Good morning, ladies and gentlemen, and welcome to Eni's 2017 4th Quarter and Full Year Results Conference Call. Hosted by Mr. Claudio Descalci, 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 1 on your touchtone telephone. I am now handing you over to your host to begin today's conference. Thank you.
Good morning and welcome to our 2017 full year results. 2017 was a year of outstanding results coming from the implementation of our strategy over the last 3 years and based on our strong focus on upstream's value growth, the well advanced turnaround in mid downstream and the structural reduction of our cost basis. 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 2015, 2017, we reached a total recordable in year 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 and by 19% versus 2014, confirming that we are well on track to our long term target of reducing of 43% in 2025. Metal emission and routine flame reduction are the key levers to reaching the GHG target. And 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 megawatts 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 4 key metrics of our strategy execution. In production in 2017, we produced 1,820,000 barrels per day, a 3.2% growth versus 2016 or 5.3% when factoring in OPEC cuts 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 and notwithstanding an E and P CapEx reduction of around 40%. In CapEx efficiency with $10.6 per barrel of mine and development cost in the period 2015 2017, we are growing more efficiently, thanks to the great portfolio of optionality, which is continuously enhanced through exploration, the new model of development and the benefits of market depression. This is a remarkable reduction versus the F and D of $21 per barrel we had in the period 2012, 2014. In operating cash flow in 2017, upstream cash flow from operation inclusive of interest and taxes was €8,300,000,000 We generated a free cash flow of around €1,700,000,000 corresponding to a self financing ratio of 125%. And this is without taking into account any benefit from disposal.
And 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 1,000,000,000 barrels of equity resources, including 200,000,000 barrels from the farm in of Evans Scholes in Australia. We continue to add resources at a competitive unitary exploration cost of $1 per barrel. In 2017, we continue to explore near field with contribution from Egypt, Indonesia, Libya and Norway.
And we opened promising new basin in Mexico where we discovered 2,000,000,000 barrels of oil in place. Most of these discoveries will be fast track and will start up within the 4 year plan. At the same time, we further reloaded our portfolio by adding 90 7,000 square kilometer of new net acreage in offshore Oman, Mexico, Ivory Coast, Cyprus, Morocco, Norway and Kazakhstan. Inspirational success in 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 Perla Phase 2 reserves to improve due to the contingent domestic situation. And finally, another metric which proves the effectiveness of our upstream model between 2015 and 2017, our replacement ratio of all sources was 120%, even including the effect of the disposal.
And now let's have a look at the 2017 start ups. In December, we started the Updoor just 28 months after discovery and 22 months from the FID, an industry record for a giant deepwater development. Dore is now ramping up fast. It has reached a gross production of 400,000,000 scarp per day and it is expected to contribute 1,900,000,000 scarp per day by the end of the year. In 2018, it will be contribute on an average around 70,000 barrels per day to any production.
This is just the latest success of our integrated model of development. In the first half of twenty seventeen, we started up 3 main deepwater fields in Angola, Ghana, Indonesia. All these projects coming from our exploration discoveries started ahead of schedule with a never expansion market of less than 3 years from our FID. Overall, these 4 fields are performing better than expected, contributing to 80,000 barrels per day to 20 seventeen's average equity production. They are expected to contribute around 210,000 barrel per day in 2018.
Let's now move to E and P results. 20 seventeen's EBIT of €5,200,000,000 is double last year's. OpEx at $6.6 per barrel and depreciation cost at $10.3 per barrel and in line with our expectation. In 2017, benefiting from high value barrels, upstream operating cash flow was around €8,300,000,000 This 38% increase in cash generation, coupled with a 20% CapEx reduction, generate a free cash flow of EUR 1,700,000,000 Our cash generation is equivalent to a cash flow of $14.1 per barrel or $15.3 per barrel at the budget scenario of $57.5 per barrel, exceeding our original guidance. And now let me give you some numbers of the key turnaround of our mid downstream.
Gas and Power is structurally positive with more than €200,000,000 of EBIT. That includes around €100,000,000 positive non recurring profit. We have exceeded the original guidance of Vekiva. We have progressed in the restructuring of our supply portfolio and logistics cost and enhanced the contribution from high value segments, trading, LNG and Retail. The overall €600,000,000 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 and M generated €530,000,000 of EBIT with market team contributing €390,000,000 This year's refining results of €140,000,000 in a $5 barrel margin scenario has been achieved notwithstanding the impact of €100,000,000 fixed cost mainly related to Jira, 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 start up of JERA, the restart of HEST and additional operating improvement. Chemicals generated €460,000,000 a record and an improvement of 50% on 20 16. The negative results from 2,008 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 2 years. Lead Downstream contributed more than €1,000,000,000 EBIT in 2017, tripled the average result of the past 2 years. Overall, in the period 20 fifteen-twenty 17, we accumulated an economic result of €2,000,000,000 versus the losses of €2,100,000,000 of the previous 3 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 €3,700,000,000 in the period of 2012 2014 into a contribution of €8,000,000,000 in the last 3 years through greater operational efficiency, optimization of logistics, renegotiation of gas supply contract and the recovery of working capital including take off pay. In 2017, our mid downstream businesses were self sustaining and with a generation of around €1,000,000,000 of free cash flow, They are able to cover 1 third of our dividend. Before concluding, let's have a look at our group results for 2017. The 4th quarter was marked by an acceleration of our economic and financial performance. In this quarter, which is seasonally stronger for Rainy, we leveraged our upstream positioning, producing growth and efficiency of our mid downstream assets.
Compared to the Q3, we record an increase of 100% on EBIT and 50% of cash flow from operation level. The 2017 economic results confirm the trend of our improvement. Overall, the company generated €5,800,000,000 of EBIT, an increase of €3,500,000,000 versus last year. This result was driven by the improved scenario for €3,100,000,000 mostly in the upstream sector, growth and efficiency action from €600,000,000 and negative one off effect on OPEC cuts for around €200,000,000 Cash flow from operations for the year was €10,000,000,000 or €9,300,000,000 before working capital at replacement tools. We generated an adjusted net profit of €2,400,000,000 The average tax rate in the full year was 56% or around 61% normalized for one off effect.
Our reported net result was €3,400,000,000 the highest since 2013. In 2017, A and E achieved a much improved financial position, beating its cash neutrality target. A and E'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 €3,400,000,000 As a result, we have lowered our net debt to €10,900,000,000 contributing to a reduction of the gearing to 18%, one of the lowest among the European measures. 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 and Power's underlying EBIT expected at €300,000,000 Refining breakeven at around $3 per barrel at year end CapEx in line with the 2017 up to €8,000,000,000 confirming our focus on a disciplined and sustainable growth. With the upstream set for growth in a loss scenario and continuous improvement of mid downstream and a strong financial position, we will be able to capture all the potential upside from the recovery of the oil and gas prices. We will disclose our plan on 16th March, but 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.
And now we can pass to answer your question with our management team.
And now ladies and gentlemen, let's begin the question and answer session. The first question is from Mr. John O'Rigbe of UBS. Please go ahead, sir.
Yes, good morning. Hello, everybody. Can I ask 3 questions, please? The first is just on the tax rate, which obviously came down in 4Q. 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. But can you just talk a little bit more about that and maybe reference also cash tax rate as well? The second is on production. There's a big pickup in North African gas production in the Q4. And 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 4th quarter. And then lastly, I was intrigued by, Mr. Viscalchi, your comments around the creation of surplus value for shareholders or substantial surplus value for shareholders. And 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 talked about it more on the 16th March, but it does seem to sort of hint at some plans behind the scenes about looking at your share of your dividend policy or your distribution policy?
Thank you.
Okay. Thank you. Maximo is going to answer about the tax rate and then the follow-up.
Okay. Hi, John. So the normalized tax rate we got in 2017 is around 60%. 60 percent is a bit lower than the guidance we gave. It 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 Mid downstream businesses, including retail and mid gas and the chemical business, got the result better than expected. This result is exposed to a lower than the average tax rate. So this is the first reason.
The second one is that the mix of production we got in E and 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 D and D average, while we got some less production from Norway that you know is exposed to a 78% tax rate. So 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 term of cash tax rate, the cash tax rate we got in 2017 is something in the range of 30%.
And 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. So we talk about Libya and Egypt mainly also if we have also Algeria. So the main source of new gas comes from Egypt because Egypt, we have the ore, but we have also the roofs and additional gas that will go on stream. And that is for the local market.
Then 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. And we can have some fluctuation, some variation, but there is no we didn't increase our import except maybe in some special days, but we didn't increase our import from Libya. And Libya is really consuming and increasing the gas consumption. So that is the situation. Clearly, the gas rate and the gas equity of RENI is going to be increased in this area because we have new field and new projects on stream.
For the remuneration for the TSR, for the remuneration dividend, as you well noted, it's something that we are going to explore and elaborate on it in March. So you have to be a little bit patient and 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 dollars It feels I mean, it looks like that's mostly coming from the lower CapEx spend versus budget, the $300,000,000 or $400,000,000 less CapEx spent versus €8,000,000,000 Is that where that's coming from? And where did that kind of €300,000,000 €400,000,000 CapEx saving come from? And is that not something that could flow into 2018 as well, please?
First question. And 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.
Oliver, I believe that cash neutrality, if the sense of your question, if the 57 are sustainable or even potentially improved to be improved in the future, the answer is definitely yes. So it's not depending on the level of CapEx, a bit lower than the €8,000,000,000 We believe that this level of cash flow from operation and CapEx is sustainable even to feed in the future production growth. So this is our view in this respect.
Okay. For Mexico, Luca and Antonio, if you want to answer, please.
So we have already presented to the authority plan of development. The discussion is already ongoing. We expect by end of March, early April to get the approval of plan of development. And then 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 and where we expect to start drilling operation around the year end of 2018. So we will prepare for drilling in the new license by the year end of 2018. And regarding Area 1, we will continue drilling, of course, appraisal 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 and Power. Clearly, a good quarter. Probably, there's a bit of seasonality, but certainly, there is a structural improvement in the results. And I think you have 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? And 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 project. I was wondering if you can give us maybe a bit more color on that as well.
Thank you.
Massimo, you can answer to CASM Power.
Yes. On CASM Power, the driver we had this year were mostly renegotiation on gas supply and at least 3 big long term contracts. Then we had, of course, huge efforts on reducing the logistics sand 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 and those are also the drivers which we see for the future.
And in the strategy, we will tell a little bit more in particular on LNG.
Antonio, maybe you can talk about to give some light on the 210 in terms ramp up and the other contributions and the gross production.
So the exactly number we have achieved and the ramp up is that it's going to continue on 2018 is going to be 60,000 55,000, 60,000 barrel is going to be new startup. And the 280,000,000 is going to be the ramp up along the year.
So just to give some names to the ramp up, clearly the ramp up will come the big ramp up is coming from work to put in production additional 4 trains. So we passed from a 400 minuteus car per day to 1.9 by the end of the year. Then we have Aeron PAP in OTCP. So we have the gas phase of the project in Ghana and we doubled the production to reach 85,000 barrels per day of gross production in Ghana. Then we have additional ramp up in Egypt for the great Nowruz area that is the shallow water considering Nowruz and Bantin West.
So Egypt will be a big contributor. Then we have Indonesia, where we increased production in Jan Creek. We have an additional growth for a project of the West hub that start up, the structure in West hub, the start up in May, April. So that's the main contributor. We have also an offshore production in Libya, and we have a project in Algeria.
So there is a quite diversified contribution from different projects that we are going to 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 and 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?
And maybe also a few words on the awards of the blocks in Lebanon. We have potential synergies with DOR from those blocks. The second question is on the divestments left in 2018, if you have an update on what's the big cash been over this year? And third question is out of the
Sorry, can you talk a lot because we just catch the first question, but we lost the other two questions.
Sure, sorry. Sorry. Could you give us an update on the divestment to be cashed in over 2018? And out of the EUR 8,000,000,000 CapEx, how much is related to Zorra and Mexico?
Okay. Okay. So we couldn't hear you, but we got some questions and we try to answer it. It's not completely you can repeat. The first point is so the Block 6 is not the Block 6 is finished, we drill.
So the well that is under that is stuck and is in discussion is the well in the Block 3. So is the Block 3, it is another well. And the situation in the Block 3, I have just to highlight that the block is in the exclusive economic zone of the super south. So we have been very, very attentive to locate the right location. That is the 3rd well that we drill in this area.
And 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. We are at the moment, we are waiting. And for Lebanon, maybe, Luca, you can say something.
Lebanon is part of our positioning is the Mediterranean and we don't see direct synergies with Zor. It's mainly an exploration activity that we look for, 1st of all, domestic opportunities. This is our intention.
Thank you. So for the other question that we understood was about the return on the emission in 2018 on Zohr and on Mexico. Give the floor to Massimo to answer it.
So Massimo, the dual aspirational model we apply successfully, I believe, up to now will be continuing in the future. So as already commented in September, the potential divestment in the near term could relate some recent expression success we had with a very high interest rate such as the area 1 in Mexico already commented, Narake has seen in Indonesia. Definitely, there are some other candidates in our portfolio even right now as well as, I would 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 definitely an M and A activity looking forward. But I'm strongly convinced that the positive contribution from the Duol Sporation will be continued without jeopardizing the production growth as we did up to now, including the reserve replacement because I would like to highlight the comment that Claudio already made about our replacement ratio that in the last few years when we put in place the significant part of our dual exploration model, selling down 25% of Mozambi, 40% of Zohr.
Anyway, our replacing all sources has been 120%, so everything included.
Thank you.
The next question is from Mr. Mark Koffler of Jefferies. Please go ahead, sir.
Sir. Hi, everyone, and thanks for taking my question. I think from the press release, feels as if you're adopting a more conservative approach with regards to your operations in Venezuela going forward. So I was just wondering if you could talk a bit more about how the situation there is unfolding at the moment. And then also, if you could, I think it would be great if you could talk about the production that's in the budget for 2018 from Venezuela.
Thanks.
So I answer maybe the first part of the question, then I hear the possibility to Massimo and Antonio to complete the answer. From an operational point of view, we are producing from Perra, from Coro, from Conin 5. So the production is steady and Perra is producing quite well. We are sending, selling everything to the domestic market. And so there is no operational issue and problem.
What happened that's due to the situation of outstanding that we have, clearly we are not proceeding with the second, third phase. The second, third phase is there in term of authorization, in term of production and technical feasibility, but we want to understand better the situation and be able to recover our spending that now are around 600,000,000 our share. So we want to understand when and how we can recover and then we can continue our operation. All our most of our operation are offshore, so they are not impacted, but we want to be sure about the economic and financial return. Antonio?
Okay. Now in terms of budget 2018, we still have the same budget of 60 4,000 barrels per day of 2017 and also in 2018. The growth in expected on the previous activity has been suspended. And 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 Gertrude Hodee of Kepler Cheuvreux. Please go ahead.
Yes. Hello. Thank you for taking my question. 2, if I may. The one is about potential FID E and I could take in 2018.
So you've talked about Mexico Area 1, but in new developed user is other potential candidates. And the second question is relates to Zohr and the divestment. So Rosneft and BP did not exercise the option to acquire another 10%. So would you try to sell another 10% of those going forward?
Okay. Thank you. About the FID, Roberto, Antonio can answer and then we talk about DOR.
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. Mokka and its own Tekro Ali.
Then in Egypt, we continue the development in the area of Nowruz with Baltin Southwest. In Italy, we will sanction the Argo Cascapea project, gas project offshore. Then we have the continuation of NNE development in Congo. In Indonesia, we can go ahead with the Merakes development, which is a field close to Giant Creek. So very cost effective in terms of tying.
And last but not least, Deepwater Nigeria will be another major FAD envisage this year. So about the potential divestment to additional 10% on Zohr, I would say the divestment following the dual aspiration model has been done on Zohr. So the sale of 40%, I would say, completing the most important part of what we would like to do on this prospect. I would say an additional 10% would be an opportunistic way to handle our portfolio and to swap with some asset, 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 OPL245 development being sanctioned this year?
Yes.
The next question is from Hamish Craig of Merrill Lynch. Please go ahead.
Good morning. A few questions. Firstly, just on Venezuela.
I know quite a lot
of the moves in 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 closed or around €400,000,000 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? 2nd question and sticking with Venezuela with Perla 2 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 sort of €8,000,000,000 CapEx level? And I believe you were due to spend some money in Venezuela, which you will no longer do.
And 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?
Venezuela, yes. So Venezuela last year was 450,000,000. Now we are at as I said, we reached EUR 600,000,000 of outstanding. 2nd, the Phase 2 is not canceled. The Phase 2 is suspended.
And so 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. So we are going to invest in Phase 2. So there is no direct impact on our CapEx plan because it's already included. Mexico, I think that we have been very successful and we won other 3 blocks and we won another blocks.
We continue in 3 different bid rounds to increase our resource base, asset base in Mexico. So now we have blocks in the offshore, conventional water in deep offshore. So we are present and we are going to continue to participate to the other bid rounds. Perfect. Thank you very much.
Have a good weekend. Thank you.
The last question is from Martin Ratz of Morgan Stanley. Please go ahead, sir.
Well, yes, thanks very much.
It seems almost all my questions
have been answered. So 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 AnyConference Call. You may disconnect your telephones.
Thank you very much. Have a good weekend.