- FINANCE, STRATEGY AND REPORTING
- ● PRICE SENSITIVE
San Donato Milanese, July 29, 2011 – Eni, the international oil and gas company, today announces its group results for the second quarter and the first half of 2011 (unaudited).
Paolo Scaroni, Chief Executive Officer, commented:
“The main feature impacting Eni’s results in the first half of 2011 was the disruption in supply of oil and gas from Libya, which affected all of our business activities. G&P results also suffered from the high supply costs of natural gas, which currently take no account of the expected retroactive benefits of ongoing renegotiations. In this context, Eni delivered solid results, benefitting in particular from improved profitability in E&P. In the first half of the year we have strengthened our growth prospects through the progress on key development projects, continuing exploration success and new agreements which secure access to resources in core and new high potential areas. Management’s expectations for solid full-year results and the Company’s growth and profitability outlook underpin our dividend policy and our proposal for an interim dividend of €0.52 per share.”
On the same occasion of reviewing this press release, the Board has approved the interim consolidated report as of June 30, 2011, 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 2011 alongside completion of the auditor’s review.
Second Quarter 2010
First Quarter 2011
Second Quarter 2011
SUMMARY GROUP RESULTS
Adjusted operating profit (a)
Net profit (b)
- per share (€) (c)
- per ADR ($) (c) (d)
Adjusted net profit (a) (b)
- per share (€) (c)
- per ADR ($) (c) (d)
(a) For a detailed explanation of adjusted operating profit and net profit see paragraph “Reconciliation of reported operating and net profit to results on an adjusted basis” page 27.
(b) Profit attributable to Eni’s shareholders.
(c) Fully diluted. Dollar amounts are converted on the basis of the average EUR/USD exchange rate quoted by the ECB for the periods presented.
(d) One ADR (American Depositary Receipt) is equal to two Eni ordinary shares.
Adjusted operating profit
Eni reported lowered adjusted operating profit for the second quarter of 2011 at €4 billion, down by 3% from the year-earlier quarter, dragged down by a weak performance of the downstream businesses. The Gas & Power division’s profit fell by 60% from a year ago driven by reduced marketing margins on gas sales due to strong competitive pressures and a weak trading environment. The division’s performance did not take into account the possible benefit associated with ongoing renegotiations of the Company’s long-term gas purchase contracts which may become effective earlier than the end of June 2011. The Refining & Marketing and Petrochemical divisions both reported widening operating losses driven by high costs for oil-based feedstock only partially transferred to end prices. On the positive side, the Exploration & Production division delivered an improved performance (up by 11% from a year ago) driven by a strong oil price environment, partly offset by the impact associated with a lowered Libyan output and the appreciation of the euro vs. the US dollar (up by 13%). Also the Engineering & Construction segment posted higher profit (up 10%) helped by a stronger turnover and higher margins on works.
For the first half of 2011, the Group reported an improved operating profit compared to the first half of 2010 (up by 8% to €9.1 billion) on the back of better performances reported by the Exploration & Production and, to a lesser extent, the Engineering & Construction segment, partly offset by weak trends in the Company’s downstream businesses.
Adjusted net profit
Adjusted net profit for the second quarter of 2011 was €1.44 billion, a decrease of 14% compared with the second quarter of 2010 as a result of the decreased operating performance and 2 percentage points increase of the Group tax rate. Adjusted net profit for the first half of 2011 was €3.63 billion (up 4% from the first half of 2010) driven by a better operating performance, also helped by a slight decrease in the Group tax rate (down by a half percentage point).
Capital expenditure was €3,740 million for the quarter and €6,615 million for the first half mainly relating to continuing development of oil and gas reserves, the upgrading of rigs and offshore vessels in the Engineering & Construction segment and of the gas transport infrastructures.
In the second quarter of 2011 net cash generated by operating activities amounted to €4,411 million (€8,596 million in the first half). Cash flow from operating activities of the quarter benefited from a cash inflow of €248 million associated with transferring trade receivables due beyond March 31, 2011, to factoring institutions amounting to €932 million in the first quarter 2011, while the current quarter benefitted from transferring €1,180 million of trade receivables due beyond June 30, 2011, to the same institutions.
These inflows were used to fund part of the financing requirements associated with capital expenditure incurred in the period and dividend payment, which included payment of balance dividend for the fiscal year 2010 to Eni’s shareholders for €1,811 million and to non-controlling interests by consolidated entities (€397 million). As a result, net borrowings1 as of June 30, 2011, amounted to €25,978 million, representing a slight decrease of €141 million from December 31, 2010, and an increase of €1,027 million from March 31, 2011.
Return on Average Capital Employed (ROACE)2 calculated on an adjusted basis for the twelve-month period to June 30, 2011, was 10.9% (9.7% at June 30, 2010).
Ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage2 – was 0.47 at June 30, 2011, unchanged from December 31, 2010. This indicator was positively influenced by net profit for the period and the slight decrease of net borrowings which effects were absorbed by the appreciation of the euro against the US dollar as recorded at period end exchange rates (up 8%) which reduced shareholders’ equity by €2.37 billion, as well as dividend payment.
Interim dividend 2011
In light of the financial results achieved for the first half of 2011 and management’s expectations for the full-year results, the interim dividend proposal to the Board of Directors on September 8, 2011, will amount to €0.52 per share (€0.50 per share in 2010). The interim dividend is payable on September 22, 2011, being September 19, 2011 the ex dividend date.
Second Quarter 2010
First Quarter 2011
Second Quarter 2011
Production of oil
- Natural gas
Worldwide gas sales
Retail sales of refined products in Europe
Exploration & Production
Eni reported liquids and gas production of 1,489 kboe/d for the second quarter of 2011 (1,586 kboe/d in the first half of 2011), down by 15% from the second quarter of 2010 (down by 12% from the first half of 2010). The magnitude of this reduction was the result of the shutdown of activities at all Eni’s producing sites in Libya and the closure of the GreenStream pipeline transporting gas from Libya to Italy, with the sole exception of the Wafa field which has been flowing at a level of approximately 50 kboe/d net to Eni with the full supply supporting local production of electricity.
Performance for the quarter was also negatively impacted by lower entitlements in the Company’s PSAs due to higher oil prices with an overall effect of 36 kboe/d compared to the year-earlier quarter (approximately 30 kboe/d from the first half of 2010), in addition to the above mentioned loss of Libyan output amounting to approximately 200 kboe/d compared to the second quarter of 2010 (down by approximately 170 kboe/d from the first half of 2010). Net of those effects, production for the quarter decreased by 2 percentage points (down 1 percentage point in the first half of 2011) mainly due to planned facility downtime in particular in Italy. Production decline at mature fields was absorbed by continuing production ramp up in Norway, Egypt and Iraq.
Gas & Power
In the second quarter of 2011 Eni’s gas sales were 21 bcm, an increase of 9% compared with the second quarter of 2010 (up 7 % from the first half of 2010) which reflected an improved performance both in Europe and the domestic market. Volumes gains in European markets (up by 2.29 bcm in the quarter of 2011, or 26%; up by 19% in the first half of 2011) were driven by growth registered in Turkey, Germany/Austria, Belgium, UK/Northern Europe and France. In Italy volume increases (up by 0.84 bcm in the quarter of 2011, or 13%; up by 11% in the first half of 2011) were driven by client additions and higher off-takes in power generation, wholesalers and industrial segments which gave a boost to Eni’s market share. These increases were partly offset by lower sales to shippers which import gas to Italy (down by 74% and 55% in the second quarter and first half of 2011, respectively) due to reduced off-takes and lower availability of Libyan gas resulting from the closure of the GreenStream importing pipeline.
Refining & Marketing
In the second quarter of 2011, the benchmark refining margin on TRC Brent crude was unprofitable (down by 68% to 1.1$/barrel from the second quarter of 2010; down by 51% from the first half of 2010 to 1.4$/barrel) as high costs of oil-based feedstock were only partially transferred to product prices pressured by weak demand, high inventory levels and excess capacity. In addition refinery utilities expenses registered large increases as they are indexed to the cost of oil. Against this backdrop, Eni’s realized margins fell sharply although Eni’s complex cycles were helped by widening sweet-sour crude price differentials on the marketplace and higher premium prices on gasoline and gasoil compared to fuel oil.
In the second quarter of 2011, sales volumes on the Italian retail market decreased by 1.4% from a year ago (down by 2.4 in the first half of 2011) due to a large drop in fuel consumption (down by 1.9%). Market share for the period increased by 0.1 percentage points to 30.2% compared to the same period of the previous year. Also retail sales on European market were weaker in the quarter due to lower demand and higher competitive pressure (down by 1.3% in the quarter; however they were up 1.4% in the first half) with reductions in Germany, France and Eastern Europe. These negatives were partly offset by the purchase of a network of service stations in Austria closed during 2010.
Results of operations for the second quarter and first half of 2011 were negatively impacted by the appreciation of the euro vs the US dollar (up 13% and 5.6% in the quarter and in the first half of 2011, respectively).
Update on Libyan situation
All of Eni’s producing facilities came to halt including export through the GreenStream gas pipeline, with the sole exception of the Wafa field where it is supporting local production of electricity. Plants and pipelines were put into safety status and no damage has been reported. Eni is technically able to resume the gas output at a level similar to the pre-crisis flows in 2010 once the situation has returned to normal. Since March 2011 Eni has evacuated all its personnel and suspended ongoing exploration and development activities. Eni’s production in Libya is currently flowing at a rate of approximately 50 kboe/d, down from the expected level of 280 kboe/d for the year. As of June 30, 2011, Eni’s net capital employed in Libya amounted to $2.04 billion ($2.5 billion as of December 31, 2010), including a 50% interest in GreenStream BV.
In April 2011, Eni signed a cooperation agreement with Sonatrach to explore for and develop unconventional hydrocarbons, particularly shale gas plays.
In May 2011, Eni signed an agreement with MEO Australia Limited to farm-in the Heron and Blackwood gas discoveries in permit NT/P-68, located in the Timor Sea. Eni will acquire a 50% stake and operatorship in the first gas discovery by financing exploration activities relating to the drilling of two appraisal wells. Eni was granted an option to earn a 50% stake in Blackwood discovery by drilling one appraisal well in the area and performing seismic surveys. The agreement also provides an option to acquire an additional 25% in both the discoveries by financing the development plan required to reach a Final Investment Decision (FID).
In May 2011, Eni was awarded rights to explore and the operatorship of the Arguni I block with a 100% interest, located in the Bintuni basin, with high mineral potential. The agreement foresees drilling 2 wells to be carried out in the first 3 years of exploration license.
In June 2011, Eni signed a Memorandum of Understanding with South Africa’s State-owned oil company PetroSA to promote common opportunities to jointly expand operations in conventional and unconventional hydrocarbons in South Africa and in Africa. The parties will also study joint initiatives to evaluate long-term LNG supplies for power generation and gas-to-liquids (GTL) as well as refined products to be provided by Eni.
In addition, Eni will support the construction of new power plants aimed at guaranteeing economic development of the country. In addition, Eni and PetroSA will also evaluate leasing options to use storage facilities in Saldanha, located strategically between the Asian, American and European markets.
In June 2011, through its subsidiary Polimeri Europa, Eni signed a cooperation agreement with Novamont SpA to convert Eni’s Porto Torres chemical plant into an innovative bio-based chemical complex to produce bio-plastics and other bio-based petrochemical products (bio-lubricants and bio-additives) for which significant growth is expected in the medium-long term. The project will be supported by an integrated supply chain and raw materials of vegetable origin. Novamont will contribute its technologies and skills in the bio-plastics and bio-based chemical sector. Eni will contribute to the joint entity the Porto Torres plant, infrastructure and professional staff as well as its industry and technical-engineering and commercial know-how in the petrochemical sector. In addition, Eni foresees to build a biomass power plant and to carry out a number of projects for environmental restoration and clean-up activities. Eni plans to make capital expenditure totalling approximately €1.2 billion in the 2011-2016 period to execute the above mentioned projects directly or through the joint entity.
In July 2011, Eni and the Egyptian Authorities reaffirmed their upstream commitment in the country, particularly in the Western Desert, the Mediterranean Sea and the Sinai basins. The program of activity foresees a development plan including the drilling of additional wells and the fast track of recent discoveries as well as an exploration plan including the drilling of 12 wells. In addition, Eni will provide for a number of sustainable initiatives designed to support the country’s population.
In July 2011, Eni signed an agreement with NV Noun Energy for the acquisition of the subsidiary Noun Belgium NV. The company supplies gas and electricity to the industrial and residential segments in Belgium. The agreement is subject to the approval of the relevant Authorities.
Exploration activities yielded positive results in:
(i) Norway, with the Skrugard oil and gas discovery to be readily put in production in the PL 532 (Eni’s interest 30%), with initial recoverable reserves of approximately 250 mmbbl;
(ii) USA, in the Gulf of Mexico, with the Hadrian North appraisal well containing oil and natural gas resources in Block KC919 (Eni’s interest 25%);
(iii) Ghana, with the appraisal well Sankofa-2 and Gye Nyame discovery containing oil and gas resources in the offshore license Cape Three Points (Eni 47.22%, operator);
(iv) Venezuela, with the Perla 4 and 5 appraisal wells in Block Cardon IV (Eni’s interest 50%) that have been successfully drilled. The results exceeded the initial resource estimation to more than approximately 16,000 bcf. The development plan provides for a production target of approximately 300 mmcf/d in 2013;
(v) the United Kingdom with the appraisal of the Culzean gas and liquids discovery (Eni’s interest 16.95%);
(vi) Angola, in Block 15/06 (Eni operator with a 35% interest) with the Mukuvo-1 discovery and Cinguvu-2 appraisal oil wells, within the West Hub project sanctioned in 2010. Planned activities progressed and start-up is expected in 2013 with peak production at 22 kbbl/d;
(vii) Egypt, with near field activities in: (i) the Belayim concession (Eni’s interest 100%) with the BB-10 and BLNE-1 oil discoveries that were linked to existing facilities; (ii) the development lease Abu Madi West (Eni’s interest 75%) with the Nidoco West and Nidoco East gas discoveries. Their linking to the existing facilities progressed; (iii) the development lease Meleiha (Eni’s interest 56%) with the Aman SW and Dorra-1X oil discoveries that were started-up;
(viii) Pakistan, with the Kadanwari-27 exploration well (Eni’s interest 18.42%), in the Kadanwari permit.
Main production start-ups
In line with the Company’s production plans, production was started at the following main fields:
(i) Capparuccia (Eni’s interest 77.8%) in Italy, with an initial production of approximately 4 kboe/d;
(ii) Libondo (Eni’s interest 35%), offshore Congo;
(iii) Nikaitchuq (Eni operator with a 100% interest), offshore Alaska. Peak production is expected at 28 kbbl/d;
(iv) Appaloosa (Eni’s interest 100%) in the Gulf of Mexico, with a production of approximately 7 kbbl/d.
Divestment of international pipelines
As part of the agreement signed with the European Commission for the divestment of Eni’s interests in the German TENP, the Swiss Transitgas and the Austrian TAG gas transport pipelines, interconnected with the Italian transport system, on June 10, 2011, Eni entered a purchase agreement with Italian Cassa Depositi e Prestiti S.p.A (“CDP”) for the sale of its whole interest in Trans Austria Gasleitung GmbH representing 89% of outstanding shares, which give right to 94% of the entity's earnings. Trans Austria Gasleitung GmbH is the company which owns the transport rights for the Austrian section of the pipeline that connects Russia to Italy. The divestment, subject to approval of the European Commission, provides for the payment of €483 million, plus the reimbursement of a shareholder loan granted by Eni to the company equal to €192 million. These amounts will be subject to review at the closing date as per market practice. The parties have also agreed upon earn-out mechanisms linked to the occurrence of certain events. The transaction, once finalized, will leave unaffected the ship-or-pay contract signed by Eni with TAG. Procedures are progressing for the divestment of Eni’s interest in the other two gas transport pipelines, the German TENP and the Swiss Transitgas.
Management expects that the global economic recovery will continue to progress at a modest pace during the year 2011. Nonetheless, the 2011 outlook is also characterized by a certain degree of uncertainty and volatility in light of ongoing macroeconomic and geopolitical developments, particularly the evolution of the Libyan crisis. Eni forecasts an upward trend for Brent crude oil prices also supported by healthier global oil demand. For its short-term economic and financial projections, Eni assumes an average Brent price of 115 $/bbl for the full year 2011. Management expects that the European gas market will remain weak as sluggish demand growth is insufficient to absorb current oversupplies and ongoing competitive pressures undermine gas operators’ profitability. Refining margins are expected to remain at unprofitable levels due to weak underlying fundamentals (sluggish demand and excess capacity) and high feedstock costs. Against this backdrop, management expectations about the main trends in the Company’s businesses for 2011 are disclosed below.
- Production of liquids and natural gas is forecast to decline from 2010 (1.815 million boe/d was the actual level in 2010 at 80 $/bbl) at the Company’s pricing scenario of 115 $/bbl for the full year. The decline is expected as a result of volume losses in Libya following the shutdown of almost all of the Company’s production facilities. Better production performance at the Company’s assets elsewhere in the world will help partly offset the impact associated with rising crude oil prices on PSAs entitlements. Assuming the actual production level at 50 kboe/d in Libya for the remainder of 2011, management forecasts a 10 percentage points reduction in the expected production plateau for the full year at a constant pricing scenario. Management has been implementing its plans to target production growth in the Company’s assets by ramping up fields that were started in 2010, starting up new fields in the USA, Australia, Egypt, Italy and Algeria, as well as executing production optimizations in particular in Nigeria, Norway, Egypt, Angola and the United Kingdom;
- Worldwide gas sales are expected to grow from 2010 (in 2010 actual sales amounted to 97.06 bcm), in spite of sales losses to certain Italian importers due to lower availability of gas from Libya. Management plans to drive volume growth in Italy, leveraging clients additions in the power generation, industrial and wholesale segments, as well as regaining significant market share, and capitalising on organic growth in key European markets. Considering mounting competitive pressure in the gas market, the achievement of the planned volume targets will be underpinned by strengthening the Company’s leadership on the European market; marketing actions intended to strengthen the customer base in the domestic market and renegotiating the Company’s long-term gas purchase contracts. The cash flow impact associated with lower sales to Italian shippers will be offset by expected lower cash outflows associated with the Company’s take-or-pay gas purchase contracts as the Company is planning to meet lower availability of Libyan gas with gas from other sources in its portfolio;
- Regulated businesses in Italy will benefit from the pre-set regulatory return on new capital expenditure and continuing efficiency actions;
- Refining throughputs on Eni’s account are expected to slightly decline compared to 2010 (actual throughputs in 2010 were 34.8 mmtonnes). The decline is mainly expected at the Venice refinery due to difficulties in supplying Libyan crude oil. Higher volumes are expected to be processed at the Sannazzaro and Taranto refineries and optimization of refinery cycles, as well as efficiency actions are expected to be implemented in response to a negative trading environment;
- Retail sales of refined products in Italy and the rest of Europe are expected to be slightly lower than in 2010 (11.73 mmtonnes in 2010) against the backdrop of weaker demand. Management plans to counteract that negative trend by leveraging selective pricing and marketing initiatives, developing the “non-oil” business and service upgrade;
- The Engineering & Construction business confirms solid results due to increasing turnover and a robust order backlog.
In 2011, management plans to make capital expenditure broadly in line with 2010 (€13.87 billion was invested in 2010) mainly directed to developing giant fields and starting production at new important fields in the Exploration & Production division, refinery upgrading related in particular to the realization of the EST project, completing the program of enhancing Saipem’s fleet of vessels and rigs, and upgrading the natural gas transport infrastructures. Assuming a Brent price of $115/barrel and the planned divestment of certain assets, management forecasts that the ratio of net borrowings to total equity (leverage) at year-end will be lower than in 2010.
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 2011 (unaudited). Results of operations for the first half of 2011 and material business trends have been extracted from the interim consolidated report 2011 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.
In this press release results and cash flows are presented for the second quarter and the first half of 2011 and for the second quarter and the first half of 2010. Information on liquidity and capital resources relates to the end of the periods as of June 30, 2011, March 31, 2011 and December 31, 2010. Tables contained in this press release are comparable with those presented in management’s disclosure section of the Company’s annual report and interim report. Quarterly and semi-annual 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.
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.
(1) Information on net borrowings composition is furnished on page 36.
(2) Non-GAAP financial measures 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 for by CESR Recommendation No. 2005-178b. See pages 36 and 37 for leverage and ROACE, respectively.
Eni’s Chief Financial Officer, Alessandro Bernini, 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.
This press release, in particular the statements under the section “Outlook”, contains certain forward-looking statements particularly those regarding capital expenditure, development and management of oil and gas resources, dividends, 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.