- FINANCE, STRATEGY AND REPORTING
- ● PRICE SENSITIVE
Highlights and outlook
Best proven reserves (P1) value of the industry as of January 1, 20161
Claudio Descalzi, Eni’s Chief Executive Officer, commented:
"In the first quarter of 2016, despite the sharply weaker commodity price environment, Eni achieved outstanding results in executing its strategy of organic growth, capital expenditure optimization and efficiency enhancement. Hydrocarbon production grew, benefitting from the start-up of the Goliat oilfield and three other projects. At the same time, we strengthened the foundations for future growth as we took the final investment decision for the development of the giant Zohr gas field, we obtained approval for the development plan of Coral from the Mozambican Authorities and we achieved further exploration success. We are therefore progressing in promoting also in 2016 significant volumes of new proved reserves, whose per-barrel present value already at the end of 2015 leads those of our main competitors. In absolute terms, the present value of our reserves portfolio ranks fourth among the International Oil Majors. I am confident that, even in terms of reserves yet to mature, our portfolio is one of the most valuable in the industry thanks to its exposure to conventional assets and Eni’s continued exploration success. Finally, the G&P and the R&M segments also achieved positive results in the first quarter, benefiting from continuous optimization initiatives and cost efficiencies, despite a less favorable trading environment year on year. Overall, the Group's financial and operating results allow us to confirm our 2016 guidance of a 20% reduction in capex, organically financed at $50/bl, and our targeted leverage, which we monitor closely and is currently among the lowest in the industry."
1 Data disclosed in the "Standardized measure of discounted future net cash flows" of the Annual Report on Form 20-F. Peers group (Exxon, Chevron, Total, Statoil, BP, Shell) data extracted from either the 10-K or the 20-F files.
2 Operating profit.
3 In this press release adjusted results from continuing operations exclude as usual the items "profit/loss on stock" and extraordinary gains and losses (special items), while they reinstate the effects relating to the elimination of gains and losses on intercompany transactions with the Chemical sector which is in the disposal phase, represented as discontinued operations under the IFRS5. A corresponding alternative performance measure has been presented for the cash flow from operating activities. For further information, see "Disclaimer" on page 6 and the reconciliations and explanations on page 22.
4 Net cash provided by operating activities of continuing operations on a standalone basis.
|SUMMARY GROUP RESULTS (a)||(€ million)||First Quarter||% Ch.|
|715||Adjusted operating profit (loss) (b)||1,418||73||(94.9)|
|(487)||Adjusted net profit (loss) (b)||454||(479)||..|
|(7,373)||Net profit (loss)||617||(803)||..|
|(2.05)||- per share (€) (c)||0.17||(0.22)||..|
|(4.49)||- per ADR ($) (c) (d)||0.38||(0.48)||..|
|(9,017)||Net profit (loss)||832||(792)||..|
|(2.50)||- per share (€) (c)||0.23||(0.22)||..|
|(5.48)||- per ADR ($) (c) (d)||0.52||(0.48)||..|
|Results of continuing operations on standalone basis (b)|
|593||Adjusted operating profit (loss)||1,503||472||(68.6)|
|(308)||Adjusted net profit (loss)||701||(77)||..|
|3,955||Net cash provided by operating activities||2,890||1,266||(56.2)|
(a) Attributable to Eni's shareholders.
(b) Non-GAAP measures. For a detailed explanation and reconciliation of standalone adjusted results and cash flow which exclude as usual the items “profit/loss on stock”and extraordinary gains and losses (special items), while they reinstate the effects relating the elimination of gains and losses on intercompany transactions with discontinued operations see pages 22 and subsequent.
(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.
Effective January 1, 2016, management adopted the accounting of the successful-effort method (SEM) to recognize exploration expenses in the preparation of the Group consolidated financial statements. The successful-effort method is largely adopted by oil&gas companies, to which Eni is increasingly comparable given the recent re-focusing of the Group activities on its core upstream business. Since it is a voluntary change in accounting policy, the SEM adoption has been applied retrospectively, as if it had always been applied. Accordingly, the comparative amounts disclosed for each prior period presented in this press release and the FY 2015 results have been restated.
Standalone adjusted operating profit from continuing operations for Q1 2016 was €0.47 billion, down by 69% from Q1 2015. This reflected sharply lower results of the E&P segment (down by €1 billion) driven by the impact of continuing weakness in commodity prices (the Brent benchmark was down by 37%), partly offset by production growth, cost efficiencies and lower amortization charges. The G&P and R&M segments reported positive results, albeit slightly lower than in Q1 2015 due to negative scenario effects and, in the case of G&P, lower one time effects associated with gas contract renegotiations and other non-recurring events, as well as mild winter-weather conditions. These negatives were partly offset by efficiency and optimization gains.
Overall, the low oil price environment had a fundamentally negative effect on the operating performance amounting to €1.6 billion, which was partially offset by production growth and efficiency gains of €0.6 billion.
In the quarter, Eni reported a standalone adjusted net result from continuing operations almost at breakeven (a negative €77 million) compared to an adjusted net profit of €0.7 billion reported in Q1 2015. The drivers of this reduction were a lowered operating profit and a lower than proportional reduction in the tax expense in E&P, which was negatively affected by the recognition of a major part of the positive pre-tax results in PSA contracts, which, although more resilient in a low-price environment, nonetheless bear higher-than-average rates of tax.
As of March 31, 2016 net borrowings5 were €12.21 billion, €4.65 billion lower than December 31, 2015, due to the closing of the Saipem transaction. This comprised the reimbursement of intercompany financing receivables owed by Saipem to Eni (€5.8 billion), the proceeds from the divestment of 12.503% of Eni’s interest in Saipem to FSI (€0.46 billion), net of the amount cashed out to subscribe pro-quota the Saipem share capital increase (€1.07 billion).
The standalone cash flow from operating activities from continuing operations came in at €1.27 billion, down by 56% year-on-year. Proceeds from disposals were €0.81 billion and comprised the available-for-sale shareholding in Snam due to the exercise of the conversion right from bondholders (€0.33 billion), in addition to the sale of 12.503% of Eni’s interest in Saipem. These inflows funded a share of the financial requirements for the capital expenditure of the quarter (€2.42 billion) and the amount cashed out to subscribe the share capital increase of Saipem.
As of March 31, 2016, the ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage 6 – decreased to 0.23, compared to 0.30 as of December 31, 2015.
This decrease was due to lower net borrowings partly offset by a reduction in total equity. The equity reduction was impacted by the results of the period and the de-recognition of the Saipem non- controlling interest, as well as a depreciation 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. The US dollar was down by 4.6% compared to the closing of the previous reporting period at December 31, 2015.
Following the filing of proven reserves (P1) reports by competitors in their regulatory annual financial statements, information is now available which allows for a further appreciation of the value of Eni’s proven reserves, which widen in relative terms during a downturn in the oil cycle, likewise the current one. The data in the graph are drawn from the regulatory filings with the US SEC and relate to the net present value of proved reserves of Eni and of an oil & gas benchmark group. Those data were determined in accordance with FASB Oil and Gas disclosures requirements. In particular, looking at the reported numbers:
In absolute dollar terms, our portfolio ranks 4th among our peer group, coming ahead of companies with proved reserve volumes much bigger than ours. This result confirms the quality of Eni’s reserve portfolio and the effectiveness of actions taken to deal with falling oil prices. Looking forward, management expects to further strengthen Eni’s portfolio, by promoting new P1 thanks to the continued progress in developing the discoveries recently achieved.
5 Details on net borrowings are furnished on page 27.
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 pages 22 and 27.
In March 2016, production at the Goliat field started up in the PL 229 licence off the Norwegian Barents Sea. Goliat is the first producing oilfield in the Barents Sea and is operated through the largest and most sophisticated floating cylindrical production and storage vessel (FPSO) in the world. Production is expected to peak at 100 kbbl/d (65 kbbl/d net to Eni). The field is estimated to contain reserves amounting to about 180 million barrels of oil.
A new exploration licence, the Cape Three Points Block 4, was obtained offshore Ghana. The new block covers an area of approximately 1,000 square kilometers in water depths ranging from 100 to 1,200 meters and is located near the OCTP block operated by Eni. In case of exploration success, the block will benefit from the OCTP project infrastructures, under development.
A Farm-Out Agreement (FOA) was signed with Chariot Oil & Gas to enter the Rabat Deep Offshore exploration permits I-VI, in the Northern Atlantic Margin of Morocco. Eni will retain operatorship and a working interest of 40%, as well as exploration rights over an area of approximately 11,000 square kilometers, with a water depth ranging from 150 to 3,500 meters. The new acreage has the potential for finding liquid hydrocarbons. The completion of this FOA is subject to the authorization of the country’s authorities and other conditions precedent.
As part of the APA Round 2015, Eni was awarded the following exploration licences: PL 128D (Eni’s interest 11.5%) in the Norwegian Sea, PL 816 (Eni operator with a 70% interest) in the Norwegian section of the North Sea, PL 229D (Eni operator with a 65% interest) and PL 849 (Eni’s interest 30%) in the Barents Sea.
In February 2016, Egyptian authorities sanctioned the development plan of the Zohr discovery, where production start-up is expected by end of 2017. In March 2016, Eni completed the drilling of the Zohr 2X well and successfully performed the production test, which confirmed the mineral potential of discovery.
In February 2016, Mozambique authorities sanctioned the development of the first development phase of Coral, targeting production of 5 Tcf of gas.
As part of Eni’s near-field exploration strategy, positive results were achieved with the Nidoco North 1-X well in the Abu Madi West production concession, located in the Nile Delta. By mid-2016, with the addition of new reserves discovered, the production capacity in the concession will increase to over 60 kboe/d.
The global macroeconomic outlook for 2016 is clouded by a number of risks and uncertainties, mainly relating to a continued slowdown of growth in China, caution in the Eurozone and in commodity- exporting countries. After hitting 13-years lows of below $30 per barrel at the beginning of 2016, the price of crude oil has recovered to the 40 dollar-mark thanks to signs of a partial easing in the global glut. However, the fundamentals of the oil market remain weak with the price of crude oil exposed to possible negative pressure due to the uncertainties surrounding the pace of energy demand growth in the short and medium term.
In order to cope with the anticipated negative impact of the scenario on the E&P results from operations and cash flow, management is planning to increase efforts to optimize capex and reduce operating costs by exploiting the deflationary pressure induced by the fall in crude oil prices. In the G&P sector, management anticipates a challenging environment pressured by weak demand growth and oversupplies. The Company confirms its strategy to renegotiate long-term supply contracts in order to align the supply terms with market conditions, as well as boost profitability in its high-value businesses (LNG, gas retail and trading). In the R&M sector management expects the refining margin to be lower than in 2015. In this context, business strategies will be focused on the optimization of refinery processes and costs as well as on the enhancement of results in marketing.
Management’s forecasts for the Group’s 2016 production and sale metrics are explained below:
- Hydrocarbons production: management expects production to be largely flat y-o-y even assuming a production shutdown in the Val d’Agri district until to year-end. This unfavourable development, the decline of mature fields and a lower expected contribution from production one-offs will be absorbed by the planned start-up of new fields and continuing production ramp-up, particularly in Norway, Egypt, Venezuela, Angola and Congo;
- Natural gas sales: against a backdrop of weak demand and strong competition, management expects gas sales to be down y-o-y in line with an expected reduction of the contractual minimum take of supply contracts. Management plans to retain its market share in the large customers and retail segments, also increasing the value of the existing customer base by developing innovative commercial initiatives, by integrating services to the supply of the commodity and by optimizing operations and commercial activities;
- Refinery intake on own account; refinery intakes are expected to be flat y-o-y, excluding the effect of the disposal of Eni’s refining capacity in CRC refinery in Czech Republic finalized on April 30, 2015;
- Refined products sales in Italy and in the rest of Europe: against a backdrop of weak demand growth and strong competition, management expects to consolidate volume and market share in the Italian retail market while also increasing the value of the existing customer base. This will be achieved by leveraging our offer differentiation, an innovation in products and services as well as efficiency in logistic and commercial activities.
In 2016 management expects to carry out a number of initiatives intended to reduce capital spending by 20% y-o-y on a constant exchange rate basis by re-phasing and rescheduling capital projects, being increasingly selective with exploration plays and renegotiating contracts for the supply of capital goods in order to cope with the slump in crude oil prices. This capex optimization is not expected to negatively affect production growth, which is confirmed at above 3% across the plan period.
The Group’s leverage is projected to remain within the 0.30 threshold thanks to the closing of the Saipem transaction, optimization of the underlying performance and portfolio management, which are expected to reduce the impact of the weak commodity environment.
Effective March 18, 2016, Legislative Decree No.25/2016, transposing the European Directive 2013/50/EU, has removed for Italian- listed companies the reporting obligation to disclose quarterly financial results. Therefore, this press release has been prepared on a voluntary basis in line with Eni’s policy to provide the market and investors with regular information about the Company’s financial and operating performances and business prospects considering the disclosure policy followed by oil&gas peers.
Results and cash flow are presented for the first quarter of 2016 and for the first quarter and the fourth quarter of 2015. Information on liquidity and capital resources relates to end of the periods as of March 31, 2016, and December 31, 2015.
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 2015 Annual report on form 20-F filed with the US SEC on April 12, 2016, which investors are urged to read.
As of December 31, 2015, the two operating segments Chemical and E&C have been classified as discontinued operations based on the guidelines of IFRS 5(see Annual Report on Form 20-F - preface to the explanatory notes to the financial statements).
The Saipem transaction was finalized on January 22, 2016, with the closing of the sale of a 12.503% stake in the entity to the Fondo Strategico Italiano (FSI) and the concurrent enter into force of the shareholder agreement between the parties intended to establish joint control over the former subsidiary. From the transaction date, Saipem assets and liabilities, revenues and expenses have been derecognized from Eni’s consolidated accounts.
The residual stake in Saipem of 30.42% has been recognized as an investment in an equity-accounted joint venture with an initial carrying amount aligned to the share price at the closing date of the transaction (€4.2 per share) recognizing a loss through profit and loss of €441 million. This loss has been recognized in the Group consolidated accounts for the first quarter 2016 as part of gains and losses of the discontinued operations.
As far as the Chemical segment concerns, negotiations are underway with an industrial partner who has showed interest in acquiring a controlling stake of Versalis, the 100%-owned Eni subsidiary, which manages the Group chemical business, thus supporting Eni in implementing an industrial plan designed to upgrade the business.
Because Eni is exiting two major lines of business, the mentioned disposal groups have been represented and accounted for as discontinued operations. Based on this accounting, gains and losses pertaining to the discontinued operations include only those earned from transactions with third parties, while gains and losses on intercompany transactions have continued being eliminated because both disposal groups were fully consolidated entities and therefore intercompany transactions are eliminated upon consolidation till the closing of any sale agreement. The accounting of the discontinued operations entails that in presence of large intercompany transactions, the results of the continuing operations do not fully illustrate the underlying performance given the elimination of gains and losses on intercompany transactions with the discontinued operations. Regarding Versalis, the revenues earned by the Group operating companies, mainly in the R&M segment, for the supply of oil-based chemical feedstock are eliminated upon consolidation. Furthermore, starting from January 1, 2016, Versalis ceased recognizing depreciation charges.
Successful effort method (SEM)
Effective January 1, 2016, management modified on voluntary basis, the criterion to recognize exploration expenses adopting the accounting of the successful-effort method (SEM) . The successful-effort method is largely adopted by oil&gas companies, to which Eni is increasingly comparable given the recent re-focalization of the Group activities on its core upstream business.
Under the S-E-M, geological and geophysical exploration costs are recognized as an expense as incurred. Costs directly associated with an exploration well are initially capitalized as an unproved tangible asset until the drilling of the well is complete and the results have been evaluated. If potentially commercial quantities of hydrocarbons are not found, the exploration well costs are written off. If hydrocarbons are found and, subject to further appraisal activity, are likely to be capable of commercial development, the costs continue to be carried as an unproved asset. If it is determined that development will not occur then the costs are expensed. Costs directly associated with appraisal activity undertaken to determine the size, characteristics and commercial potential of a reservoir following the initial discovery of hydrocarbons are initially capitalized as an unproved tangible asset. When proved reserves of oil and natural gas are determined and development is approved by management, the relevant expenditure is transferred to proved property. In accordance to IAS 8 “Accounting policies, Changes in accounting estimates and Errors”, the SEM application is a voluntary changes in accounting policy explained by the alignment with an accounting standard largely adopted by oil&gas companies and as such it has been applied retrospectively.
The retrospective application of the SEM has required adjustment of the opening balance of the retained earnings and other comparative amounts as of January 1, 2014. Specifically, the opening balance of the carrying amount of property, plant and equipment was increased by €3,524 million, intangible assets by €860 million and the retained earnings by €3,001 million. Other adjustments related to deferred tax liabilities and other minor line items.
As far as 2015 financial year is concerned, the adoption of SEM determined a reduction of operating profit of €815 million compared to the amount publicly disclosed in our annual report 2015 (from a loss of €2,781 million to a loss of €3,596 million) driven by: (i) a reduction in depreciation and amortization related to the previously fully-amortized exploration drilling costs; (ii) the write-off of exploration initiatives which management has determined to be no more economical due to technical, legal, contractual issues, capital allocation decisions or a revised outlook for commodity prices; (iii) higher impairment losses taken at property plant and equipment following the revaluation of the book values at oil&gas CGUs.
2015 net loss pertaining to Eni’s shareholders was re-determined in €7,969 million, compared to a loss of €7,680 million as previously filed. In elaborating Non-GAAP measures (i.e adjusted results) the write-off of certain exploration projects expected to be no more profitable as management reviewed the commodity price scenario, was classified as special charges (a pre- tax amount of €169 million).
The tables below set forth the restated amounts of the comparative periods 2015 which have been restated following the adoption of the SEM.
|(€ milioni)||I quarter 2015||II quarter 2015||III quarter 2015||IV quarter 2015||Full year 2015||I quarter 2015||II quarter 2015||III quarter 2015||IV quarter 2015||Full year 2015|
|Operating profit (loss) - continuing operations||1,484||1,164||(421)||(5,008)||(2,781)||1,599||1,154||(259)||(6,090)||(3,596)|
|Operating profit (loss) E&P||1,298||1,471||701||(3,614)||(144)||1,413||1,461||863||(4,696)||(959)|
|Adjusted operating profit (loss) - continuing operations on a standalone basis||1,378||1,436||432||858||4,104||1,503||1,488||594||593||4,178|
|Adjusted operating profit (loss) - E&P||955||1,533||757||863||4,108||1,080||1,585||919||598||4,182|
|Net profit (loss) attributable to Eni's shareholders - continuing operations||489||34||(1,425)||(6,778)||(7,680)||617||50||(1,263)||(7,373)||(7,969)|
|Adjusted net profit (loss) attributable to Eni's shareholders - continuing operations on a standalone basis||575||390||(429)||(202)||334||701||447||(267)||(308)||573|
|Eni's shareholders equity||51,753||55,199|
|Cash flow from operations from continuing operations on a standalone basis||2,287||3,511||1,371||4,012||11,181||2,222||3,440||1305||3,960||10,927|
|Net cash flow||656||(1,804)||(34)||(232)||(1,414)||656||(1,804)||(34)||(232)||(1,414)|
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 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.
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, gearing, future operating performance, 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 first quarter of the year cannot be extrapolated on an annual basis.
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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.