Eni announces Results for the Third Quarter and Nine Months 2013

Financial highlights²

•  Adjusted operating profit: €3.44 billion for the quarter (down 15.7%³); €9.1 billion for the nine months (down 35.2%³);
•  Adjusted net profit: €1.17 billion for the quarter (down 29.4%³); €3.13 billion for the nine months (down 41%³);
•  Net profit: €3.99 billion for the quarter (up 61.9%); €5.81 billion for the nine months (down 5.8%);
•  Operating cash flow: €3.04 billion for the quarter; €7.79 billion for the nine months;
•  Leverage at 0.24.

Operational highlights

•  Oil and gas production: 1.653 mmboe/d in the quarter, down 3.8%, due to extraordinary reductions in Nigeria and Libya (down 3.1% in the nine months);
•  Recognized net consideration and net gain of €3 billion on the divestment to CNPC of the 28.57% interest in Eni East Africa, owner of the mineral rights in Area 4 in Mozambique;
•  Produced first oil at the giant Kashagan oil field;
•  Made large exploration successes offshore Mozambique, Congo and Australia;
•  Resource base increased by 0.7 billion barrels in the quarter; 1.6 billion barrels in the nine months.

Paolo Scaroni, Chief Executive Officer, commented:
"In the third quarter of 2013, we achieved significant exploration successes, made excellent progress in our development activities with new field start-ups and monetized part of our interest in Mozambique. These operating successes strengthen our profitability outlook against the backdrop of a quarter that has not only been affected by difficult market conditions in the European markets of mid and downstream, but also by the extraordinary reductions of production in Nigeria and Libya, and by the appreciation of the euro. Considering that these trends are temporary and given the solidity of our businesses, we will start the buyback program."

(1) This press release represents the quarterly report prepared in compliance with Italian listing standards as provided by article 154-ter of the Italian code for securities and exchanges (Testo Unico della Finanza).
(2) Throughout this press release, changes in the Group results for the third quarter and nine months 2013 are calculated with respect to results earned by the Group’s continuing operations in the third quarter and nine months 2012 considering that at the time Snam was consolidated in the Group accounts and reported as discontinued operations based on IFRS 5.
(3) These changes are calculated excluding Snam’s contribution to the Group results in the third quarter and nine months 2012. This is the result of Snam transactions with Eni included in the continuing operations results of the third quarter and nine months 2012 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 third quarter of 2013, adjusted operating profit was €3.44 billion, down 15.7% when excluding Snam’s contribution to continuing operations in the third quarter of 2012. With the exception of Versalis, all of Eni’s businesses recorded a decline in operating profit. The Exploration & Production Division was down €419 million, or 9.7%, due to the appreciation of the euro vs. the US dollar (up 5.9%) and extraordinary disruptions; the Refining & Marketing and Gas & Power Divisions reported deeper losses of €113 million and €52 million, respectively, due to continued deterioration in sale prices and margins, reflecting weak demand, oversupply and increasing competitive pressures; finally the Engineering & Construction segment saw a contraction of 38.5% in operating profit due to a slowdown in business activity. It is worth mentioning that the Gas & Power Division results benefited only partially from certain price revisions at long-term supply contracts, some of which are still pending and therefore delaying the recognition of the associated economic effects.

In the nine months of 2013, adjusted operating profit was €9.1 billion, down 35.2% excluding Snam’s contribution to continuing operations in the nine months of 2012. This decline was driven by the trends described above and the operating losses incurred by the Engineering & Construction segment in the second quarter of 2013 following revised margin estimates at certain large contracts. Furthermore, the Gas & Power Division results for the nine months of 2012 were boosted by the economic benefits associated with the renegotiations of certain long-term gas supply contracts which had retroactive effects to the beginning of 2011.

Adjusted Net Profit

In the third quarter of 2013, adjusted net profit was €1.17 billion, down 29.4% when excluding Snam’s contribution to continuing operations in the third quarter of 2012. The decline was due to a reduced operating performance, lower income from interests in industrial joint ventures and an increase of approximately 10 percentage points in the Group adjusted tax rate. This rose to 63.4% due to 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 nine months of 2013, adjusted net profit was €3.13 billion, down 41% when excluding Snam’s contribution to continuing operations in the nine months of 2012. The Group adjusted tax rate increased by 11 percentage points.

Net Profit

In the third quarter of 2013, net profit amounted to €3.99 billion, up by €1.53 billion or 61.9% from the same quarter of 2012 driven by the recognition of the gain on the divestment of the 28.57% stake in Eni East Africa, which retains a 70% interest in Area 4 in Mozambique, to CNPC, amounting to €3 billion net of the related tax charges. This positive was partly offset by a decrease in operating performance and other changes.

In the nine months of 2013, net profit was €5.81 billion, down by 5.8%.

Capital Expenditure

Capital expenditure for the third quarter of 2013 amounted to €3.05 billion (€8.98 billion for the nine months of 2013) and mainly related to the continuing development of oil and gas reserves. In the nine months of 2013 the Group also incurred expenditures of €0.22 billion to finance acquisitions, joint venture projects and equity investees.

Cash Flow

In the third quarter of 2013, net proceeds from the transaction in Mozambique of €3 billion and net cash generated by operating activities of €3,036 million were used to fund financing requirements associated with capital expenditure (€3,053 million) and the 2013 interim dividend payment of €1,993 million to Eni’s shareholders. Net borrowings⁴ decreased by €1,346 million from June 30, 2013 to €15,146 million as of September 30, 2013 (down by €365 million from December 31, 2012, which also reflected a lower amount of trade receivables transferred to financing institutions).

In the nine months of 2013, net cash generated by operating activities amounted to €7,788 million, which was also impacted by a lower amount of trade receivables transferred to financing institutions due in subsequent reporting periods as compared to what has been done in the fourth quarter of 2012 (down by €388 million). Proceeds from disposals (€6,010 million) related to the divestment of Eni’s interest in Mozambique, as well as the divestment of the available-for-sale interests in Snam (€1,459 million) and Galp (€810 million). Cash outflows mainly related to capital expenditure (€8,984 million) and dividend payments (€4,200 million).

The ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage⁵ – declined to 0.24 at September 30, 2013 from 0.25 as of December 31, 2012 and 0.27 as of June 30, 2013. The ratio was positively influenced by lower net borrowings, whilst, as far as shareholders’ equity is concerned, net profit for the period was offset by dividend payments and negative currency translation differences (down €1.12 billion) relating to net assets of dollar-reporting subsidiaries.

Exploration & Production

In the third quarter of 2013, Eni’s liquids and gas production of 1,653 kboe/d declined by 3.8% from the third quarter of 2012, reflecting significant force majeure events in Nigeria and in Libya (down by approximately 50 kboe/d). New field start-ups and continuing production ramp-ups mainly in Russia, Algeria, Angola and Egypt, offset planned facility downtime, in particular in the North Sea, and mature field declines. In the nine months of 2013, hydrocarbon production declined by 3.1% from the nine months of 2012 due to the drivers described in the quarterly disclosure.

Gas & Power

In the third quarter of 2013, Eni’s worldwide natural gas sales declined by 1.13 bcm, or 5.8%, to 18.35 bcm, mainly due to the use of the higher flexibility obtained from the renegotiation of long-term supply contracts. This was against the backdrop of an ongoing downturn in demand, intensified competitive pressure and oversupplies. Eni’s sales in Italy reported a slight increase (up 2.9% to 6.13 bmc in the quarter) due to higher spot sales offsetting continuing lower supplies to the power generation segment. Eni’s natural gas sales in the European markets decreased by 17.6%, particularly in the UK due to lower spot sales, and in France and Benelux reflecting increased competitive pressures. Gas sales in Germany/Austria reported an increase. Sales to importers to Italy experienced a substantial increase due to the recovery of Libyan supplies. Sales to extra-European markets increased by 5.3% in the quarter, reflecting higher LNG volumes sold in international markets.

In the nine months of 2013, natural gas sales of 67.61 bcm declined by 3.7% from the nine months of 2012, due to the same drivers described above and the divestment of Eni’s interest in Galp in 2012. Net of the impact of Galp, the reduction declined to 1.5%.

Refining & Marketing

In the third quarter of 2013, refining margins in the Mediterranean area fell sharply to $2.14 per barrel (down 73.1% from the third quarter 2012; down 39.9% from the nine months of 2012). This was driven by ongoing structural weaknesses in the industry due to overcapacity, shrinking demand and high feedstock costs. Furthermore, results at Eni’s refining business were adversely impacted by negative trends in differentials between the marker Brent and crudes supplied within Eni’s circuit.

In the third quarter of 2013, retail sales in Italy were down by 23.7% to 1.71 million tonnes (down by 15.9% in the nine months) due to falling domestic consumption and increasing competitive pressure. Eni’s market share dropped to 27.2% in the third quarter compared to a share of 34.5% in the same quarter of the previous year, which was boosted by the benefits associated with a marketing campaign "riparti con eni" during the summer weekends.

In the third quarter of 2013, retail sales in the European markets slightly increased to 0.83 million tonnes, or 2.5% (broadly in line with the nine months to 2.29 million tonnes) due to higher sales in Germany.

Currency

Results of operations for the third quarter and nine months of 2013 were negatively impacted by the appreciation of the euro vs. the US dollar (up 5.9% and 2.8% in the third quarter and in the nine months of 2013, respectively).

Portfolio Developments

Mozambique

On July 26, 2013, following completion of certain conditions precedent, including relevant Authorities’ approval, Eni finalised the sale of an interest of 28.57% in Eni East Africa (EEA) to China National Petroleum Corporation (CNPC). EEA currently retains an interest of 70% in the Area 4 mineral property, offshore Mozambique. CNPC indirectly acquires, through its 28.57% equity investment in Eni East Africa, a 20% interest in Area 4, while Eni will retain a 50% interest through the remaining stake in Eni East Africa.

The total consideration of €3,386 million includes the agreed price of $4,210 million for the 20% stake, as defined by the Share Sale and Purchase Agreement signed on March 14, 2013, as well as certain price adjustments reflecting financial interest accrued in the period and other charges.

Eni recorded through profit a net gain on the disposal amounting to €3,359 million, which was classified as a gain from investments (€2,994 million, net of tax charges incurred in Mozambique and Italy).

CNPC’s entrance into Area 4 is a strategic development for the project because of the standing of the Chinese company in the global upstream and downstream sectors. In addition, the planned activities of the Joint Study Agreement progressed to develop a promising shale gas block located in the Sichuan Basin in China.

In September 2013, Eni made the tenth discovery in Area 4 at the Agulha exploration prospect. Management estimates that the Agulha structure may contain from 5 to 7 trillion cubic feet of gas in place. Agulha was drilled in 2,492 meters of water and reached a total depth of 6,203 meters. The discovery opens a new exploration play in the Southern section of Area 4 where the drilling of three additional wells is planned for 2014.

Kazakhstan

On September 11, 2013, the first oil from the giant Kashagan field was produced. During the initial production phase, output will grow up to 180,000 barrels per day. Thereafter, output will increase progressively up to the planned production plateau predicted at 370,000 barrels of oil per day by the Experimental Program.

Congo

In September 2013, Eni acquired the Ngolo exploration block, which is part of the Cuvette Basin. Eni will act as operator in joint venture with the Congolese state company Société Nationale des Pétroles du Congo (SNPC). Exploration activities will take place over a period of 10 years. The Cuvette Basin, so far little explored, is one of the new themes of frontier exploration in Africa.

Australia

On October 24, 2013, exploration activity yielded positive results, with the Evans Shoal North-1 appraisal well, in the NT/P48 permit (Eni’s interest 32.5%) located in the Timor Sea. The total potential of the Evans Shoal discovery is estimated at 8 tcf of raw gas in place.

Start-ups

In the nine months of 2013, in line with production plans, the following projects have been started up:

(i)   Algeria: the MLE-CAFC field (Eni’s interest 75%) with an overall plateau of approximately 33 kboe/d net to Eni by 2016 and the El Merk field (Eni’s interest 12.25%) with an expected peak at 18 kboe/d net to Eni expected in 2015;
(ii)  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)  Nigeria: in Block OML 125 (Eni operator with an 85% interest) the offshore Abo- Phase 3 project;
(iv) 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; and
(v)  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 nine months of 2013, 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 this 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 field;
(iv) Mozambique, in addition to the discovery disclosed above, with the Coral 3, Mamba South 3 and Mamba North East 3 delineation wells that strengthen the mineral potential of the area bringing the estimated mineral potential up to 80 tcf of gas in place;
(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 global economy is forecast to recover at a moderate pace in 2013, as both the financial risk and prolonged recessionary phase in the Euro-zone have wound down. The price of crude oil is affected by ongoing geopolitical risks and supply disruptions that have affected several exporting countries, against the backdrop of moderate dynamics in crude oil demand. Trends in crude oil prices are expected to be more than offset by the appreciation of the euro vs. the US dollar for oil companies that report in euros. The trading environment is anticipated to remain depressed in the European sectors of gas marketing, power generation, refining and the marketing of fuels and in the chemical sector. This was driven by weak demand for commodities, oversupply and competitive pressures. 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 expectations for full-year production and sales of Eni businesses are highlighted below:

• Production of liquids and natural gas: full-year production is expected to be lower compared to 2012 due to the impact of geopolitical factors, in particular in Nigeria and Libya. Major project start-ups, such as those in Kazakhstan, Algeria and Angola, and continuing production ramp-up at fields started in 2012, in particular in Egypt, will proceed but will not be sufficient to offset these force majeure events, mature field declines and the effect of 2012 asset disposals;
• Gas sales: natural gas sales are expected to decrease compared to 2012 (95.32 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;
• Retail sales of refined products in Italy and the Rest of Europe: management foresees retail sales volumes declining from 2012 (10.87 million tonnes in 2012) due to an expected contraction in domestic demand, increasing competitive pressure and the factoring of the effect of a marketing campaign which was executed during the summer week-ends of 2012. The expected fall in domestic retail volumes will only be 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 is focused on the development of hydrocarbon reserves in Sub-Saharan and North Africa, Norway, the United States, Iraq, Kazakhstan and Venezuela. Additionally, exploration projects in Sub-Saharan Africa, Norway, Egypt, the United States and new 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 $108 a barrel on average for the full year 2013, the ratio of net borrowings to total equity – leverage – is projected to remain substantially in line with the level achieved at the end of 2012, due to cash flows from operations and portfolio management.

This press release for the third quarter and nine months of 2013 (unaudited) provides data and information on business and financial performance in compliance with article 154-ter of the Italian code for securities and exchanges ("Testo Unico della Finanza" - TUF).

Results and cash flow are presented for the third and second quarter and the nine months of 2013, and for the third quarter and the nine months of 2012. Information on liquidity and capital resources relates to end of the period as of September 30, 2013, June 30, 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, and do not differ from the accounting standards adopted in the preparation of our statutory consolidated annual report for the year ended December 31, 2012 and the semi-annual consolidated statutory report at and for the six months ended June 30, 2013. Investors are urged to read the accounting standards and policies of such regulatory filings.

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 records.

(4) Information on net borrowings composition is furnished on page 31.
(5) 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 31 for leverage.

Disclaimer

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, buyback, 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 third quarter cannot be extrapolated on an annual basis.