Eni announces results for the Fourth Quarter and the Full Year 2012

Financial highlights ¹

• Continuing operations:
  • Adjusted operating profit: €19.75 billion (up 14.6%) for the full year; €4.96 billion (up 17%) for the quarter;
  • Adjusted operating profit excluding Snam contribution*: up 20.2% for the full year, up 29.7% for the quarter;
  • Adjusted net profit: €7.13 billion (up 2.7%) for the full year; €1.52 billion (down 3.6%) for the quarter;
  • Adjusted net profit excluding Snam contribution*: up 7.6% for the full year; up 9.2% for the quarter;
  • Cash flow: €12.42 billion for the full year; €2.17 billion for the quarter; leverage² from 0.46 to 0.25;
• Net profit: €7.79 billion for the full year; €1.46 billion for the quarter;
• Dividend proposal for the full year of €1.08 per share (includes an interim dividend of €0.54 per share paid in September 2012).

Operational highlights

• Record amount of discovered resources in the year: 3.64 bboe;
• Proved reserves at eight-year record: 7.17 bboe with a reference Brent price of $111 per barrel. The organic reserve replacement ratio was 147% ³;
• Oil and natural gas production: 1.701 million barrels per day in the year, up 7% from 2011 (up 3.6% in the quarter) ³;
• Natural gas sales: down 1.5% to 95.32 billion cubic meters in the year (down 1.5% in the quarter);
• Signed an agreement with Anadarko for the development of common onshore activities in Mozambique;
• Acquired exploration licenses in the emerging areas of Liberia, Kenya, Vietnam, Cyprus and offshore Russia during the year;
• Further progress in the divestment of Snam and Galp also through the placement of convertible bonds;
• Started reorganization of Eni's downstream activities in 2012.

Paolo Scaroni, Chief Executive Officer, commented:
"2012 was a record year for exploration at Eni with discovered resources about six times yearly production thanks to our outstanding achievements in Mozambique and our other successes in West Africa, in the Barents Sea and in Indonesia. We have also made significant progress in developing projects, further increasing our reserves to best ever levels. Production growth has delivered excellent operating profits at our Exploration and Production division. In Gas & Power and Refining & Marketing we have realised significant efficiency improvements that have allowed us to absorb most of the effects of the still difficult European scenario. Thanks to Eni’s capital structure, which has also been strengthened by the disposals of Snam and Galp, the company will achieve industry-leading upstream growth rates."

(1) Due the divestment plan of the Regulated Gas Businesses in Italy, Snam results are represented as discontinued operations throughout this press release.
(2) Ratio of net borrowings to shareholders' equity. For further disclosure see page 36.
(3) Excluding the impact of updating the natural gas conversion rate. For further information see page 9.
* The Snam contribution excluded is the result of Snam transactions with Eni included in the continuing operations according to IFRS 5. Adjusted operating profit and adjusted net profit are not provided by IFRS.

 
(a) Attributable to Eni’s shareholders.
(b) 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".
(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
In the fourth quarter of 2012, adjusted operating profit from continuing operations was €4.96 billion, up 17% from the fourth quarter of 2011. The result reflected a robust operating performance reported by the Exploration & Production division (up 15.4%) also due to an ongoing production recovery in Libya. The Refining & Marketing division reported a substantial reduction in operating losses driven by efficiency and optimization gains (the operating loss was down by €259 million). The Gas & Power division reported a profit, reversing the prior year loss (up by €113 million) benefiting from the renegotiations of certain supply contracts some of which retroactive to 2011, and an ongoing recovery at Libyan supplies. Also the Chemical sector reduced its operating losses. These positives were partly offset by a reduction in operating profit reported by the Engineering & Construction division (down 18.7%), which was adversely affected by falling demand for oilfield services and lower margins at certain works.
Finally, adjusted operating profit for the quarter benefited from the appreciation of the US dollar against the euro (up 3.8%).
In 2012, adjusted operating profit from continuing operations was €19.75 billion, an increase of 14.6% compared to 2011. This was due to the above mentioned drivers as explained in the review of the fourth quarter operating profit.

Adjusted net profit
In the fourth quarter of 2012, adjusted net profit from continuing operations was €1.52 billion (down 3.6%). The better operating performance was absorbed by lower profit earned by equity-accounted entities and joint ventures (down by €243 million) and an increased consolidated tax rate (up by eleven percentage points) due to higher taxable profit reported by the Exploration & Production division, write-down of prior-quarter deferred tax assets at Italian subsidiaries which were not classified as special charges (approximately €230 million), as well as lower profit from investments. For the full year 2012, adjusted net profit from continuing operations amounted to €7.13 billion, up 2.7%.

Capital expenditure
Capital expenditure of continuing operation for the fourth quarter of 2012 amounted to €3.89 billion (€12.76 billion for the full year 2012), mainly related to the continuing development of oil and gas reserves and exploration projects (€3.14 billion) as well as the upgrading of rigs and offshore vessels in the Engineering & Construction division. The Group also incurred expenditures of €0.57 billion in the year to finance acquisitions, joint-venture projects and equity investees.

Balance sheet and Cash flow
Eni’s balance sheet as of December 31, 2012 has substantially improved from 2011 due to the divestment of a stake in Snam amounting to approximately 30% to the Italian “Cassa Depositi e Prestiti‘ for a total consideration of €3.52 billion with loss of control, and the deconsolidation of Snam’s finance debt amounting to €12.45 billion.
The ratio of net borrowings to shareholders’ equity including minority interest – leverage 4 – decreased to 0.25 at December 31, 2012. Net borrowings 5 amounted to €15.45 billion as of December 31, 2012, with a reduction of €12.59 billion from December 31, 2011. In addition to the Snam disposal, the reduction in net borrowings reflected net cash generated by the Group’s operating activities attributable to continuing operations (€12.42 billion) and cash from other disposals of €2.5 billion mainly relating to the divestment of Eni’s stake in Galp (€0.96 billion) and non-strategic assets in the Exploration & Production division as well as the divestment of a 5% interest in Snam before loss of control which was accounted as an equity transaction (€0.61 billion). Those inflows were used to fund the financing requirements associated with capital expenditure and investment (€13.33 billion) as well as dividend payments to Eni’s shareholders (€3.84 billion) and non-controlling interests (€0.54 billion).
The reduction in net borrowings of €4.17 billion from September 30, 2012 was mainly due to the impact of the divestment of a stake in Snam, net cash generated by operating activities attributable to continuing operations (€2.17 billion) and the sale of a stake in Galp (€0.38 billion). Capital expenditure for the period amounted to €3.89 billion.

Dividend 2012
The Board of Directors intends to submit a proposal for distributing a cash dividend of €1.08 per share 6 (€1.04 in 2011) at the Annual Shareholders’ Meeting. Included in this annual payment is €0.54 per share which was paid as interim dividend in September 2012. The balance of €0.54 per share is payable to shareholders on May 23, 2013, the ex-dividend date being May 20, 2013.

(a) From July 1, 2012, the conversion rate of natural gas from cubic feet to boe has been updated to 1 barrel of oil = 5,492 cubic feet of gas (it was 1 barrel of oil = 5,550 cubic feet of gas). The effect on production has been 9 kboe/d. For further information see page 9.

Exploration & Production
In the fourth quarter of 2012, reported liquids and gas production was 1.747 mmboe/d (1.701 mmboe/d in 2012), calculated using the updated gas conversion coefficient of 1,000 cubic meters equivalent to 6.43 barrels (previously 6.36 barrels; see the methodology note on page 9 for further details). On a homogeneous basis, i.e. excluding the effect of the updating of the gas conversion coefficient, production grew by 3.6% in the quarter, and 7% in the whole year. Performance was sustained by the recovery of activities in Libya, the start-up/ramp-up of fields, particularly in Russia, and higher production in Iraq. These positive factors were partially offset by the shut down of production in the United Kingdom after the incident at the Elgin/Franklin field (Eni's interest 21.87%) operated by another oil major, force majeure events in Nigeria and mature field declines.

Gas & Power
In the fourth quarter of 2012, Eni’s gas sales of 25.08 bcm were 1.5% down compared to the fourth quarter of 2011.
When excluding gas sales made by Galp following Eni’s exit from the shareholders’ pact, gas sales were broadly in line with the same quarter of the previous year. In a scenario characterized by the contraction in European demand and intensified competitive pressure, Eni’s sales in Italy (10.15 bmc) increased by 9.1%, due to higher volumes sold on the VTP (Virtual Trading Point)/exchange (up 0.62 bmc) and to the wholesale segment (up 0.37 bmc). These increases were partially offset by lower demand from the power generation industry (down 0.20 bmc), which was affected by the fall in demand for electricity. Off-takes from Italian importers more than doubled in the quarter (up 0.45 bmc) after the resumption of supplies from Libya.
These increases were more than offset by the fall in European markets (down 1.56 bcm) attributable primarily to the Iberian Peninsula (down 0.67 bcm), as the reporting of sales made by Galp was discontinued, the UK/Northern Europe (down 0.28 bcm) and Turkey (down 0.22 bcm).
For the full year, gas sales (95.32 bcm) fell by 1.5% compared to the previous year. The fall in volumes in Italy in the first part of the year was offset by growth registered in the fourth quarter. Abroad, the fall (down 2.5%) is attributable to lower sales to Italian importers (down 15.7%) and declining volumes in main European markets (Benelux and the Iberian Peninsula). Sales on markets outside Europe increased (up 0.55 bcm), sustained by the positive trend in LNG sales in the Far East, in particular Japan.

Refining & Marketing
In the fourth quarter of 2012, the refining margin in the Mediterranean area remained volatile, following the same pattern as in previous quarters (the TRC Brent margin was at 2.54 $/barrel in line with the same quarter of 2011). The absolute margin level was unprofitable due to falling demand and excess capacity. Upward trends in raw material costs drove higher plant utility expenses. On yearly average, against the backdrop of a volatile market environment, the refining margin improved somewhat from 2011 (the TRC Brent margin was 4.83 $/barrel, up 2.77 $/barrel). Again, the overall margin level remained unprofitable due to weak fundamentals, including narrowing price differentials between light and heavy crudes.
In the fourth quarter of 2012, Eni marketed 1.8 million tonnes on the Italian retail network (7.83 million tonnes for the full year), 12.2% lower than the fourth quarter of 2011 (down 250 ktonnes; down approximately 530 ktonnes, or 6.3% for the full year), due to a steep decline in consumption and growing competitive pressure. These negative effects were offset by the contribution made by marketing initiatives which increased market share by 0.7 percentage points compared to 2011 (from 30.5% in 2011 to 31.2% in 2012).

Currency
Results of operations for the fourth quarter and the full year 2012 benefited from the appreciation of the dollar against the euro (up 3.8% in the quarter; up 7.7% over the year).

Business developments
In 2012 Eni laid the foundations for a new development phase of its oil&gas production. Over the intermediate and long-term we expect to achieve industry-leading growth by leveraging the extraordinary success of our exploration in the last four years, particularly in 2012, the almost completed recovery in Libya and a strong project pipeline.
In the Exploration & Production division, 2012 was a record for exploration, adding 3.64 billion boe of fresh resources to an already strong base. This was due to the massive volumes of natural gas discovered in Mozambique following appraisal works at the Mamba complex and the discovery of a new exploration play at Coral. Other significant success was achieved in core areas in Norway, Angola, Indonesia, Ghana and Pakistan. Eni’s portfolio was boosted with the acquisition of new exploration acreage in Kenya, Liberia, offshore Russia, Vietnam, Ukraine, Pakistan and China. Production benefited from the nearly complete recovery of production levels in Libya in spite of the complex transition phase the Country is undergoing following the revolution. The Gas & Power, Refining & Marketing and Chemical divisions due to their exposure to the European slowdown were adversely affected by a sharp fall in demand for energy commodities and competitive pressures. In those segments we have been intensifying the initiatives to restore our profitability against the backdrop of ongoing difficult market conditions and weak and volatile margins. In the Gas & Power division we are progressing in the process of renegotiating our supply contracts and implementing measures to optimize margins and mitigate the take-or-pay risk. In the Refining & Marketing division we have stepped up efficiency efforts at our refineries and succeeded in preserving our market share in the retail market. In the Chemical sector we are restructuring our loss-making plants and executing our strategy designed to increase the relative weight of the green chemistry business as well as higher margin businesses. All of our three downstream divisions are expanding outside Europe to seize opportunities in growing markets.

Exploration & Production
Mozambique
The exploration campaign executed in 2012 in the operated Area 4 offshore the Rovuma basin proved the Mamba gas complex to be a world class discovery. A total of 7 exploration and appraisal wells were drilled in the area, bringing in many successes including the identification of new, giant exploration plays at the Coral and Mamba North-East prospects, which are independent from Mamba’s structure. Eni estimates the full mineral potential of Area 4 at 75 tcf of gas in place. Eni plans to drill at least other two wells to fully establish the upside potential of Area 4.
In December 2012, Eni signed an agreement with Anadarko Petroleum Corporation establishing basic principles for the coordinated development of common offshore activities in Area 4, operated by Eni and Area 1, operated by Anadarko. Furthermore, the two companies will jointly plan and construct onshore LNG liquefaction facilities in Northern Mozambique.

The Republic of Cyprus
In January 2013, Exploration and Production Sharing Contracts were signed with the Republic of Cyprus, for Blocks 2, 3 and 9 located in the Cypriot deep offshore portion of the Levantine basin, which encompass an area of around 12,530 square kilometers, thus marking the entry of Eni in the Country. Eni was awarded the three blocks whilst leading the consortium with an 80% interest.

Pakistan
In December 2012, Eni signed an agreement with the Pakistani Authorities and the state oil and gas company OGDCL for the acquisition of 25% and the operatorship of the Indus Block G exploration license. The contractual area is located offshore in ultra-deep waters and covers approximately 7,500 square kilometers.

Libya
Onshore exploration activity was resumed by drilling the A1-108/4 exploration well that will reach a total depth of approximately 4,420 meters. This is the first well of an onshore exploration campaign that will continue to 2013 marking a relevant step in the full recovery of Eni’s upstream activity in Libya.

Ghana
In August 2012, Eni and its partner Vitol signed a Memorandum of Understanding with the Government of Ghana and Ghana National Petrolium Corporation for the development and marketing of gas reserves discovered in the offshore Cape Three Points Block in the Tano basin operated by Eni (47.22% interest). In September 2012, as part of the ongoing exploration campaign in the Block, Eni made an oil discovery with the Sankofa East-1X well. Early in 2013 the Sankofa East 2A appraisal well was drilled and confirmed the extension of the oil accumulation made in the discovery well. Eni estimates the overall potential of the discovery to be around 450 million barrels of oil in place with recoverable resources of up to 150 million barrels. The data acquisition confirmed the hydraulic communication in the oil prone reservoir between the discovery and the appraisal well. Eni has immediately commenced plans for the commercial exploitation of the oil reserves.

Liberia
In August 2012, Eni acquired a 25% interest in three blocks offshore Liberia covering an area of 9,560 square kilometers at a maximum water depth of 3,000 meters. The joint venture is operated by another international oil company. This operation marks Eni’s entry into Liberia.

Kenya
In July 2012, Eni was awarded three product sharing contracts by the government of Kenya. The contracts relate to the L-21, L-23 and L-24 exploration blocks which are located in the deep and ultra-deep waters of the Lamu Basin covering an area of 35,000 square kilometers.

Vietnam
In June and July 2012, Eni acquired the operatorship (50 % interest) of three exploration blocks located offshore Vietnam, in the Song Hong and Phu Khanh basins. The three blocks cover approximately 21,000 square kilometers of acreage. These basins are estimated to contain 10% of Vietnam’s hydrocarbon resources, mainly gas. The Company plans to make significant investment to explore for hydrocarbons in the acquired acreage by drilling four wells. In January 2013 Eni and the Vietnamese national oil company PetroVietnam signed a Memorandum of Understanding for the development of business opportunities in Vietnam and abroad.

Karachaganak
On June 28, 2012, the international contractor companies of the final production sharing agreement of the giant Karachaganak gas-condensate field and the Republic of Kazakhstan closed a settlement agreement to all pending claims relating to the recovery of costs incurred to develop the field. The contractor companies divested 10% of their rights and interest in the project to Kazakhstan’s KazMunaiGas for a $1 billion net cash consideration ($325 million being Eni’s share). From the effective date, Eni’s interest in the Karachaganak project has been reduced to 29.25% from the 32.5% previously held. The agreement also included the allocation of an additional 2 million tonnes per year capacity in the Caspian Pipeline Consortium export pipeline (CPC) over the remaining life of the FPSA, which is expected to be fully operational within the next three years, as well as a final settlement on all tax and customs claims up to the end of 2009.

Ukraine
In June 2012, Eni signed a Share Purchase Agreement with Ukrainian state-owned National Joint Stock Company, Nak Nadra Ukrayny, and Cadogan Petroleum Plc to acquire a 50.01% interest and operatorship of the Ukrainian company Westgasinvest LLC which currently holds subsoil rights to nine unconventional (shale) gas license areas in the Lviv Basin of Ukraine. These licenses cover approximately 3,800 square kilometers of acreage.

Exploration success
In addition to the above-mentioned exploration successes in Mozambique and the oil discovery in Ghana, it is worth mentioning that exploration activities performed well in:

• Norway, with the oil and gas Skrugard and Havis discoveries, located in the PL532 (Eni 's interest 30%) license in the Barents Sea. Recoverable oil reserves are estimated to approximately 500 million barrels (100%);
• Egypt, in the Meleiha license (Eni 's interest 56%) with (i) the important Emry Deep 1X discovery that was started up; (ii) the Rosa North 1X discovery, estimated to start-up in 2013. The short time to market of these discoveries is in line with Eni’s strategy to focus on fast track development of conventional and synergic oil;
• Congo, with the hydrocarbon discovery of Nene Marine 1 located, in the offshore Marine XII license (Eni's interest 65%, operator). The appraisal of the discovery is expected in 2013;
• Indonesia, with the gas discovery of Katak Biru, in the Muara Bakau license (Eni's interest 55%, operator), 30 km far from the Jangkrik Northern West discovery;
• Angola, (i) in Block 15/06 (Eni 's interest 35%, operator), with the Vandumbu 1 oil discovery, within the West Hub project; (ii) in Block 2 (Eni 's interest 20%) with the condensates and gas Etele Tampa 7 well;
• United States in Block Green Canyon 903 (Eni 's interest 12.25%) in the Gulf of Mexico with a successful outlining campaign of the Heidelberg discovery, increasing recoverable reserves to approximately 200 million barrels (100%);
• Pakistan with a relevant gas discovery in the Exploration concession Badhra Area B (Eni's interest 40%, operator). The Badhra B North-1 exploration well was started up. The discovery is estimated to hold from 8.5 to 11.5 billion cubic meters of gas in place. A further outline of the discovery will require additional wells;
• Nigeria, in Blocks Opl 282 (Eni 's interest 90%) and Opl 2009 (Eni 's interest 49%) with the oil discoveries at the Tinpa 1 field and Afiando 1 and 2 wells.

Start-up
In line with production plans, the following fields were started up:

(i)   Menzel Ledjmet Est (MLE), located in Block 405b (Eni's interest 75%) in Algeria. A plant located in the field allows for the treatment of rich gas for the daily production and sale of 9 million cubic meters of gas, 15,000 barrels of oil and condensates and 12,000 barrels of LPG;
(ii)  the offshore field of Seth, located in the Ras El Barr concession (Eni's interest 50%) in Egypt. The field is expected to produce approximately 4.8 million cubic meters of gas per day, of which Eni’s equity is 1.7 million cubic meters (approximately 11 kboe/d) net to Eni;
(iii)  Kizomba satellites-Phase 1 (Eni's interest 20%) in Angola. A production peak of 72,000 barrels/d (12,000 net to Eni) is expected in 2013;
(iv) OML119, Phase 2A in Nigeria with the drilling of two subsea production wells linked to an FPSO unit present in the area. Production peak is expected to reach 15,000 barrels/d;
(v)  Samburgskoye (Eni's interest 29.4%) in Siberia, through the start-up of the first two treatment trains flowing at a level of approximately 98 kboe/d (28 kboe/d, net to Eni). A production peak of 146 kboe/d (43 kboe/d net to Eni) is expected in 2016.

Gas & Power
Eni signed a trilateral agreement with Korea Gas Corporation and the Japanese company Chubu Electric Power Company for the sale of 28 loads of LNG (liquefied natural gas) corresponding to 1.7 million tonnes of LNG in the 2013-2017 period.

Refining & Marketing
In October 2012, the Green Refinery project was launched, which targets the conversion of the Venice plant into a “bio-refinery‘ to produce bio-fuels. The project will involve an estimated investment of approximately €100 million leveraging the Ecofining technology developed and licenced by Eni. Biofuel production will start from January 1, 2014 and will grow progressively as new facilities enter into operation. The new facilities to be built under the project will be completed in the first half of 2015.

Chemicals
In October 2012, Versalis, Eni’s chemical subsidiary, signed agreements to establish two joint ventures with major chemicals operators in South Korea and Malaysia to build and operate facilities for the production of elastomers incorporating Versalis proprietary technologies and know-how. These initiatives are part of Versalis strategy of international expansion in Asian markets with interesting growth prospect where Versalis can leverage on its technological and industrial leadership in elastomers.
In January 2013, Versalis signed a strategic partnership with Yulex for the manufacture of biorubber materials for consumer, medical and industrial markets and the construction of an industrial production complex in Southern Europe. The partnership will leverage on Yulex’s agronomical competencies and biorubber extraction technologies to boost Versalis’ green products portfolio.

Sale of Snam to Cassa Depositi e Prestiti
On October 15, 2012, after the occurrence of conditions precedent, including in particular, the Antitrust Authority approval, Eni finalized the sale to Cassa Depositi e Prestiti SpA (“CDP‘) of a stake of 30% less one share in the voting share capital of Snam. The transaction implemented the provisions of Law No. 27/2012, pursuant to which Eni was mandated to divest its controlling shareholding in Snam in accordance with the model of ownership unbundling and, via the implementing acts, required to fully divest its residual interests in Snam. The transaction covered 1,013,619,522 ordinary shares of Snam at a price of €3.47 a share yielding a capital gain through profit of €2.02 billion. Total consideration of the sale amounted to €3,517 million, 75% of which was paid within the balance sheet date. The residual amount of €879 million is expected to be paid no later than February 2013. The exclusion of Snam from consolidation effective from the fourth quarter 2012 allowed to reduce financial debt by €12.45 billion. Prior to the divestment, Snam had already reimbursed intercompany loans via third-party financing.
Including the sale of a further 5% interest in Snam made to institutional investors in July 2012, after the transaction with CDP, the residual interest of Eni in Snam is equal to 20.2% at the balance sheet date. This interest was classified as an available-for-sale financial instrument and measured at fair value corresponding to market prices which brought to profit a revaluation gain of €1,451 million at the price current at the transaction date of €3.5 a share with future changes in fair value recognized in equity.
In January 2013, Eni finalized the divestment of part of its interest in Snam with the placement of €1,250 million aggregate principal amount of senior, unsecured bonds, exchangeable into ordinary shares of Snam. The bonds have maturity of 3 years and pay a coupon of 0.625% per annum. The bonds will be exchangeable into Snam ordinary shares at an exchange price of €4.33 per Snam ordinary share, representing approximately a 20% premium to the Snam current reference price. Underlying the Bonds are approximately 288.7 million ordinary shares of Snam, corresponding to approximately 8.54% of the currently outstanding share capital of Snam. Changes in fair value of those shares will be reported through profit as opposed to equity based on the fair value option provided by IAS 39 from inception, i.e. the transaction date with CDP. Those changes were immaterial at the balance sheet date.

Divestment of Eni’s interest in Galp
The divestment of Eni’s interest in Galp Energia SGPS SA (“Galp‘) started with the agreements signed by Eni, Amorim Energia BV and Caixa Geral de Depositos SA and announced to the market on March 29, 2012, on which basis on July 20, 2012, Eni concluded the sale of 5% of the share capital of Galp to Amorim Energia. Following the sale Eni ceased to be part of the existing shareholders’ agreement governing Galp. The transaction covered 41.5 million shares at the price of €14.25 per share, for a total consideration of €582 million and a capital gain of €288 million registered in profit of the third quarter 2012.
Eni’s interest in Galp decreased to 28.34% and was stated as an available-for-sale financial asset which was measured at fair value represented by the market price of Galp which resulted in a gain of €865 million at the price current at the transaction date of €10.78 a share in the third quarter of 2012. In the third quarter subsequent changes in fair value of the interest were recognized in equity not considering the expected convertible bond emission on part of Galp shares. In the fourth quarter 2012, following the placement of a convertible bond as described below, management elected the fair value option for those shares underlying the bond. Consequently, changes in fair value of those shares have been recognized in profit and the previous gain reported in equity in the third quarter has been reclassified to profit including the update to market fair value as of the balance sheet date. As part of the March agreement, Eni has the right to sell up to 18% of Galp shares on the market (which could potentially increase by 2% if convertible bonds are issued).
On November 27, 2012, through an accelerated book-building procedure, Eni sold approximately 33.2 million shares of Galp, corresponding to 4% of its share capital at the price of €11.48 per share for a total consideration of approximately €381 million and a gain on divestment amounting to €23 million. Concurrently with the Equity Offering, Eni has completed the placement of approximately €1,028 million aggregate principal amount of senior, unsecured bonds, exchangeable into ordinary Galp shares. The bonds have maturity of 3 years and pay a coupon of 0.25% per annum. The bonds will be exchangeable into Galp ordinary shares at an exchange price of approximately €15.50 per share, representing a 35% premium to the Equity Offering placing price. Underlying the exchangeable bonds are approximately 66.3 million ordinary shares of Galp, corresponding to approximately 8% of the currently outstanding share capital of Galp. Changes in fair value of those shares were reported through profit as opposed to equity based on the fair value option provided by IAS 39 from inception, i.e. the transaction date with Amorim; considering the current price of Galp shares of €11.76 a share at period end, a revaluation gain of €65 million was recorded in profit which was partially offset by a negative change in the fair value of the bonds amounting to €26 million.

Outlook

Eni will host a strategy presentation on March 14, 2013 to outline the Company’s targets and strategies for the 2013-2016 four-year plan.
The 2013 outlook features the uncertainties that surround the global economic recovery, particularly in the Eurozone, and restraint shown by businesses and households in investments and consumption decisions. A number of factors will contribute to support the price of oil including ongoing geopolitical risk as well as improved balance between world demand and supplies of crude oil and oil products. For investment evaluation purposes and short-term financial projections, Eni assumes a full-year average price of $90 a barrel for the Brent crude benchmark. Management expects continuing weak conditions in the European gas, refining and marketing of fuels and chemicals sectors. Demand for energy commodities is anticipated to remain sluggish due to the economic stagnation; unit margins are exposed to competitive pressure and the risk of new increases in the costs of oil-based raw materials in an extremely volatile environment. In this scenario, the recovery of profitability in the Gas & Power, Refining & Marketing and Chemicals divisions will depend greatly on management actions to optimise 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: production is expected to grow compared to 2012 (1.701 million boe/day for 2012). The principal drivers will be the start-up of major projects, mainly Kashagan in Kazakhstan, Angola LNG and the gas assets in Algeria, as well as the ramp up of the fields started up in 2012, only partly offset by the decline in mature production;
• Gas sales: natural gas sales are expected to be in line with 2012, excluding the impact of the Galp divestment (93.96 bcm in 2012, including consolidated sales and Eni share of the joint ventures, as well as upstream sales in Europe and the Gulf of Mexico). In a scenario of continuing weak demand and strong competition, management plans to retain the Company’s market share by leveraging improved costs in procurement and logistics, and effective commercial actions designed to upgrade service quality, targeted pricing and growth in the most remunerative segments. The international expansion in the LNG business is expected to continue by boosting the Company’s presence in the more lucrative Far East markets;
• Refining throughputs on Eni’s account: in a scenario of stagnant consumption, volumes are expected to be substantially in line with those processed in 2012 (30.01 million tonnes in 2012). This projection assumes the restart of the Gela plant in June 2013 and the start up of the new EST technology conversion plant at Sannazzaro, as well as the shut down of the Venice plant to  start the Green Refinery project;
• Retail sales of refined products in Italy and the Rest of Europe: retail sales are expected to be in line with those of 2012 (10.87 million tonnes, 2012 total), net of the effect of the “riparti con Eni‘ marketing campaign which was executed in the summer of 2012. Management expects a modest fall in domestic retail volumes due to an anticipated contraction in domestic demand, the effect of which will be absorbed by the expected increase in sales in the Rest of Europe. In this intensely competitive context, management intends to preserve the Company’s market share in Italy by leveraging marketing initiatives to build loyalty and retain customers, the strength of the Eni brand with the completion of network rebranding, service excellence and development of the oil and non-oil offer;
• Engineering & Construction: the profitability prospects of this business are expected to be adversely affected by the conclusion of highly-profitable projects, an anticipated slowdown in order acquisitions and the start of lower margin projects in the Onshore and Offshore Engineering and Construction businesses.

In 2013, management expects a capital budget in line with 2012 (€12.76 billion in capital expenditure and €0.57 billion in financial investments in 2012, excluding the Snam investments). In 2013 the company will be focused on the development of hydrocarbons reserves in Western and Northern Africa, Norway, Iraq and Venezuela, the exploration projects in Western Africa, 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 green businesses in the Chemical sector in Porto Torres. Assuming a Brent price of $90 a barrel on average for the full year 2013, the ratio of net borrowings to total equity – leverage – is projected to be almost in line with 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 on the marketplace. It provides data and information on the Company’s business and financial performance for the fourth quarter and the full year 2012 (unaudited). In this press release results and cash flows are presented for the third and fourth quarter of 2012, the fourth quarter of 2011 and the full year 2012 and 2011.
Information on liquidity and capital resources relates to the end of the periods as of December 31 and September 30, 2012, and December 31, 2011. Tables contained in this press release are comparable with those presented in the management’s disclosure section of the Company’s annual report and interim report.
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. The evaluation and recognition criteria applied in the preparation of this report are unchanged from those
adopted for the preparation of the 2011 Annual Report.
In the fourth quarter of 2012, Snam and its subsidiaries have been excluded from consolidation in Eni’s Group accounts following the divestiture of a controlling stake to an Italian entity, Cassa Depositi e Prestiti (“CDP‘) on October 15, 2012. At the date of the transaction, the counterparty CDP holds a stake in Eni that allows for a significant influence on the latter and is subject, with ENI, to the Italian Ministry for Economy and Finance’s common control. Consequently, the transaction qualifies as material transaction with related parties, as the value of the transaction is above certain established thresholds applicable to sale transactions pursuant to the Consob Regulation (no. 17221 of March 12, 2010 as updated by reg. 17389 of June 23, 2010) and the internal procedures adopted by the Company.
A full review of transaction is disclosed in the Information Statement, published on June 6, 2012 (and available at the Eni website www.eni.com) in application of the Consob Regulation No. 11971 of May 14, 1999 and later additions and modifications.
The divestment of a controlling stake in Snam complied with the provisions of the Italian Law on Liberalizations no. 27/2012 whereby Eni was mandated to divest its shareholding in Snam in accordance with the model of ownership unbundling, while the implementing acts established the complete divestment of any residual interest of Eni in Snam.
From the date the transaction was announced to the market in the second quarter 2012 (including a restatement of the first quarter 2012 results), the Italian regulated businesses managed by Snam have been reported as discontinued operations up to loss of control in accordance with the guidelines of IFRS 5, since they represented a major line of business. Assets and liabilities, results of operations and cash flow of the discontinued operations are reported separately from the Group’s continuing operations, including gains on disposal and revaluation of the residual interest. Accordingly, considering that Snam and its subsidiaries are fully consolidated in Eni’s accounts, results of the discontinued operations are those deriving from transactions with third parties and therefore profits earned by the discontinued operations on sales to the continuing operations are eliminated on consolidation from the discontinued operations and attributed to the continuing operations and vice versa. This representation does not indicate the profits earned by continuing or discontinued operations, as if they were standalone entities. Results of the previous reporting periods have been restated accordingly.

From July 1, 2012, as part of a regular reviewing procedure, Eni has updated the conversion rate of gas to 5,492 cubic feet of gas equals 1 barrel of oil (it was 5, 550 cubic feet of gas per barrel in previous reporting periods). This update reflected changes in Eni’s gas properties that took place in the last three years and was assessed by collecting data on the heating power of gas in all Eni’s gas fields currently on stream. The effect of this update on production expressed in boe for the fourth quarter of 2012 was 9 kboe/d. Other per-boe indicators were only marginally affected by the update (e.g. realization prices, costs per boe) and also negligible was the impact on depletion charges. Other oil companies may use different conversion rates.

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, that data and information disclosed in this press release correspond to the Company’s evidence and accounting books and records, pursuant to rule 154-bis paragraph 2 of Legislative Decree No. 58/1998.

Disclaimer
This press release, in particular the statements under the section “Outlook‘, contains certain forward-looking statements particularly those regarding capital expenditure, 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 fourth quarter of the year cannot be extrapolated on an annual basis. The Reserve Replacement Ratio is a measure used by management to indicate the extent to which production is replaced by proved oil and gas reserves. A ratio higher than 100% indicates that more proved reserves were added than produced in a year. The Reserve Replacement Ratio is not an indicator of future production because the ultimate development and production of reserves is subject to a number of risks and uncertainties. These include the risks associated with the successful completion of large-scale projects, including addressing ongoing regulatory issues and completion of infrastructure, as well as changes in oil and gas prices, political risks and geological and other environmental risks.