growing production from 2020 to 2023. We see the additional contribution coming from this additional production. We see an increase in such amount of dividend later on.
Thank you.
The next question is from Martijn Rats of Morgan Stanley. Please go ahead.
Yeah, good morning. I've got two 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 what you're seeing in Venezuela and anything you can say to shine some light on what the production outlook could be there. In the result, there is a reference to a EUR 330 million one-off payment related to the settlement of an 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 was the Pascagoula arbitration. This is a part of the working capital change. As far as Venezuela, we said that in our production guidance, we embedded a production in the range of 40,000 barrel per day. That correspond more or less to 370,380 standard cubic feet, million cubic feet per day. Today, we are running a bit lower than this. Instead of 40, we are 36, 37. That's the reason why we kept the guidance unchanged. By definition, the revenue today are lower than expected, less than the EUR 300 million per year. Dollars, sorry, per year. In term of how much of this revenue are cashed in 2019, we expect to cash in more or less 25% of this number. Very much in line with the expectation we had since the budget time.
Okay, thank you.
The final question is from Christyan Malek of JP Morgan. Please go ahead, sir.
Hi, gentlemen. Thanks for taking my questions. First of all, two, please, one downstream. What are the key drivers that will generate the EUR 260 million EBIT into Q4 and to meet the guidance around EUR 400 million? Just around IMO, how quick does Eni's business adapt to the fuel or specification requirements? What proportion of Eni's E&P production is light, low sulfur? I guess the question is how material could the benefit be if IMO widens the light heavy crude spreads? The second question is around your buyback framework. Beyond the EUR 400 million commitment for 2019, how do you think about the leverage oil price thresholds? You've obviously got EUR 400 million per annum on a $ 60, $65 Brent, EUR 800 million per annum above $ 65.
Just given the volatility sub EUR 60, I'd just like to understand how we should think about the buyback outlook in periods if oil is below EUR 60. Thank you.
Okay. I give you the answer about the buyback, and then I leave the floor to Ricci to answer your question about the expectation about the fourth quarter result in R&M. You remember correctly that we linked our buyback to the level of Brent as well as the leverage. Now, end of September, our leverage is in the range of 25% because of the peak of the cash out. I mentioned the 20% stake in other refinery payment, as well as the interim dividend payment that took place in September. 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.
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. We feel confident that the leverage would be in the money in term of buyback. In term of oil price, we will be more precise when we present the strategy presentation. Could be second half of February 2020. Probably if you see the forward curve today, you will have an indication about what the oil price we assume will be. By definition, higher than today, speaking with the today numbers, higher than EUR 60 per barrel. Then I leave the floor to Giuseppe Ricci.
About the IMO regulation, now we are seeing the effect on the spread. In fact, the spread between the low sulfur and the high sulfur fuel oil is increasing and is reaching EUR 150. That is a very significant spread. As for the gas oil, fuel oil, the difference is continuously now more than EUR 300 per tons. With this spread, it is mandatory to produce a low sulfur fuel oil, in our system, with the contribution of Taranto refinery that produce low sulfur fuel oil. The contribution of Milazzo refinery with the acid treating that produce low sulfur fuel oil. The upcoming restarting of EST in Sannazzaro, we cover all the conversion to low sulfur fuel oil or zero high sulfur fuel oil.
In the fourth quarter, we expect to complete the new arrangement for the production of the 0.5% sulfur fuel oil, and for the distribution on the market of the new product. The result of the refining system in the fourth quarter is expected more or less in break-even or slightly positive.
Brilliant. Thank you.
The final question is from Massimo Bonisoli of Equita. Please go ahead.
Good afternoon. Two questions left. You had strong results in marketing in R&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 Eni 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 billion you announced in March this year for the four-year plan?
Okay. I'll leave the floor to Giuseppe Ricci to answer your question about the marketing, and I will give you the answer.
About the marketing, the good result are EUR 450 million, not EUR 550 million. EUR 450 million. Very good, driven by the retail, both Italian and abroad retail, and mainly driven in the summer season due to many factors. First of all, we have boosted the sale of our premium product, Eni Diesel +, that includes the 15% of HVO. We have an increase of the sale compared with the past year of more than 30%. 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 factor boosted the result.
Okay, in term of mission, you said you don't want to spoil. In summary, I think it would be fair saying that, in February, March, when we are going to present the new mission, you will see clear idea about how to reach the transition, complying with the emission target. Clear idea about how to get there, I would say no CapEx increase as far as the next four years maneuver.
Good. Thank you.
Mr. Mondazzi, there are no more questions registered, sir.
Okay. Thank you very much, everyone. Bye-bye.