Good morning, ladies and gentlemen, and welcome to Eni's 2017 fourth quarter and full year results conference call, hosted by Mr. Claudio Descalzi, Chief Executive Officer, and Mr. Massimo Mondazzi, Chief Financial Officer. For the duration of the call, you will be in listen-only mode. However, at the end of the call, you will have the opportunity to ask questions by pressing star and one on your touch-tone telephone. I am now handing you over to your host to begin today's conference. Thank you.
Good morning, welcome to our 2017 full-year results. 2017 was a year of outstanding results, coming from the implementation of our strategy over the last two years, based on our strong focus on Upstream's value growth, the well-advanced turnaround of Midstream, and the structural reduction of our cost base. We have succeeded in making our company financially sustainable, also in a weak scenario, delivering material cash generation while putting into a position to be able to benefit from possible upside. We have improved our main operating and financial targets in all businesses and HSE. Starting from HSE, we continue to register the long-term trend of improvement in all key metrics. In safety in 2017, we reached a total recordable injury rate of 0.33, 7% lower than 2015. For the environment, we are strongly committed to reducing the carbon footprint of our activities.
The GHG emission intensity in the Upstream decreased by 3% versus 2016, by 19% versus 2014, confirming that we are well on track to our long-term target of reducing of 43% in 2025. Methane emission and routine flaring reduction are the key levers to reaching the GHG target, for both, we are progressing well and close to achieving our goals. Our strategy in reducing our carbon footprint also implies a growing exposure to renewables. With 20 projects under execution or close to sanctioning, we will add around 250 MW of new power capacity in the coming years, a major first step toward a much greater presence in this emerging business. In Upstream, let me highlight the four key metrics of our strategy's execution.
In production in 2017, we produced 1.82 million barrels per day, a 3.2% growth versus 2016, or 5.3% when factoring in OPEC cut and PSA effect. Our 2017 production increase is around 220,000 barrels per day, 14% higher than in 2014 when the price started to fall, notwithstanding an E&P CapEx reduction of around 40%. In CapEx efficiency, with $10.6 per barrel of finding and development cost in the period 2015 to 2017, we are growing more efficiently thanks to the great portfolio positionality, which is continuously enhanced through exploration, the new model of development, and the benefits of market deflation. This is a remarkable reduction versus the F&D of $21 per barrel we had in the period 2012 to 2014. In operating cash flow in 2017, Upstream cash flow from operation, inclusive of interest and taxes, was EUR 8.3 billion.
We generated a free cash flow of around EUR 1.7 billion, corresponding to a self-financing ratio of 125%. This is without taking into account any benefit from disposal. Finally, in Upstream cash neutrality, Upstream cash flow covers its CapEx at around $45 per barrel, a reduction of more than 50% versus the level of 2013, around $100 per barrel. Let's turn to exploration, the engine of our growth, which had another outstanding year, the 10th in a row. We added 1 billion barrels of equity resources, including 200 million barrels from the farming of Evans Shoal in Australia. We continue to add resources at a competitive unitary exploration cost of $1 per barrel. In 2017, we continued to explore near field, with contribution from Egypt, Indonesia, Libya, and Norway. We opened a promising new basin in Mexico, where we discovered 2 billion barrels of oil in place.
Most of these discoveries will be fast-tracked, and will start up within the four-year plan. At the same time, we further reloaded our portfolio by adding 97,000 square kilometers of new net acreage in offshore Oman, Mexico, Ivory Coast, Cyprus, Morocco, Norway, and Kashagan in Kazakhstan. Exploration success and fast-track development are key to reserves replacement, and this year we recorded an organic reserves replacement ratio of 151%, or 103% taking into account the effect of the reclassification of Coral Phase 2 reserves to unproved due to the contingent domestic situation. Finally, another metric which proves the effectiveness of our upstream model, between 2015 and 2017, our reserve replacement ratio all sources was 120%, even including the effects of the disposal. Now let's have a look at the 2017 startups.
In December, we started up Zohr, just 28 months after discovery and 22 months from the FID, an industry record for a giant deep water development. Zohr is now ramping up fast. It has reached a gross production of 400 million scf per day, and it is expected to contribute 1.9 billion scf per day by the end of the year. In 2018, it will be contribute on an average around 70,000 barrel per day to Eni production. This is just latest success of our integrated model of development. In the first half of 2017, we started up three main deep water fields in Angola, Ghana, Indonesia. All these projects coming from our exploration discoveries, start ahead of schedule with an average time to market of less than three years from FID.
Overall, these four fields are performing better than expected, contributing to 80,000 barrel per day to 2017 average equity production. They are expected to contribute around 210,000 barrel per day in 2018. Let's now move to E&P results. 2017's EBIT of EUR 5.2 billion is double last year's. OPEX at $6.6 per barrel, and depreciation cost at $10.3 per barrel are in line with our expectations. In 2017, benefiting from higher value barrels, upstream operating cash flow was around EUR 8.3 billion. This 38% increase in cash generation, coupled with a 20% CapEx reduction, generate a free cash flow of EUR 1.7 billion. Our cash generation is equivalent to a cash flow of $14.1 per barrel or $15.3 per barrel at the budget scenario of $57.50 per barrel, exceeding our original guidance. Now let me give you some numbers of the key turnaround of our Mid downstream.
Gas & Power is structurally positive with more than EUR 200 million of EBIT. That includes around EUR 100 million of positive non-recurring profit. We have exceeded the original guidance of breakeven. We have progressed in the restructuring of our supply portfolio and logistics costs, and enhanced the contribution from high value segments, trading, LNG, and retail. The overall EUR 600 million improvement versus 2016 is equally split between the restructuring of our portfolio, such as supply and logistics, high value segments such as LNG trading optimization and retail. The refinery sector is profitable at $3.8 per barrel, a margin of breakeven that is 40% lower than 2014. R&M generated EUR 530 million of EBIT, with marketing contributing EUR 390 million.
This year's refinery results of EUR 140 million in a $5 per barrel margin scenario has been achieved notwithstanding the impact of EUR 100 million fixed costs, mainly related to Gela, currently under conversion into a biorefinery, and in production at the end of 2018. We are therefore well on track to reduce the breakeven to $3 per barrel by the end of this year with the startup of Gela, the restart of EST, and additional operating improvements. Chemicals generated EUR 460 million, a record, and an improvement of 50% on 2016. The negative results from 2008 to 2014 are behind us, and Versalis is now a self-sustaining company also in terms of free cash flow. The operating profit from our mid downstream is at its highest point for a decade, while cash flow maintains the positive trend of the past two years.
Mid downstream contributed more than EUR 1 billion of EBIT in 2017, triple the average result of the past two years. Overall, in the period 2015-2017, we accumulated an economic result of EUR 2 billion versus the losses of EUR 2.1 billion of the previous three years. All sectors are now structurally positive and are much more resilient to weaker scenarios. This turnaround is even more remarkable at cash flow level. We were able to turn a drain of EUR 3.7 billion in the period 2012-2014 into a contribution of EUR 8 billion in the last three years. Through greater operational efficiency, optimization of logistics, renegotiation of gas supply contracts, and the recovery of working capital, including take or pay. In 2017, our mid downstream businesses were self-sustaining, and with a generation of around EUR 1 billion of free cash flow, they are able to cover one third of our dividends.
Before concluding, let's have a look at our group results for 2017. The fourth quarter was marked by an acceleration of our economic and financial performance. In this quarter, which is seasonally stronger for Eni, we leveraged our upstream positioning, producing growth and efficiency of our mid downstream assets. Compared to the third quarter, we record an increase of 100% on EBIT and 50% of cash flow from operation level. The 2017 economic results confirmed the trend of our improvement. Overall, the company generated EUR 5.8 billion of EBIT, an increase of EUR 3.5 billion versus last year. This result was driven by the improved scenario for EUR 3.1 billion, mostly in the upstream sector, growth and efficiency action from EUR 600 million, and negative one-off effect on OPEC for around EUR 200 million. Cash flow from operation for the year was EUR 10 billion, or EUR 9.3 billion before working capital at replacement cost.
We generated an adjusted net profit of EUR 2.4 billion. The average tax rate in the full year was 56%, or around 61% normalized for one-off effect. Our reported net result was EUR 3.4 billion, the highest since 2013. In 2017, Eni achieved a much-improved financial position, beating its cash neutrality target. Eni's 2017 organic cash neutrality covered all costs, CapEx, and a full cash dividend is at $57 per barrel, an improvement to the original guidance of $60 per barrel. If we take into account the cash in from the dual exploration model, our cash neutrality was equal $39 per barrel, generating a free cash flow after dividend of EUR 3.4 billion. As a result, we have lowered our net debt to EUR 10.9 billion, contributing to a reduction of the gearing to 18%, one of the lowest among the European majors. Before concluding, let's have a preliminary look at 2018.
For this year, I can anticipate an organic production growth of 3% versus 2017. Gas & Power's underlying EBIT expected at EUR 300 million. Refining breakeven at around $3 per barrel at year-end. CapEx in line with the 2017, up to EUR 8 billion, confirming our focus on a disciplined and sustainable growth. With the upstream set for growth in a low scenario and continuous improvement of mid downstream and a strong financial position, we will be able to capture all the potential upsides from the recovery of the oil and gas prices. We will disclose our plan on 16th of March, I confirm that all the action and initiatives are in place to build a stronger, a longer future for Eni and its shareholders. Thank you. Now we can pass to answer your question with our management team.
Now, ladies and gentlemen, let's begin the question and answer session. The first question is from Mr. Jon Rigby of UBS. Please go ahead, sir.
Yeah, good morning. Hello, everybody. Can I ask three questions, please? The first is just on the tax rate, which obviously came down in Q4. I guess there's some sort of reappraisal going on, so we need to look at the full year 2017 number to get some guidance on the outlook for tax rate. Could you just talk a little bit more about that and maybe reference also cash tax rates as well? The second is on production. There was a big pickup in North African gas production in the fourth quarter, I just wonder whether you're able to characterize that between organic growth in Egypt and maybe demand pull out of Italy from Libya. I know that sometimes impacts your fourth quarter.
Lastly, I was intrigued by, Mr. Descalzi, your comments around the creation of surplus value for shareholders or substantial surplus value for shareholders. I was just wondering whether you could maybe start to talk a little bit about how you think about how that can be shared with shareholders. I know you probably talk about it more on the 16th of March, but it does seem to sort of hint at some plans behind the scenes about looking at your dividend policy or your distribution policy. Thank you.
Thank you. Massimo is going to answer about the tax rate. The follow-up.
Hi, Jon. The normalized tax rate we got in 2017 is around 60%. 60% is a bit lower than the guidance we gave that was in the range of 65%. Why we got this slight reduction, I would say because mainly two reasons. First of all, the Italian activities, the midstream businesses, including retail, mid-gas, and the chemical business, got results better than expected. This result is exposed to lower than the average tax rate. This is the first reason. The second one is that the mix of production we got in E&P is slightly different versus the expectation. We got a higher contribution from the new startup, including Angola, for example, that is exposed to a lower tax rate than the average. While we got some less production from Norway that is exposed to a 78% tax rate.
The combination took us to a lower tax rate in the range of 60%. I believe that 60% would be the right guidance as well as for 2018 in a $60 per barrel Brent scenario. In terms of cash tax rate, the cash tax rate we got in 2017 is something in the range of 30%. We expect, I'm just checking the numbers, something in the range of 25% in 2018.
Okay, thank you.
Just to try to give more context about gas in the Mediterranean. We talk about Libya and Egypt mainly. If we have also Algeria. The main source of new gas comes from Egypt, because Egypt we have Zohr. We have also Nooros and additional gas that will go on stream. That is for the local market. We have also gas clearly from Libya and the flow of gas is split 40/60. 60% is for the local market and 40% for the Italian market. We can have some fluctuation, some variation. We didn't increase our import, except maybe in some special days. We didn't increase our import from Libya. Libya is really consuming and increasing the gas consumption. That is the situation.
Clearly, the gas rate and the gas equity of Eni is going to be increased in this area because we have new field and new project on stream. For the remuneration, for the TSR, for the remuneration dividend, as you well noted, is something that we are going to disclose and elaborate on it in March. You have to be a little bit patient. In March, we're going to answer to all your questions. Thank you.
Okay, thank you very much.
The next question is from Oswald Clint of Bernstein. Please go ahead, sir.
Thank you very much. Good morning. Maybe just a question on the cash flow neutrality number that you've given out this morning, the EUR 57 versus your expectation of EUR 60. It looks like that's mostly coming from the lower CapEx spend versus budget, the EUR 300 million or EUR 400 million less CapEx spend versus EUR 8 billion. Is that where that's coming from? Where did that kind of EUR 300 million, EUR 400 million CapEx saving come from? Is that not something that could flow into 2018 as well? Please, first question. Second question, just on Mexico. I see you've completed your exploration campaign pretty quickly. I'm just curious to know what is the activity plan for Mexico in 2018, please? Thank you.
Oswald, I believe that cash neutrality, if the sense of your question, if the EUR 57 are sustainable or even potentially to be improved in the future, the answer is definitely yes. It's not depending on the level of CapEx, a bit lower than the EUR 8 billion. We believe that this level of cash flow from operation and CapEx is sustainable even to feed in the future production growth. This is our view in this respect.
Okay. For Mexico, Luca and Antonio, if you want to answer, please.
We have already presented to the authority of Mexico the plan of development. The discussion is already ongoing. We expect by end of March, early April, to get the approval of plan of development. Immediately after, we will proceed with our FID. Luca?
Exploration-wise, we will start working on the other license that we won in 2017 rounds, where we expect to start drilling operation around the year-end of 2018. We will prepare for drilling in the new license by the year-end of 2018.
Okay.
Regarding Area 1, we will continue drilling, of course.
Uprise of development drilling for all the years. These wells will be key producers for the project.
Very good. Thank you.
The next question is from Mr. Alessandro Pozzi of Mediobanca. Please go ahead, sir.
Thank you for taking my two questions. The first one is on Gas & Power. Clearly a good quarter. Probably there's a bit of seasonality, but certainly there's a structural improvement in the results. I think you have a further improvement this year. I was wondering if you can maybe give us a bit more color on how you're planning to achieve that, whether it's based on previous renegotiations or whether you are planning to perform more cost-saving initiatives over the next few quarters. Also, the second one is on production growth. I think you're assuming 3% this year. I believe there is 200,000 barrels from new projects. I was wondering if you can give us maybe a bit more color on that as well. Thank you.
Massimo, you can answer to the Gas & Power.
Yeah, on Gas & Power. The driver we had this year were mostly renegotiation on gas supply and at least three big long-term contracts. We had, of course, huge efforts on reducing the logistics and cost. This was done mainly by terminating, also taking opportunities from the regulation contracts or capacity, and, in particular, on aspect trading. We had also quite a significant result from LNG trading. Those are also the drivers which we see for the future. In the strategy, we will tell a little bit more in particular on LNG.
Antonio, maybe you can talk about.
Yes
to give some light on the 210 in terms of ramp up and the other contributions and the gross production.
The exact number we have achieved, and the ramp up is that it's going to continue on 2018. It's going to be 55,000, 60,000 barrels is going to be new startup. 280 is going to be the ramp up along the year.
Just to give some names to the ramp up. Clearly, the big ramp up is coming from Zohr.
Zohr, yes
We put in production additional four trains. We passed from a 400 MMscf per day to 1.9 by the end of the year. We have a ramp up in OCTP. We have the gas phase of the project in Ghana, and we double the production to reach 85,000 barrel per day of gross production in Ghana. We have additional ramp up in Egypt for the Great Nooros Area that is the shallow water considering Nooros and Manting West. Egypt will be a big contributor. We have Indonesia, where we increase production in Jangkrik. We have an additional growth for a project of the West Hub, the structure in the West Hub that start up in May, April. That are the main contributor. We have also an offshore production in Libya, and we have project in Algeria.
There is a quite diversified contribution from different projects that we are going to or ramp up or start up, as Antonio said.
Okay. Thank you very much.
The next question is from Mr. Massimo Bonisoli of Equita. Please go ahead, sir.
Thank you. Good morning. Three questions from my side. Could you just spend a few words on the exploration block in Block 6 in Cyprus and what's the current situation following the opposition of the Turkish government? Maybe also a few words on the awards of the blocks in Lebanon. Do you have potential synergies with Zohr from those blocks? The second question is on the divestment left in 2018, if you have an update on what to be cashed in over this year. Third question is out of the-
Sorry, can you talk aloud? We just caught the first question, but we lost the other two questions.
Sure. Sorry.
You have to shout, otherwise, it is quite soft, so it's difficult to hear you.
Sorry. Could you give us an update on the divestment to be cashed in over 2018? Out of the EUR 8 billion CapEx, how much is related to Zohr and Mexico?
Okay. We couldn't hear you, but we got some questions, and we tried to understand. If not completely, you can repeat.
No, the first point is, the Block 6 is finished with drill. The well that is stuck and is in discussion is the well in the Block 3.
It is another well. The situation in the Block 3, I have just to highlight that the block is in the exclusive economic zone of Cyprus South. We have been very attentive to locate the well in the right location. That is the third well that we drill in this area. For the first two wells, we didn't have any problem. Now the situation is not really under our control, because it's the diplomacy of different countries, Italy, Europe, France, and Cyprus and Turkey, that are discussing this issue. At the moment we are waiting. For Lebanon, maybe, Luca, you can say something.
Lebanon is part of our position in the Eastern Mediterranean, and we don't see direct synergies with Zohr. It's mainly an exploration activity that we look for, first of all, domestic opportunities. This is our intention.
Thank you. For the other question that we understood was about the return on the definition 2018 on Zohr and on Mexico. I give the floor to Massimo to answer it.
Massimo, the dual exploration model we apply successfully, I believe, up to now will be continuing in the future. As I already commented in September, the potential divestment in the near term could relate some recent exploration success we had with a very high interest rate, such as the one in Mexico already commented, Merakes in Indonesia. There are some other candidates in our portfolio, even right now, as well as we say we are very confident that the future exploration activity that probably we will comment at length during our strategy presentation, will give us additional floor to keep on this kind of strategy. I cannot give you a precise number because it will be definitely an M&A activity looking forward.
I'm strongly convinced that the positive contribution from the dual exploration will be continued without jeopardizing the production growth as we did up to now, including the reserve replacement. I would like to highlight the comment that Claudio already made about our replacement ratio, that in the last three years, what we put in place the significant part of our dual exploration model, selling down 25% of Mubadala, I mean 40% of Zohr. Our replacing all sources has been 120%, everything included.
Thank you.
As a reminder, please press star and one for questions. The next question is from Mr. Marc Kofler of Jefferies. Please go ahead, sir.
Hi, everyone, thanks for taking my question. I think from the press release it feels as if you are adopting a more conservative approach with regards to your operations in Venezuela going forward. I was just wondering if you could talk a bit more about how the situation there is unfolding at the moment. Also, if you could, I think it would be great if you could talk about the production that is in the budget for 2018 from Venezuela. Thanks.
I answer maybe the first part of the question, then I give the possibility to Massimo and Antonio to complete the answer. From an operational point of view, we are producing from Perla, from Corocoro, from Junín-5. The production is steady and Perla is producing quite well. We are selling everything to the domestic market, there is no operational issue and problem. What happened that due to the situation of outstanding that we have, clearly we are not proceeding with the second and third phase. The second and third phase is there in term of authorization, in term of production and technical feasibility. We want to understand better the situation and be able to recover our outstanding that now are around EUR 600 million, our share. We want to understand when and how we can recover, then we can continue our operation.
Most of our operation are offshore, they are not impacted. We want to be sure about the economic and financial return. Antonio?
Okay, Claudio. In term of budget 2018, we still have the same budget of 64,000 barrels per day of 2017, also in 2018. The growth expected on the previous activity has been suspended, we are delivering the gas requirement for local market as the facility in place. Thank you.
All right. Thank you.
The next question is from Bertrand Hodee of Kepler Cheuvreux. Please go ahead.
Yes. Hello. Thank you for taking my question. Two, if I may. The one is about potential FID Eni could take in 2018. You've talked about Mexico Area 1, which can you develop because there is other potential candidates. The second question is related to Zohr, and the divestment. Rosneft and BP did not exercise the option to acquire another 10%. Would you try to sell another 10% of Zohr going forward?
Okay, thank you. About the FID, Roberto Antonio can answer, and then we talk about Zohr.
Okay, thank you. We have envisaged in 2018 a number of important FIDs. Well, as we discussed earlier, Mexico will definitely be one of them for the entire Area 1, Amoca and its own Tecoalli. Then, in Egypt, we continue the development in the area of Nooros with North West. In Italy, we will sanction the Argo Cassiopea project, gas project offshore. Then we have the continuation of Nené development in Congo. In Indonesia, we can go ahead with the Merakes development, which is a field close to Jangkrik, so very cost effective in terms of tie-in. Last but not least, Deepwater, Nigeria will be another major FID envisaged this year.
For Zohr, Massimo will respond.
About the potential divestment of additional 10% on Zohr, I would say the divestment following the dual exploration model has been done on Zohr. The sale of 40%, I would say, completed the most important part of what we would like to do in this respect. I would say, an additional 10% would be an opportunistic way to handle our overall portfolio and to swap with some other asset, no more than that.
Okay, thank you. Can I just make one follow-up on FID? You mentioned Deepwater, Nigeria. You are referring to OPL 245 development being sanctioned this year?
Yes.
Okay.
Thank you.
The next question is from Hamish Clegg of Merrill Lynch. Please go ahead.
Good morning. A few questions. Firstly, just on Venezuela. I know quite a lot of the moves and the housekeeping today related to some of the write-downs taken there. I just wanted to confirm a number you gave us last year for existing or outstanding receivables was close to or around EUR 400 million, I believe. If you could clarify where that stands today so we have an idea of what receivable is still pending from Venezuela, given the moves you've taken in results. Second question, sticking with Venezuela, with Perla Two appearing to be canceled now, I guess as a result of the situation in Venezuela, could you confirm where that CapEx will be directed, given you're keeping with a sort of EUR 8 billion CapEx level, and what I believe you were due to spend some money in Venezuela, which you will no longer do.
Thirdly, and finally, if Mexico is so good as you've increased the reserves several times, which has been impressive, could you confirm why you chose not to increase your acreage in the recent licensing rounds in January?
Well, Venezuela.
Thanks.
Yes. Venezuela last year was 450. Now we are at six. As I said, we reach 600 million outstanding. Second, the phase 2 is not canceled. The phase 2 is suspended. We are observing, and we are discussing and understanding if we can go ahead. At the moment, we don't think that's for 2018, and that is already included in our budget. We are going to invest in phase 2. There is not a direct impact on our CapEx plan because it's already included. Mexico, I think that we've been very successful, and we won other three blocks, and we won another blocks. We continue in three different bid rounds to increase our resource base, asset base in Mexico. Now we have blocks in the offshore, conventional water and deep offshore.
We are present, and we are going to continue to participate to the other bid rounds.
Lovely. Thank you very much. Have a good weekend.
Thank you.
The last question is from Martijn Rats of Morgan Stanley. Please go ahead, sir.
Well, yeah, thanks very much. To be honest, all my questions have been answered. I'll leave it at this. Thank you.
Okay, thank you.
Excuse me, sir. That was the final question. Thank you for participating in the Eni conference call. You may disconnect your telephones.
Thank you very much. Have a good weekend.