Eni: third quarter and nine months of 2015 results

Third Quarter Highlights and FY 2015 outlook

• Divestment of interest in Saipem: agreed the terms of the sale of a 12.5% interest to FSI. At closing, expected in first quarter of 2016, Saipem will be derecognized and Eni will be reimbursed of its financing receivables by €6.1 billion net. Pro-forma leverage as of September 30 decreasing by 8 percentage points.
• Exploration success: discovered more than 1.2 bn boe resources, at an average cost of 0.6 $/boe versus a planned target of 500 mm boe in 2015 at an average cost of more than 2 $/boe. Giant Zohr discovery in the Mediterranean Sea.
• Strong hydrocarbon production growth: up 8.1% to 1.703 million boe/d in the quarter (up 8.7% in the nine months). Excluding price effects, production increased by 4.3% (up 4.9% in the nine months). FY 2015 production is now seen growing by about 9%, up from a prior guidance of more than 7%.
• Robust R&M and Chemicals performance: best adjusted EBIT2 since the third quarter of 2006 due to the restructuring plan and a favourable trading environment. FCF3 is projected to be positive as early as in 2015, anticipating the original plan by two years.
• Improved G&P performance: enhanced adjusted EBIT guidance, now expected to substantially break even in 2015, in spite of delayed settlement of ongoing arbitrations.
• Further cost reduction: raised the target reduction of FY capex4 to 17% from a prior guidance of a 14% cut; opex per barrel expected to decrease by 12% to 7.3 $/bl (previous guidance was down by 7%).
• Self-financed capex: when excluding Saipem, capex organically financed as early as in 2015 at a Brent scenario of 55 $/b.
• Entrance in new countries: upstream of Mexico with the operatorship of three offshore oilfields.

Results

• Cash flow5: €1.71 billion for the quarter (€7.39 billion in the nine months).
• Adjusted operating profit excluding Saipem: €0.6 billion in the quarter (down 79%); €3.51 billion for the nine months (down 60%).
• Adjusted net profit excluding Saipem: loss of €0.29 billion in the quarter; €0.76 billion for the nine months (down 76%).
• Net loss: €0.95 billion for the quarter; €0.36 billion in the nine months.
• Net borrowings: €18.41 billion at the end of September; leverage at 0.30 (0.22 as of December 31, 2014).

(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) Operating profit.
(3) Free cash flow: net cash provided by operating activities less capex.
(4) Capital expenditure and investments; outlook normalized to consider exchange differences and other changes.
(5) Net cash provided by operating activities.

Claudio Descalzi, Chief Executive Officer, commented:
"Saipem’s stake sale and deconsolidation marks another significant step in Eni’s transformation as we refocus on our core business. It increases our financial flexibility, freeing up resources to support our strategic plan. In the meantime we retain a significant share in Saipem and we will participate in its capital increase, strengthening its financial solidity and the execution of its new business plan. In the quarter, despite a weak oil price environment, Eni continued to deliver strong growth in upstream and important progress in restructuring the mid and downstream businesses. In E&P, we have increased our full year production guidance for the second time this year, almost doubling our original target. We have also more than doubled our resources target after discovering 1.2 billion barrels of new resources over the past nine months. This has all been achieved at a lower exploration cost. Meanwhile, we have improved our guidance for G&P, while R&M and Chemicals are on track to deliver an excellent performance and positive cash generation in 2015. These businesses continue to benefit from the restructuring and efficiency initiatives we have been implementing and from the favourable pricing environment. These actions, along with the further optimization of our investments during the year and the improvement of our operational cost structure, will allow us to cover our investments in 2015 with organic cash flow, excluding Saipem and considering a 55 $/b oil price scenario."

(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" of the Interim consolidated report as of June 30, 2015 and of the Integrated Annual Report 2014. Adjusted operating profit and adjusted net profit are non-GAAP measures.
(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 2015, adjusted operating profit was €0.6 billion, down by 79% from the third quarter of 2014 (excluding Saipem, which reported a profit of €0.15 billion). This reflected a lower contribution from the E&P segment (down by €2.3 billion, or 76%) driven by sharply lower oil prices (down by approximately 51%), partly offset by production growth, cost efficiencies and the depreciation of the euro against the dollar (down 16%). The G&P segment reported a greater loss (down by €0.29 billion) mainly due to the reversal of gas prepaid in previous years at prices higher than the current cost of supplies and an unfavourable trading environment impacting certain sales to large clients.
The R&M and Chemicals segment reported a marked improvement (up by €0.32 billion) due to an ongoing recovery in both margins and volumes which coupled with efficiency measures and capacity optimizations strengthened the profitability of both businesses.
The Group's consolidated adjusted operating profit for the third quarter of 2015 was €0.75 billion, down by €2.3 billion or 75% y-o-y.
In the first nine months of 2015, adjusted operating profit excluding Saipem was €3.51 billion, down by €5.3 billion or 60% due to a negative commodity environment (€6.1 billion), partially offset by production growth and efficiency and optimization gains of €0.8 billion. Group's consolidated adjusted operating profit for the first nine months amounted to €3.1 billion, down by €6.2 billion or 67% y-o-y, due to Saipem declining performance because of the extraordinary loss accounted in the second quarter of 2015.

Adjusted net profit
In the third quarter of 2015, adjusted net profit excluding Saipem was €0.29 billion, down by €1.42 billion y-o-y. The reduction was driven by lower operating profit and a higher consolidated tax rate, which increased to 143% due to the E&P segment. This was impacted by a deteriorating price scenario, which resulted in the segment taxable profit being earned in countries with higher rates of taxes and being impacted to a larger extent by certain expenses that could not be deducted from taxable profit among which successful exploration costs relating to projects yet to be sanctioned. The Group’s consolidated adjusted net loss for the third quarter was €0.26 billion, from an adjusted net profit of €1.17 billion reported a year ago.
In the first nine months of 2015, adjusted net profit excluding Saipem amounted to €0.76 billion, down by 76% y-o-y. Group's consolidated adjusted net profit for the first nine months was €0.53 billion, 83.7% lower compared to the first nine months of 2014; the tax rate registered an increase of 30 percentage points driven by the trends previously disclosed for the quarter and the circumstance that Saipem loss was non-deductible for tax purposes.

Operating cash flow
In the first nine months of 2015, cash flow from operating activities of €7.39 billion and divestment proceeds of €0.91 billion relating to non-strategic assets mainly in the Exploration & Production segment funded a fair share of capital expenditure incurred in the period (€8.65 billion). Eni's shareholders remuneration amounted to €3.43 billion relating to the balance dividend for the year 2014 and the interim dividend for the year 2015. As of September 30, 2015 net borrowings had increased by €4.73 billion to €18.41 billion, compared to December 31, 2014.
Compared to June 30, 2015, net borrowings increased by €1.94 billion due to cash outflows relating to the interim dividend for 2015 (€1.42 billion) and capital expenditure incurred in the period (€2.42 billion). These were partially offset by cash flow from operations (€1.71 billion) which was negatively influenced by lower receivables due beyond the end of the reporting period being transferred to financing institutions compared to the amount transferred at the end of the previous reporting period (down by €0.21 billion from June 30, 2015).
As of September 30, 2015, the ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage6  – increased to 0.30, compared to 0.22 as of December 31, 2014. This trend was due to increased net borrowings partly offset by higher total equity, which was helped by a sizable appreciation of the US dollar against the euro in the translation of the financial statements of Eni’s subsidiaries that use the US dollar as functional currency, resulting in an equity gain of €3.33 billion. The US dollar was up by 7.7% compared to the closing of the previous reporting period at December 31, 2014 and September 30, 2015.

Business developments

Eni made a world-class gas discovery at the Zohr exploration prospect in the deep waters of the Egyptian section of the Mediterranean Sea. This field is estimated to retain 30 trillion cubic feet of gas in place. The discovery could grant energy independence to the Country for many years to come.
Eni made an important gas and condensates discovery in the Nooros exploration prospect, located in the Abu Madi West licence in the shallow waters of the Nile Delta. The discovery was put into production in two months time through a tie-in to the existing Abu Madi gas treatment plant, located 25 kilometers far from the field.
Eni made a gas and condensates discovery in the prospection permit Nkala Marine in the Marine XII block in the shallow waters of Congo. The discovery is the latest of a strong track record which includes Litchendjili, Nené Marine and Minsala Marine.
Eni’s move into the upstream sector of Mexico was signaled by the Production Sharing Contract as operator (Eni’s interest 100%) of the Block 1 to develop the oilfields of Amoca, Miztón e Tecoalli, in the shallow waters of the Southern section of the Gulf of Mexico. These fields are estimated to retain 800 million barrels of oil and 480 billion cubic feet of associated gas in place.
Eni licensed to Total the use of the Eni’s Slurry Technology (EST) for converting heavy and extra-heavy feedstock in the refining process.
Eni started production at the giant Perla gas field, offshore Venezuela, holding a potential of up to 17 Tcf of gas in place (or 3.1 billion boe). Perla is one of Eni’s most important start-ups of 2015 and has been developed in just 5 years, an industry-leading time-to-market. A production plateau of approximately 1,200 mmcf/d is expected by 2020. Gas is sold to the national oil and gas company PDVSA under a Gas Sales Agreement running until 2036.
Eni finalised a preliminary agreement with KazMunayGas to acquire 50% of the mineral rights in the Isatay block in the Caspian Sea.
Eni signed agreements to sell 1.4 mmtonnes/y of liquefied natural gas from the Eni-operated Jangkrik field  (Eni’s interest 55%) to the Indonesian state-run company PT Pertamina, starting from 2017. These agreements will support the development of Jangkrik.
In Ghana, the final investment decision for the integrated Offshore Cape Three Points (OCTP) oil and gas project (Eni 47.22%, operator) was sanctioned. The first oil is expected in 2017.
Eni finalised an agreement in Egypt to invest up to $5 billion (at 100%) in the development of the Country’s oil and gas reserves. In addition, Eni revised certain ongoing oil contracts, with the economic effects retroactive to January 1, 2015. The agreement also comprised new measures to reduce overdue amounts of trade receivables relating to hydrocarbon supplies to Egyptian state-owned companies.
Eni was awarded three Concession Agreements in Egypt, for the Southwest Melehia block in the western desert, as well as the Karawan and North Leil blocks in the Mediterranean Sea. In October 2015, Eni was awarded two offshore blocks, North El Hammad (operated by Eni with a 37.5% interest) and North Ras El Esh (Eni’s interest 50%).
Eni made a gas discovery in the Latif block (Eni 33.3%) in Pakistan.
In Myanmar, Eni was awarded two Production Sharing Contracts (PSCs) for the exploration of the offshore blocks MD-02 and MD-04.
In Norway, Eni acquired the 40% interest and the operatorship of the exploration licence PL 806 in the Barents Sea and the 13.12% interest in PL 044C licence in the North Sea.
In the United Kingdom, Eni was awarded four licences in the Central North Sea and finalized the acquisition of three licences in the southern area of the North Sea.

In Angola, Eni sanctioned a three-year extension of the exploration period of the Block 15/06, where the first oil from the West Hub development project was achieved at the end of 2014.

(6) 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 26 for leverage.

Outlook

The outlook 2015 features a slowdown in the global economic growth caused by the reduced pace of activity in China and other emerging economies. These trends drove downwards the prices of commodities. Against this backdrop, crude oil prices have contracted markedly, falling below the 50 $/b mark during summer months. The fundamentals of the oil market remain weak due to oversupplied global markets and uncertainties about the resilience of demand, which in the course of 2015 has shown a noticeable recovery till now. Crude oil prices for the FY 2015 are forecasted to be significantly lower than the previous year. In the Exploration & Production segment, management will carry out efficiency initiatives relating to operating costs and optimize investments, while retaining a strong focus on project execution and time-to-market delivery in order to cope with the negative impact of a lower oil price environment. In the downstream sectors of gas, refining and chemicals, considering the structural issues of overcapacity and competitive pressure on a global scale, management has targeted executed efficiency measures, contract renegotiations and capacity optimizations in order to achieve structurally positive results and cash flows.

Management expects the following production and sales trends for Eni's businesses:

• Hydrocarbon production: production is expected to achieve strong growth, increasing by approximately 9% from 2014 driven by new field start-ups and ramp-ups in 2014 mainly in Venezuela, Norway, the United States, Angola, Egypt and Congo in additions to projected higher volumes in Libya;
• Gas sales: excluding the impact of the divestment of Eni’s assets in Germany and the unusual weather conditions in 2014, natural gas sales are expected to remain stable compared to 2014. Management intends to leverage on marketing innovation in the wholesale and retail markets in order to mitigate competitive pressures. Based on the marketing initiatives and the renegotiations performed till now, a substantial recovery of prepaid gas volumes in previous reporting periods is expected compared to amounts outstanding as of December 31, 2014;
• Refining throughputs on Eni’s account: excluding the impact of the divestment of the Company's share of capacity in the CRC refinery in the Czech Republic, completed in April 30, 2015, volumes are expected to increase from 2014 driven by a favourable trading environment and better plant performance on the back of yield ramp-up at the EST conversion unit of the Sannazzaro refinery. Production of bio-fuels is projected to increase at the restructured Venice plant;
• Retail sales of refined products in Italy and the Rest of Europe: retail sales in Italy are expected to slightly decline compared to 2014 due to strong competitive pressure, against the backdrop of improving trends in fuel demand. The proprietary network is expected to perform well. Outside Italy, retail sales are expected to slightly increase, excluding the impact of the divestment of the Company’s retail networks in Eastern Europe.

In 2015, in the context of lower oil prices, Eni’s management plans to implement capital project optimization and rescheduling which will reduce expenditure compared to the 2014 levels by approximately 17%, excluding the impact of the US dollar exchange rate and other changes. These initiatives are estimated to have a limited impact on our production growth outlook in the near to medium term. When excluding Saipem, capex is expected to be self-financed through operating cash flow as early as in 2015 at a Brent scenario of 55 $/b. Leverage is expected well below the 0.30 threshold thanks to the Saipem transaction.

In this press release on the Group consolidated accounts for the nine-month period ended September 30, 2015, results and cash flow are presented for the third and second quarter of 2015, and for the third quarter of 2014 and for the nine months 2015 and 2014. Information on liquidity and capital resources relates to the period ends as of September 30, 2015, June 30, 2015, and December 31, 2014. 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. These criteria are unchanged from the 2014 annual report on form 20-F filed with the US SEC on April 2, 2015 which investors are urged to read.

New segmental reporting of Eni
Eni’s segmental reporting is established on the basis of the Group’s operating segments that are evaluated regularly by the chief operating decision maker (the CEO) in deciding how to allocate resources and in assessing performance. Effective January 1, 2015, Eni’s segment information was modified to align Eni’s reportable segments to certain changes in the organization and in profit accountability defined by Eni’s top management. The main changes adopted compared to the previous setup of the segment information related to:

• Results of the oil and products trading activities and related risk management activities were transferred to the Gas & Power segment, consistently with the new organizational setup. In previous reporting periods, results of those activities were reported within the Refining & Marketing segment as part of a reporting structure which highlighted results for each stream of commodities;
• R&M and Chemicals operating segments are now combined into a single reportable segment because a single manager is accountable for both the two segments and they show similar long-term economic performance;
• The previous reporting segments “Corporate and financial companies‘ and “Other activities‘ have been combined being residual components of the Group.

The comparative reporting periods of this press release have been restated consistently with the new segmental reporting adopted by the Group. In the table below the key performance indicators of segmental reporting are furnished with reference to the full year 2014 and quarterly reporting periods presented herein as restated in accordance with the new reportable segments adopted by Eni.

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.Management evaluates Group and business performance on the basis of adjusted operating profit and adjusted net profit in order to facilitate a comparison of base business performance across periods, and to allow financial analysts to evaluate Eni’s trading performance on the basis of their forecasting models.

Eni’s Chief Financial and Risk Management 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.

Other information
Article No. 36 of Italian regulatory exchanges (Consob Resolution No. 16191/2007 and subsequent amendments).  Continuing listing standards about issuers that control subsidiaries incorporated or regulated in accordance with laws of extra-EU Countries
Certain provisions have been enacted to regulate continuing Italian listing standards of issuers controlling subsidiaries that are incorporated or regulated in accordance with laws of extra-EU Countries, also having a material impact on the consolidated financial statements of the parent company. Regarding the aforementioned provisions, as of September 30, 2015, Eni’s subsidiaries - Burren Energy (Bermuda) Ltd, Eni Congo SA, Eni Norge AS, Eni Petroleum Co Inc, NAOC-Nigerian Agip Oil Co Ltd, Nigerian Agip Exploration Ltd, Burren Energy (Congo) Ltd, Eni Finance USA Inc, Eni Trading & Shipping Inc and Eni Canada Holding Ltd – fall within the scope of the new continuing listing standards. Eni has already adopted adequate procedures to ensure full compliance with the new regulations.


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 issues; 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 of the year cannot be extrapolated on an annual basis.

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

This press release for the third quarter and nine months of 2014 (unaudited) is also available on the Eni web site eni.com.

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