Eni announces results for the second quarter and first half of 2013

Financial Highlights¹

• Adjusted operating profit: €1.95 billion for the quarter, down 51%²; €5.66 billion for the first half, down 43%² including Saipem losses which have been recognized in the second quarter;
• Adjusted net profit: €0.58 billion for the quarter, down 55%²; €1.96 billion for the first half, down 46%² including Saipem losses which have been recognized in the second quarter;
• Net profit: €0.28 billion for the quarter, up 76%; €1.82 billion for the first half, down 51%;
• Operating cash flow: €1.95 billion for the quarter; €4.75 billion for the first half;
• Leverage at 0.27;
• Interim dividend proposal of €0.55 per share.

Operational Highlights

• Oil and gas production: 1.648 mmboe/d, broadly in line with the second quarter of 2012 (down 2.7% in the first half);
• Renegotiations of long-term gas supply contracts: reached new agreements with Sonatrach and Gazprom;
• Reached the divestment to CNPC of 28.57% of the share capital of Eni East Africa, which currently owns a 70% interest in Area 4 in Mozambique with a cash consideration of $4.2 billion, not included in the 0.27 leverage as of June 30;
• Started up six upstream projects in the first half; confirmed Kashagan schedule;
• Completed the divestment of Snam; progressed the divestment of Galp;
• Started exploration activities in the Russian upstream with Rosneft;
• Continuing exploration success; resource base increased by 950 million barrels in the first half.

Paolo Scaroni, Chief Executive Officer, commented:
"First half results were affected by a difficult economic situation across Italy and Europe, production interruption in Libya and Nigeria and by the fall in Saipem’s results. We have strengthened our balance sheet through the continuing divestment of Snam and Galp. In this context I am satisfied with the operational progress achieved in the first half including 6 production start-ups, of the 8 planned for the whole 2013, and the renegotiation of gas contracts with Sonatrach and Gazprom. Thanks to these successes we expect a significant improvement in our second half results. On September 19, I will propose to Eni's Board of Directors an interim dividend of €0.55 per share."

At the same time as reviewing this press release, the Board has approved the interim consolidated report as of June 30, 2013, which has been prepared in accordance to Italian listing standards as per article 154-ter of the Code for securities and exchanges (Testo Unico della Finanza). The document was immediately submitted to the Company’s external auditor. Publication of the interim consolidated report is scheduled within the first half of August 2013 alongside completion of the auditor’s review.

Adjusted operating profit
In the second quarter of 2013 adjusted operating profit was €1.95 billion, down 51.3% when excluding Snam’s contribution to continuing operations in the second quarter of 2012. The decline reflected the losses, fully recognized in the second quarter, incurred by the Engineering & Construction segment (down to a loss of €680 million compared to a profit of €389 million in the second quarter of 2012) due to a slowdown in the business activity and a revision of profitability estimates on some large contracts which are near completion. Excluding the Engineering & Construction shortfall, the Group operating profit would have declined by 27.2%.
The Group results were also impacted by a lower contribution from the Exploration & Production Division (down €830 million, or 19.6%) affected by lower crude oil prices (the Brent benchmark was down 5.3% from the same quarter in 2012), as well as by the ongoing weak business conditions in Italy and in Europe persisting throughout the quarter at our Refining & Marketing Division (down by 22.5%), Chemicals business (with larger losses of €57 million from the same quarter of the previous year) and Gas & Power Division (down by 8.7%). The Gas & Power Division results reflected only a part of the benefits associated with the renegotiations of the supply contracts, some of which are still pending necessarily delaying the recognition of the associated economic effects.
In the first half of 2013 adjusted operating profit was €5.66 million, down 45.9% or 43.2% excluding Snam’s contribution to continuing operations in the first half of 2012. This decline was driven by the effects described above and the fact that the Gas & Power Division results for the first half of 2012 were boosted by the economic benefits associated with the contract renegotiations which had retroactive effects to the beginning of 2011. Finally, excluding the Engineering & Construction shortfall, Eni’s Group operating profit would have declined by 33.3% in the first half 2013.

Adjusted net profit
In the second quarter of 2013, adjusted net profit was €0.58 billion, down 57.9% or 55.3% when excluding Snam’s contribution to continuing operations in the second quarter of 2012. The decline was due to a lowered operating performance, whilst the Group adjusted tax rate rose to 91.2% representing an increase of almost thirty percentage points from a year ago as the Company could not recognize any tax-loss carryforward at Saipem and recorded a higher contribution to Group profit before income taxes from the Exploration & Production segment which is subject to a larger fiscal take than other Group’s businesses.
In the first half of 2013, adjusted net profit was €1.96 billion, down 48.8% or 46.3% when excluding Snam’s contribution to continuing operations in the first half of 2012. Finally, excluding the Engineering & Construction shortfall, the Group operating profit would have declined by 26.7% and 35.9% in the second quarter and first half 2013, respectively.

Capital expenditure
Capital expenditure for the second quarter of 2013 amounted to €2.81 billion (€5.93 billion for the first half of 2013) and mainly related to continuing development of oil and gas reserves. In the first half of 2013 the Group also incurred expenditures of €0.18 billion in finance acquisitions, joint-venture projects and equity investees.

Balance sheet and Cash flow
Net cash generated by operating activities amounted to €4,752 million for the first half of 2013 (€1,954 million for the second quarter of 2013). Those flows and cash from disposals of €2,465 million were used to fund financing requirements associated with capital expenditure (€ 5,931 million) and dividend payments of €2,167 million (of which €1,956 million relating to the payment of the balance dividend for fiscal year 2012 to Eni's shareholders). Divestments in the period mainly related to the 11.69% interest in Snam (€1,459 million) and 8% in Galp (€810 million).
Net borrowings³ as of June 30, 2013 increased by €981 million from December 31, 2012 to €16,492 million which was also impacted by a lower amount of trade receivables transferred to financing institutions (down by €335 million).
Net borrowings increased by €507 million from March 31, 2013 due to a lower amount of trade receivables transferred to financing institutions (down by €368 million).
The ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage⁴ – increased to 0.27 at June 30, 2013 from 0.25 as of December 31, 2012 and do not include the effects of the Eni East Africa deal, closed on July 26, 2013. Including those effects, leverage would be 0.21.

Interim dividend 2013
In light of the financial results achieved for the first half of 2013 and management’s expectations for the full-year results, the interim dividend proposal to the Board of Directors on September 19, 2013, will amount to €0.55 per share⁵ (€0.54 per share in 2012). The interim dividend is payable on September 26, 2013, with September 23, 2013 being the ex dividend date.

Exploration & Production
In the second quarter of 2013, Eni’s liquids and gas production of 1,648 kboe/d was broadly in line with the second quarter of 2012, down 0.5% (down by 2.7% in the first half of 2013 to 1,624 million kboe/d). Performance was affected by force majeure events in Nigeria, particularly significant, and in Libya, and by the disposals made in 2012 relating to the divestment of a 10% interest in the Karachaganak field and the Galp transaction, while it was partly helped by the restart of the Elgin-Franklin field in the UK, which was off line in 2012 due to an accident. When excluding these impacts, production reported an increase of approximately two percentage points in the second quarter and was unchanged for the first half of 2013 driven by new fields’ start-up and continuing production ramp-up mainly in Russia, Algeria, Angola and Egypt, partly offset by planned facility downtime, mainly in Kazakhstan and the North Sea, and mature fields decline.

Gas & Power
In the second quarter of 2013, Eni’s worldwide natural gas sales declined by 5.5% to 19.04 bcm from the second quarter of 2012. When excluding the impact of the Galp divestment, gas sales were down by 2.9% from the same quarter of the previous year (down by 0.7% in the first half). Against the backdrop of the ongoing downturn in demand and intensified competitive pressure, Eni’s sales in Italy (6.50 bmc) performed fairly well with a 0.3% decline in the second quarter of 2013 (up 1.9% to 19.03 bcm in the first half of 2013). Eni’s natural gas sales in European markets decreased by 19.2% and 14% in the second quarter and the first half of 2013 respectively, with losses coming from Benelux reflecting lower hub sales and in Turkey due to lower withdrawals from Botas. Those negatives were partly offset by higher sales in Germany/Austria. Sales to importers to Italy experienced a substantial increase due to the recovery of Libyan supplies. Sales in extra-European markets declined by 2.6% in the quarter. In the first half this effect was more than offset by higher LNG sales in the Far East (up 10.1%).

Refining & Marketing
In the second quarter of 2013 refining margins declined by 33% in the Mediterranean area from the same period a year ago (the benchmark margin on TRC Brent crude averaged $3.97 per barrel as compared to $5.89 per barrel in the second quarter 2012).
The decline, amidst volatile market conditions, was driven by the structural weaknesses of the industry due to overcapacity, declining demand and high feedstock costs. Furthermore, results at Eni’s refining business were adversely impacted by shrinking price differentials between light and heavy crudes that reduced the profitability of complex cycles.
In the second quarter of 2013, Eni marketed lower volumes at its Italian retail outlets, down by 13.6% to 1.71 million tonnes (down by 11.3% in the first half) due to a fall in domestic consumption and in market share which dropped to 28% in the second quarter compared to a 30.8% share in the same quarter of the previous year. In the second quarter of 2013, retail sales in the European market slightly increased to 0.78 million tonnes, while they declined slightly to 1.46 million barrels, or 1.4%, in the first half, due to higher sales mainly in Germany and Austria offset by declines in the Czech Republic.

Portfolio developments

Mozambique
In July 2013, Eni and China National Petroleum Corporation (CNPC) closed the sale of 28.57% share capital of the subsidiary Eni East Africa, which currently owns a 70% interest in Area 4, offshore Mozambique, for an agreed price equal to $4,210 million, integrated for contractual balances provided until the date of closing. CNPC indirectly acquires, through its 28.57% equity investment in Eni East Africa, a 20% interest in Area 4, while Eni will retain the 50% interest through the remaining stake in Eni East Africa. CNPC’s entrance into Area 4 is a strategic development for the project because of the standing of the Chinese company in the upstream and downstream sectors worldwide. In addition, the planned activities of the Joint Study Agreement progressed to develop the promising shale gas block located in the Sichuan Basin in China.

Kazakhstan
The North Caspian Operating Company Consortium (Eni share 16.81%) that operates the development of the Kashagan field is currently focused on completing the Experimental Program. In June 2013, the onshore treatment plant in Bolashak came on line; in July operational testing activities started at offshore production facilities. Production start-up is expected in the coming weeks. Security remains the priority of the Consortium throughout the whole process to achieve first oil.

Sale of Snam and Galp
On May 9, 2013, Eni completed the sale of 395,253,345 shares equal to 11.69% of the share capital of Snam SpA, which was carried out through an accelerated book-building aimed at institutional investors. The offering was priced at €3.69 per share, yielding a total consideration of €1,458.5 million. A gain of €75 million was recognized through profit, of which €8 million were the reversal of the evaluation reserve. Following the placement, Eni holds 8.54% of the share capital of Snam underlying the €1,250 million convertible bond, issued on January 18, 2013 and due on January 18, 2016.

On May 31, 2013, Eni completed the placement of 55,452,341 ordinary shares, corresponding to approximately 6.7% of the share capital of Galp Energia SGPS S.A, which was carried out through an accelerated book-building aimed at institutional investors.
The offering was priced at €12.22 per share, yielding a total consideration of approximately €677.6 million. A gain of €95 million was recognized through profit, of which €65 million were the reversal of the evaluation reserve. As of June 30, 2013 following the sale, Eni holds 16.34% of Galp’s outstanding share capital, of which 8% underlying the approximately €1,028 million exchangeable bond issued on November 30, 2012 and due on November 30, 2015 and 8.34% subject to certain pre-emptive rights and options exercisable by Amorim Energia and previously disclosed to the market.

Russia
In June 2013, Eni and Rosneft completed a strategic cooperation agreement for operating offshore exploration activities off the Russian section of the Barents Sea (Fedynsky and Tsentralno-Barentsevsky licenses) where seismic surveys have been started, and the Russian section of the Black Sea (Western Cernomorsky license).

Norway
In June 2013, following an international licensing round Eni was awarded the operatorship with an ownership interest of 40% in the PL 717, PL 712 and PL 716 licenses and the ownership interest of 30% in the PL 714 exploration license in the Norwegian section of the Barents Sea.

Start-ups
In the first half of 2013, in line with production plans, the following projects have been started up:

(i) in Algeria, the MLE - CAFC field (Eni’s interest 75%) with an overall plateau of approximately 33 kboe/d net to Eni by 2016 and El Merk field (Eni’s interest 12.25%) with an expected peak at 18 kboe/d net to Eni expected in 2015;
(ii) in Angola the liquefaction plant managed by the Angola LNG consortium (Eni’s interest 13.6%) with the first cargo in June 2013. The plant will treat 10,594 bcf of gas in 30 years;
(iii) in Nigeria in Block OML 125 (Eni operator with an 85% interest) the offshore Abo- Phase 3 project;
(iv) in Venezuela the accelerated early production of the giant Junin 5 oil field (Eni’s interest 40%) in the Orinoco Faja. Early production is expected to reach 75 kbbl/d in 2015;
(v) in Norway, the offshore Skuld field (Eni’s interest 11.5%) with production of approximately 30 kboe/d (approximately 4 kboe/d net to Eni).

Exploration successes
In the first half of 2013, exploration activities yielded 950 million boe of equity resources, with a unit exploration cost of $1.1 per boe. Main exploration successes occurred in:

(i) Egypt, with the Rosa North-1X oil discovery in the Meleiha license (Eni’s interest 56%). Development will entail the drilling of a new well in 2013. Total production in the year will be 5 kbbl/d supported by the synergies with production facilities existing in the area;
(ii) Angola, in offshore Block 15/06 (Eni operator with a 35% interest), with the Vandumbu 1 oil discovery;
(iii) Congo, in offshore Block Marine XII (Eni operator with a 65% interest) with the oil and gas discovery and the appraisal of the Nene Marine;
(iv) Mozambique with the Coral 3 and Mamba South 3 delineation wells that strengthen the mineral potential of the area bringing the estimated mineral potential up to 80 tcf of gas in place. Eni plans to drill a new exploration well for estimating the potential of the deeper and southernmost section of Area 4;
(v) Ghana, with the Sankofa East-2A appraisal well, in the Offshore Cape Three Points licence (Eni operator with a 47.22% interest), that confirmed the high mineral oil potential of the Western area. The total potential of the Sankofa discovery is estimated at 450 mmbbl of oil in place with recoverable reserves up to 150 mmbbl;
(vi) Pakistan, with the gas discovery of Lundali 1 in the onshore Sukhpur Concession (Eni operator with a 45% interest) with a production capacity in excess of 3 kboe/d.

Outlook

The outlook for 2013 features risks and uncertainties that will weigh on the global economic recovery, namely the prolonged downturn in the Eurozone. The price of crude oil is supported by ongoing geopolitical risks, while fundamentals have been weakening as global supplies are forecast to slightly outpace demand. Management expects continued weak conditions in the European gas, refining and marketing of fuels and chemical sectors. Demand for energy commodities is anticipated to shrink due to economic stagnation and unit margins will be exposed to competitive pressure in an extremely volatile environment. In this scenario, the recovery of profitability in the Gas & Power and Refining & Marketing Divisions and Versalis will depend mainly on management actions to optimize operations and improve the cost position.

Management expects the key production and sales trends of Eni businesses to be as follows:

• production of liquids and natural gas: full-year production is expected to remain in line with 2012, under the assumption that the impact of extraordinary events on production in Nigeria and Libya in the second half of 2013 will remain at the same level as in the first half of the year. The start-up of major projects, such as those in Algeria, Angola and Kazakhstan, and production ramp-up at fields started in 2012, in particular in Egypt, will more than offset these events, mature field declines and the effect of 2012 asset disposals;
• gas sales: natural gas sales are expected to decrease compared to 2012 (95.39 bcm in 2012, including consolidated sales and Eni’s share of joint ventures) mainly due to the divestment of Galp and the use of the flexibility achieved through the renegotiation of long-term supply contracts;
• refining throughputs on Eni’s account: processed volumes are expected to decline from 2012 (30.01 million tonnes in 2012), reflecting an ongoing industry downturn and the planned shut down of the Venice plant to start the Green Refinery project. These negatives are expected to be partly offset by the start-up of the new EST technology conversion plant at Sannazzaro;
• retail sales of refined products in Italy and the Rest of Europe: management foresees retail sales volumes to decline from 2012 (10.87 million tonnes, 2012 total) due to an expected contraction in domestic demand, increasing competitive pressure and factoring in the effect of the “riparti con eni‘ marketing campaign which was executed in the summer of 2012. The expected fall in domestic retail volumes will be only partially absorbed by increased sales in the Rest of Europe;
• Engineering & Construction: this segment is expected to report a substantial reduction in the full year 2013 results.

In 2013, management expects a capital budget broadly in line with 2012 (€12.76 billion in capital expenditure and €0.57 billion in financial investments in 2012, excluding Snam investments). In 2013, the company will be focused on the development of hydrocarbon reserves in Sub-Saharan and North Africa, Norway, the United States, Iraq, Kazakhstan and Venezuela, exploration projects in Sub-Saharan Africa, Norway, Egypt, the United States and emerging areas, as well as optimization and selective growth initiatives in other sectors, the start-up of the Green Refinery works in Venice, and elastomers and bio-technologies in the Chemical sector. Assuming a Brent price of $104 a barrel on average for the full year 2013, the ratio of net borrowings to total equity - leverage - is projected to slightly improve from the level achieved at the end of 2012, due to cash flows from operations and portfolio management.

This press release has been prepared on a voluntary basis in accordance with the best practices in the marketplace. It provides data and information on the Company’s business and financial performance for the second quarter and the first half of 2013 (unaudited). Results of operations for the first half of 2013 and material business trends have been extracted from the interim consolidated report 2013 which has been prepared in compliance with article 154-ter of the Italian code for securities and exchanges (“Testo Unico della Finanza‘ – TUF) and approved by the Company’s Board of Directors today. The interim report has been transmitted to the Company’s external auditor as provided by applicable regulations. Publication of the interim report is scheduled in the first half of August, alongside the Company’s external auditor report upon completion of relevant audits.

Results and cash flow are presented for the second and first quarter and the first half of 2013, and for the second quarter and the first half of 2012. Information on liquidity and capital resources relates to end of the period as of June 30, 2013, March 31, 2013, and December 31, 2012. Statements presented in this press release are comparable with those presented in the management’s disclosure section of the Company’s annual report and interim report.

Quarterly accounts set forth herein have been prepared in accordance with the evaluation and recognition criteria set by the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and adopted by the European Commission according to the procedure set forth in Article 6 of the European Regulation (CE) No. 1606/2002 of the European Parliament and European Council of July 19, 2002, which are disclosed in our annual report for the year ended December 31, 2012, as updated with new IFRS provisions effective January 1, 2013, which are summarized below.

With Commission Regulation (EU) No. 475/2012 of June 5, 2012, the revised IAS 19 “Employee Benefits‘ (hereinafter “IAS 19‘) has been endorsed. The document requires interalia: (i) to recognize actuarial gains and losses in other comprehensive income, eliminating the possibility to adopt the corridor approach. Actuarial gains and losses recognized in other comprehensive income will not be recycled through profit and loss account in subsequent periods; and (ii) to replace the separate presentation of the expected return on plan assets and the interest cost, with a single “net interest expense or income‘. This aggregate is determined by applying the discount rate used to measure the defined benefit obligation to the net defined benefit liability. The new provisions require, interalia, additional disclosures with reference to defined benefit plans. IAS 19 is effective for annual periods beginning on or after January 1, 2013. Under the transition requirements of IAS 19, the new provisions are applied retrospectively by adjusting the opening balance as of January 1, 2012 and the 2012 profit and loss account. In the Group consolidated accounts for the first quarter 2013, the enactment of the new provisions of IAS 19 determined a pre-tax and post-tax effect amounting to, respectively: (i) a decrease of equity as of January 1, 2012 of €123 million and €61 million; (ii) a decrease of equity as of December 31, 2012 of €269 million and €155 million, of which €149 million and €96 million related to the 2012 actuarial gains and losses recognised in other comprehensive income. The effect on net profit for the first and second quarter 2012 was immaterial. In addition, the Company has reclassified interest expense on employee benefit plans as an interest expense in lieu of operating expenses (payroll costs) correspondingly changing the first half of 2013 operating profit by €23 million.

Non-GAAP financial measures and other performance indicators disclosed throughout this press release are accompanied by explanatory notes and tables to help investors to gain a full understanding of said measures in line with guidance provided by recommendation CESR/05-178b.

Eni’s Chief Financial Officer, Massimo Mondazzi, in his position as manager responsible for the preparation of the Company’s financial reports, certifies pursuant to rule 154-bis paragraph 2 of Legislative Decree No. 58/1998, that data and information disclosed in this press release correspond to the Company’s evidence and accounting books and entries.

Disclaimer
This press release, in particular the statements under the section “Outlook‘, contains certain forward-looking statements particularly those regarding capital expenditures, development and management of oil and gas resources, dividends, buy-back, allocation of future cash flow from operations, future operating performance, gearing, targets of production and sales growth, new markets, and the progress and timing of projects. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements, depending on a variety of factors, including the timing of bringing new fields on stream; management’s ability in carrying out industrial plans and in succeeding in commercial transactions; future levels of industry product supply; demand and pricing; operational problems; general economic conditions; political stability and economic growth in relevant areas of the world; changes in laws and governmental regulations; development and use of new technology; changes in public expectations and other changes in business conditions; the actions of competitors and other factors discussed elsewhere in this document. Due to the seasonality in demand for natural gas and certain refined products and the changes in a number of external factors affecting Eni’s operations, such as prices and margins of hydrocarbons and refined products, Eni’s results from operations and changes in net borrowings for the first half of the year cannot be extrapolated on an annual basis.

(1) Throughout this press release, changes in the Group results for the first quarter 2013 are calculated with respect to results earned by the Group’s continuing operations in the first half and the second quarter 2012 considering that at the time Snam was consolidated in the Group accounts and reported as discontinued operations based on IFRS 5.
(2) Those changes are calculated excluding Snam’s contribution to the Group results in the first half and the second quarter 2012. This is the result of Snam transactions with Eni included in the continuing operations results of the first half and the second quarter 2012 according to IFRS 5. Adjusted operating profit and adjusted net profit are not provided by IFRS.
(3) Information on net borrowings composition is furnished on page 33.
(4) Non-GAAP financial measures disclosed throughout this press release are accompanied by explanatory notes and tables to help investors gain a full understanding of said measures in line with guidance provided for by CESR Recommendation No. 2005-178b. See page 33 for leverage.
(5) Dividends are not entitled to tax credit and, depending on the receiver, are subject to a withholding tax on distribution or are partially cumulated to the receiver’s taxable income.

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Eni
Società per Azioni Rome, Piazzale Enrico Mattei, 1
Share capital: euro 4,005,358,876 fully paid
Tax identification number 00484960588
Tel.: +39 0659821 - Fax: +39 0659822141

This press release for the second quarter and the first half of 2013 (unaudited) is also available on the Eni web site eni.com.

The full version of the Press Release is available in PDF format.