FINANCE, STRATEGY AND REPORTING

Eni: full year 2018 and fourth quarter results

Yesterday, Eni’s Board of Directors approved the Group results for the full year and the fourth quarter of 2018 (unaudited).

Yesterday, Eni’s Board of Directors approved the Group results for the full year and the fourth quarter of 2018 (unaudited). Commenting on the results, Claudio Descalzi, CEO of Eni, remarked:

“2018 was a strong year for Eni both financially and operationally, which was characterized by a robust fourth quarter performance. We successfully optimized our portfolio and strengthened it for the future, and we doubled operating and net profit, while the price of Brent averaged 25% higher than 2017 in euro terms. We increased cash flow from operations by 35% allowing us, after investments, to cover our €3 billion dividend while also reducing net debt by approximately the same amount to €8.3 billion. Capital expenditure continues to be stable, demonstrating our disciplined management approach.
In our Upstream division we achieved our highest ever level of production of 1.85 million barrels per day, with a cash flow per barrel of $22.5, achieving our 2022 target four years early. The proven reserves replacement ratio was once again higher than 100%, for a three-year average of 131%. Gas & Power achieved its highest ever operating profit since the spin-off of regulated transport and distribution activities, equal to €0.5 billion, while the performance of Refining & Marketing and Chemicals highlights the division’s progress and resilience, despite a less favorable market environment.
With a view to the future we strengthened and geographically diversified our Upstream portfolio, expanding our growth prospects with the establishment of Vår Energi in Norway and building of a significant presence in the Middle East, while keeping costs low and maintaining a high level of profitability. In Refining, the acquisition of a stake in Ruwais increased our downstream capacity by 35%, representing the most efficient and profitable option for expansion, increasing the balance of our portfolio and making it more resilient to future cyclical pressures.
On the basis of these results, we will propose payment of a dividend of €0.83 per share at the Board of Directors' meeting to be held on 14 March.”

Highlight

Exploration & Production

Record hydrocarbons production: 1.85 million boe/d for the FY, up by 2.5% from 2017 net of price effects (1.87 million boe/d in the fourth quarter, down by 1%). This performance was recorded despite a decline in gas demand in certain countries with a negative impact of approximately 1 percentage point in the year and other one-off events (mainly the termination in the second quarter of the Intisar production contract in Libya).
Production growth was fuelled by:
- an addition of more than 300 kboe/d from production ramp-ups at highly-profitable giant projects (Zohr, Nooros, Jangkrik, OCTP oil, East Hub, Nenè phase 2) and achievement of the five start-ups planned for 2018: Ochigufu and Vandumbu in Block 15/06 in Angola, OCTP gas phase, Bahr Essalam phase 2 and Wafa Compression;
- increased production at the Kashagan, Goliat and Val d’Agri fields (the latter shutdown in 2017);
- the entry in Abu Dhabi.
Zohr: increased the production target to 3.2 bcf/d.

New projects:
- Final Investment Decisions: sanctioned the operated projects of Area 1 off Mexico, targeting development of 2.1 billion of barrels of oil equivalent in place, with the pilot project’s planned start-up in 2019 and the Merakes discovery in Indonesia, leveraging on the synergy with the existing infrastructures of the Jangkrik field. Overall, in 2018, six projects were sanctioned (in addition to those previously mentioned, in Italy, Egypt, Congo and Angola).
- Rovuma LNG Project in Mozambique: the co-venturers of Area 4 secured long-term agreements for the purchase of LNG volumes, an important step towards making the final investment decision of the first phase of the Rovuma LNG Project, for the construction of two LNG trains with a capacity of 7.6 million tons/year each and obtaining the project financing.
Exploration:
- successes of the year in Egypt, Cyprus, Norway, Angola, Nigeria, Mexico and Indonesia;
- replacing portfolio of exploration leases: in the year, added approximately 29,300 Km2 of new acreage mainly in Mexico, Lebanon, Alaska, Indonesia and Morocco.
- exploration resources: added 620 million boe of new resources, higher than the guidance.
Portfolio management:
- Dual Exploration Model: signed an agreement with Qatar Petroleum for the divestment of a 35% interest in Area 1 discoveries, off Mexico. Farm-out of part of Eni’s interest in the Nour licence in Egypt to BP (25%) and Mubadala (20%); finalized asset swaps in Mexico with Lukoil.
- Robust growth in the Middle East, achieving a more balanced risk profile of Eni’s upstream portfolio:
  awarded by the Abu Dhabi National Oil Company (ADNOC) a 25% interest in the Ghasha concession, a supergiant offshore gas project. Eni will retain the technical leadership with expected start-up by the end of 2022 and a projected production plateau at 1.5 bcf/d;
  in January 2019, Eni was awarded seven exploration licenses in onshore/offshore areas: two licenses in Abu Dhabi, one in Oman, one in the Kingdom of Bah
- Strengthened the upstream activity in Norway: finalized the business combination between Eni Norge and Point Resources, leading to the creation of Vår Energi, an equity-accounted joint venture (Eni’s interest 69.6%) that will develop the activities of the two partners in Norway targeting a production plateau of 250 kboe/d in 2023.
- Alaska: signed a preliminary agreement to acquire a 70% interest and the operatorship of the Oooguruk oil field. Eni already owns the remaining 30% working interest.
Proved hydrocarbon reserves: 7.2 billion boe; 124% of all-sources replacement ratio; 100% of organic replacement ratio (105% net of price effects); 131% three-year average organic replacement ratio.
E&P adjusted operating profit: €2.93 billion in the fourth quarter (up by 57%); in 2018 recorded the best result of the last four years, with an operating profit more than doubled to €10.85 billion.

Gas & Power

FY 2018 adjusted operating profit at €0.54 billion: more than double the 2017 result and best performance of the last eight years, thanks to the restructuring of long-term gas supply contracts, LNG growth and optimizations in the power business. Adjusted operating profit of €43 million in the fourth quarter.
LNG contracted volumes: up by 70% to 8.8 mmtonnes in 2018, more than half sold on the Asian market leveraging on supplies of upstream equity gas in Indonesia, as result of the improved integration across the two businesses.
Retail business: achieved a customer base of 9.2 million units, up by 6%, mainly in Europe.

Refining & Marketing and Chemicals

Breakeven refining margin: 3 $/barrel, in line with the guidance at the budget scenario of exchange rates and oil spreads.
Agreement with ADNOC for the acquisition of a 20% interest in the ADNOC Refining company,which owns therefining complexes of Ruwais and Abu Dhabi, with an overall capacity of more than 900 kbbl/d.
The total consideration of the deal amounts to $3.3 billion, net of acquired debt and possible price adjustments at the closing date. Additionally, the agreement includes the creation of a joint venture engaged in trading activities, participated by Eni with a 20% interest.
The transaction will significantly improve the resilience of Eni’s refining business, halving the breakeven refining margin to approximately 1.5 $/barrel when fully operational.

Sales of petrochemical products:up by 6% in the fourth quarter and in the full year.
Refining & Marketing adjusted operating profit: €0.17 billion in the fourth quarter, more than double the fourth quarter of 2017. On a yearly basis, €0.39 billion (down by 27%) due to an unfavorable refining trading environment and increased standstills, partly offset by the improved performance in marketing activities.
Chemicals results negatively affected by rising costs of oil-based feedstock in the first ten months of the year and by a sharp decrease in polyethylene prices during the fourth quarter: adjusted operating loss of €28 million in the fourth quarter and €10 million in the full year.

Sustainability, Energy Solutions and circular economy

GHG emission intensity in the E&P segment: 21.44 tCO2 eq¹/kboe, a 20% decrease from 2014, in line with the target of reduction by 2025 disclosed to the market.
Energy Solutions: installed capacity from renewables of 40 MW at year end. During 2018, the main projects related to:
- “Italian Project”: started-up production at the photovoltaic plant in Assemini, with a total capacity of 26 MW, and certain plants with a capacity of 1 MW each, at the Green Data Center in Ferrera Erbognone and at the Gela hub.
- Algeria: completed the construction of a photovoltaic plant with a capacity of 10 MW (Eni’s share 5 MW), close to the oil field Bir Rebaa North, jointly operated by Sonatrach and Eni.
- Kazakhstan: started-up the activities for the construction of Eni’s first wind farm located in the site of Badamsha, with an installed capacity of 50 MW. The project is in partnership with General Electric.
- Australia: in February 2019, finalized the acquisition of a construction-ready solar photovoltaic project near Katherine, in the Northern Territory of the region, with an installed capacity of 33.7 MW. The plant will be equipped with a battery storage system and, once into operation, it will avoid around 63,000 tonnes/year of CO2 equivalent emissions.
Italy: started-up at the Gela site, in Sicily, a pilot plant for recycling and transforming the organic fraction of solid waste produced by households and civil buildings into bio-oil, through proprietary waste-to-fuel technology.
Launched a number of partnerships with the main Italian municipalities to recycle civil waste and organic raw materials by using them as feedstock to produce high quality biofuels.
Versalis and certain Italian manufacturing companies teamed up to establish a supply chain aimed at recycling synthetic grass from sports fields.

Group results

Adjusted operating profit: up by 49% q-o-q to €2.99 billion; FY operating profit almost doubled to €11.24 billion.
Adjusted net profit: €1.46 billion in the fourth quarter of 2018 (up by 55% q-o-q); €4.59 billion in the full year of 2018 (almost doubled compared to the previous year).
Net profit: €0.50 billion in the fourth quarter; €4.23 billion in the full year of 2018.
Cash flow from operations: €4.33 billion in the fourth quarter of 2018 (up by 32% q-o-q); up by 5% from the third quarter of 2018 despite the 10% decline in Brent price; €13.65 billion in 2018 (up by 35% y-o-y) determining a 172% funding ratio of net capex.
Adjusted cash flow from operations² before changes in working capital at replacement cost at €3.3 billion in the fourth quarter (up by 40% q-o-q). In the full year, €12.7 billion, up by 37% y-o-y.
Net capex³: €7.94 billion in the full year.
Cash neutrality at a Brent price of 52 $/bbl, better than guided. When excluding the impact of the deferred cash in of 2017 disposals (Zohr), cash neutrality is redetermined in 55 $/bbl.
Net borrowings: €8.29 billion, down by €2.63 billion compared to December 31, 2017, which also includes dividend payments of €2.95 billion.
Leverage: 0.16, lower than the level of December 31, 2017 (0.23).
Adjusted ROACE: 8.5% vs. 4.7% reported in the FY 2017.
2018 dividend proposal⁴: €0.83, of which €0.42 already paid as interim dividend.

Outlook

Eni’s business outlook and financial and operational targets for the 2019-2022 industrial plan will be unveiled at a Strategy Presentation on March 15, 2019 as well as disclosed in 2018 Annual Report. The key strategic guidelines and targets will be disclosed in a press release to be published on March 15, 2019, that will be available at our website “eni.com” and publicly disseminated as required by applicable listing standards.

¹Carbon dioxide equivalent (CO₂eq) is a standard unit for measuring the impact of different greenhouse gas warming effect using, as a reference, the amount of ²CO₂ that would create the same warming effect. Eni reports greenhouse gas emissions using CO₂eq due to the inclusion of other greenhouse gas than carbon dioxide (CO₂₎, such as methane (CH₄) and nitrous oxide (N₂O), characterized by a warming potential of respectively 25 and 298 (Source: IPCC).
³See table on page 15.
⁴See details on page 1, footnote (d) and (e).