Eni results for the second quarter and half year 2019

Yesterday, Eni’s Board of Directors approved the Group results¹ for the second quarter and first half of 2019 (unaudited). Commenting on the results, Claudio Descalzi, CEO of Eni, remarked:
“In the first half 2019, Eni delivered excellent operating and financial results, making substantial progress towards the achievement of the full-year targets outlined in its industrial plan. Group cash flow before changes in working capital increased by 20% notwithstanding a less supportive trading environment than in the comparative period and largely funded capex, which remained under control in line with our financial discipline, cash return to shareholders, which in addition to the payment of the 2018 dividend, can now also count on the share buy-back programme. Therefore, net borrowings decreased by a further 5% to €7.87 billion excluding accounting lease liabilities. We expect to generate additional organic cash surplus in the near future owing to our expectation that Brent will exceed our level of cash neutrality, which at approximately 55 $/barrel is forecast to remain below actual oil prices. Our industrial performance had underpinned these results. In the Upstream, our operating model designed to minimise the time-to-market obtained another great success in Mexico with the start-up of Area 1 in less than a year following approval of the plan of development. We expanded our production capacity organically, by growing mainly in Egypt where the Zohr field is approaching full plateau. The Gas&Power segment has continued to strengthen its performance thanks to the enhancement of the long-term gas portfolio, of which a significant step was the renewal of the gas agreement with Sonatrach. The gas retail business reported robust results by enlarging its customer base by 130,000 delivery points. The R&M and Chemicals businesses managed to withstand an unfavorable trading environment recovering in the second quarter, especially in the oil marketing. Our sustainability key performance indicators are showing steady improvement, in line with targets and we highlight the start-up of the Gela Green refinery. Based on these results and prospects, it is my intention to reaffirm to our Board of Directors the proposal of an interim dividend of €0.43 per share.”

Highlights

Exploration & Production

• Hydrocarbon production: 1.83 million boe/d both in the second quarter and in the first half, almost unchanged y-o-y net of portfolio effects;
  • q-o-q change affected by the termination of the Intisar production contract in Libya from the third quarter of 2018; net of this impact and portfolio effects, production increased by 110 kboe/d in the quarter, up by 6.5% due to volume increases and lower maintenance activity (94 kboe/d, or 5.5% in the first half);
  • start-ups and ramp-ups added 218 kboe/d, driven by the achievement of full capacity at the Libyan projects started in 2018 (Wafa compression and Bahr Essalam phase 2) and by organic growth in Egypt (the Zohr ramp-up), Ghana and Angola.
• Start-ups of new fields:
  • Mexico: the Miztón field offshore Area 1 started up in early production, the first step in the hub development with an estimated 2.1 billion barrels of oil equivalent in place. The start-up was obtained in less than two and half years after drilling the first well and in less than one year following approval of the development plan, demonstrating the effectiveness of Eni’s distinctive fast track approach to upstream development projects;
  • Egypt: oil production started up at the SW Meleiha development area leveraging on the 2018 discoveries;
  • confirmed the planned start-ups in the second half in Egypt and Algeria. On July 15, 2019, started up the Trestakk field in Norway. Started up also the Berkine oil field in Algeria.
• Exploration:
  main successes:
  • in the first half new discoveries totaled 350 mmboe of exploration resources:
  • Offshore Angola: a new successful exploration campaign has led to several discoveries in Block 15/06 (Eni operator with a 36.8% interest) with the last positive outcomes in the Ndungu and Agidigbo prospects, the second and the third discoveries since the beginning of the year following the Agogo discovery and the fifth since the resumption of exploration activities in 2018. The cumulative resources found are pegged at 1.8 billion barrels of oil in place;
  • Offshore Ghana: new gas and condensates discovery made in the CTP-Block 4 (Eni operator), with estimated resources in place ranging between 550-650 bcf of gas and 18-20 mmbbl of associated condensate, representing a potential commercial discovery due to its proximity to existing production infrastructures;
  • Norwegian North Sea: new oil and gas discoveries in the PL 869 license participated by Vår Energi;
  • Offshore Egypt: made a gas discovery in the exploration permit Nour (Eni operator with a 40% interest) and near field discovery made in the western desert with the Basma and Shemy prospects, onshore Nile delta with the El Qara North East 1 prospect and the Gulf of Suez with the Sidri South prospect. Some discoveries have already been linked to the producing facilities;
  • Vietman: gas and condensates discovery in the exploration permit Ken Bau, Block 114 (Eni operator with a 50% interest), located offshore Vietnam.
    reloading Eni’s mineral interest portfolio: in the first half of 2019, acquired new exploration acreage covering 24,200 square kilometers, mainly in the Bahrain, the UAE, Mozambique, Algeria, Norway, Côte d'Ivoire and Egypt.
    The following agreements are going to be ratified:
  • Kazakhstan/Caspian Sea: an exploration and production license in the Abay concession located in shallow water, in joint venture with the national oil company KMG;
  • Ghana: the exploration and production license in Block WB03 (Eni operator with a 70% interest), in the medium deep waters of the rich Tano basin, located near the Sankofa producing field (OCTP project);
  • Argentina: the exploration license in block MLO 124 in the South offshore (Eni operator with an 80% interest).
• Signed agreements to divest to Qatar Petroleum:
  • a 13.75% share in the exploration blocks L11A, L11B and L12, in deep offshore Kenya;
  • a 30% interest in the Tarfaya exploration license, offshore Morocco, which includes 12 exploration blocks. At the closing date, Eni will retain a 45% interest and the operatorship;
  • a 25.5% interest in Block A5-A, offshore Mozambique, where Eni is retaining the operatorship with a 34% interest.
• Dual exploration model: divested a 20% interest of the Merakes discovery.
• Rovuma LNG development plan approved by the Mozambique Government for the production, liquefaction and marketing of natural gas from three reservoirs in the Mamba complex in the Area 4 offshore the Rovuma basin.
• Net capex^:2 €3.16 billion in the first half, in line with the guidance.
  
• Adjusted operating profit Exploration & Production: €2.14 billion, down by 22% q-o-q; €4.45 billion in the first half, down by 8%. Excluding the impact of the loss of control over Eni Norge on the 2018 results to allow a-like-for-like comparison, and net of scenario effects and IFRS 16 accounting, the adjusted operating profit decreased by 5% in the quarter (up by 5% in the first half).

Gas & Power

• Signed an agreement with the Algerian national oil company Sonatrach to extend the long-term supply contract to import gas to Italy until 2027 (with the option for a two-year additional term) and the transport contract to Italy through the Tunisian onshore pipeline and the offshore one.
• Outcome first phase arbitration with GasTerra: GasTerra’s claim for a price adjustment to the gas deliveries for the period October 1, 2012 –September 30, 2015 has been dismissed. No liability to be incurred by Eni. Release of the bank guarantee has been agreed.
• Retail business: enlarged the customer base by approximately 130,000 delivery points in the first half of 2019 due to growth in the power business.
• Adjusted operating profit G&P: €0.05 billion, down by 57% q-o-q; €0.4 billion in the first half (down by 3%). The performance was driven by growth and increasing efficiency in the retail business.

Refining & Marketing and Chemicals

• ADNOC refinery: obtained antitrust authorizations. Closing of the acquisition of the 20% interest expected in short time.
• Gela green refinery: started up some production units.
• EST plant at the Sannazzaro refinery: full operations expected by the third quarter 2019.
• Completed the ramp-up at the Priolo steam-cracker in the Chemical business after the upset recorded in the first quarter.
• Adjusted operating profit of the R&M business: reverted to operating profit at €0.08 billion in the second quarter after a first-quarter loss (up by 25% vs. the comparative period) due to robust results of the marketing activities and better plants performance. In the first half, operating profit at €0.07 billion (down by 15%) due to a weaker scenario for complex refineries and higher standstills.
• Adjusted result of the Chemical business: loss of €28 million in the second quarter (loss of €74 million in the first half), negatively affected by scaling up production at the Priolo steam-cracker and an unplanned downtime at the Porto Marghera steam-cracker, while the chemicals scenario has remained weak, particularly in the elastomers segment due to a slowdown in the automotive sector.

Decarbonization and circular economy

• GHG emission intensity in the E&P segment: 20.94 tCO₂ eq³ /kboe, a 1.3% decrease y-o-y (down by 2.3% vs. full year 2018), in line with the reduction target by 2025 disclosed to the market.
• Energy Solutions, power generation from renewables: 40 MW of installed capacity as of June 30, 2019. In the first half, started up the construction of the following plants:
  • Badamsha, in Kazakhstan, a 50 MW wind farm; 
  • Porto Torres, a 31 MW photovoltaic plant, in Italy;
    
  • Katherine, in Northern Australia, a 33.7 MW photovoltaic plant, equipped with a storage system;
  • Tataouine, in Southern Tunisia, a 10 MW photovoltaic plant, and Adam, located near the homonymous oil concession, a 5 MW photovoltaic plant.
• Signed a number of MOUs with notable stakeholders of the civil society and among the industrial sector (Coldiretti, Maire Tecnimont, RenOils, Veritas) to develop circular economy projects, targeting mainly the recycle of solid urban waste to convert it in bio-feedstock.
• Signed a joint declaration with the United Nations Industrial Development Organization (UNIDO), setting up a new, pioneering public-private cooperation model aimed at helping reach the UN’s Sustainable Development Goals (SDGs).
• Started a collaboration with ENEA to research magnetic confinement fusion, in order to produce clean, safe, sustainable energy.

Group results

• Adjusted operating profit: €2.28 billion for the second quarter, down by 11% q-o-q (€4.63 billion in the first half, down by 6%). Excluding the impact of the loss of control over Eni Norge on the 2018 results to allow a-like-for-like comparison, and net of scenario effects and IFRS 16 accounting, the Group adjusted operating profit increased by 9% in the quarter (up by 7% in the first half).
• Adjusted net profit: €0.56 billion for the quarter, down by 27% q-o-q (down by 24% excluding IFRS 16 accounting effects). €1.55 billion in the first half, down by 11% (down by 8% excluding IFRS 16 accounting effects).
• Net profit: €0.42 billion and €1.52 billion in the quarter and the first half, respectively.
• Robust growth in cash flow before working capital at replacement cost⁴: €3.39 billion, up by 43%, and €6.8 billion, up by 23%, in the second quarter and in the first half of 2019, respectively. These increases remain still remarkable even when excluding IFRS 16 accounting effects and discounting from the comparative periods certain extraordinary items which negatively affected the result by approximately €500 million: up by 18% to €3.3 billion in the second quarter; up by 9% to €6.5 billion in the first half of 2019.
• Cash flow provided by operating activities: €6.61 billion in the first half, up by 27% (€4.52 billion in the second quarter, up by 49%), which was negatively affected by an extraordinary payment to settle an arbitration outcome (€330 million).
• Capital expenditure and investment, net: €3.79 billion in the first half, net of the purchase of reserves in Alaska and Algeria (IFRS 16 effects were immaterial).
• Net borrowings: €7.87 billion before the effect of IFRS 16; down by 5% from 2018 year-end. Including IFRS 16, net borrowings was €13.59 billion, of which around €2 billion pertains to the share of lease liabilities attributable to joint operators in Eni-led upstream project.
• Leverage: 0.15 before the effect of IFRS 16, lower than the values at December 31, 2018 and March 31, 2019. Including IFRS 16, leverage was 0.27, or 0.23 excluding the aforementioned share of lease liabilities attributable to joint operators.
• Buy-back: the buy-back program of the Eni share started at the end of May; as of June 30, 2019 3.69 million of shares have been repurchased for a total consideration of €52.4 million.
• 2019 interim dividend proposal: €0.43 per share⁵, out of a full-year dividend forecast of €0.86 per share.

Outlook 2019

Exploration & Production
Hydrocarbon production: reaffirmed the target of a production growth rate in the range of 2%-2.5% y-o-y, assuming a Brent price forecast of 62 $/bbl and net of portfolio transactions. The projected range is assuming a production level of 40 Kboe/d in Venezuela and a scaling down in production volumes at our Indonesian project to factor in a slowdown in end-markets in Asia. Growth will be fuelled by continuing production ramp-up at fields started in 2018, particularly the Libyan projects Wafa compression and Bahr Essalam phase 2, by organic growth in Egypt (Zohr ramp-up), Ghana and Angola, as well as the start-up of the Area 1 oil project offshore Mexico, North Berkine in Algeria and the Trestakk project in Norway and the planned start-ups in Egypt and Algeria. New field start-ups and ramp-ups are projected to add approximately 250 kboe/d. following the bulk of our plant maintenance executed in the second quarter, production growth will resume at a faster rate in the third quarter still affected by residual maintenance activity and will further accelerate in the fourth quarter.
Exploration resources: expectations are for exceeding the previous target of 600 million boe of equity additions for the year.

Gas & Power
Operating profit: expected at approximately €500 million as guided.
Portfolio of retail customers projected to increase due to the development of the power business.

Refining & Marketing and Chemicals
Refinery breakeven margin expected at approximately 4.4 $/bbl in 2019 considering an unfavourable trading environment due to narrowing differentials between heavy/sour crudes and the light Brent crude and assuming full operability of the industrial system. At the budget scenario, the breakeven margin would be 3.5 $/bbl at the end of 2019.
Operating profit: downward revision to €500 million considering adverse trends in the scenario for complex refineries.
Refinery throughputs on own account: substantially unchanged.
Green throughputs: an increase expected due to the start-up of the Gela plant.
Retail sales of refined products seen as stable, in line with the market share in Italy.  
Petrochemical production volumes and sales: expected to decline y-o-y due to the shutdown of the Priolo steam-cracker in the first quarter and fully in operation by the end of July.

Group
Capex: revised to a slight decrease the previous guidance of €8 billion for FY 2019 at the budget exchange rate of 1€=1.15 USD.
Cash flow from operations before working capital at replacement cost is expected at approximately €12.8 billion at the budget scenario assumptions, before IFRS 16 effects.
Cash neutrality: organic capex and the dividend are expected to be fully funded by operating cash flows at the Brent scenario of 55 $/bbl before IFRS 16 effects, or 52 $ including IFRS 16 effects.

_{¹Results of operations, cash flow and statement of financial position for the second quarter and first half of 2019 included the effects of the new accounting standard IFRS 16 –Leases. Since as permitted by the standard the comparative periods have not been restated, to enable the users of this report to make a homogeneous comparison, the effect of IFRS 16 on the results of the second quarter and first half of 2019 have been disclosed with reference to the single items of the profit and loss, cash flow and statement of the financial position and as whole in the tables presented on page 14.
²Net of expenditures relating to reserves acquisition, purchase of minority interests and other non-organic items, for an overall amount of €500 million in the first half of 2019.
³Carbon dioxide equivalent (CO2eq) is a standard unit for measuring the impact of different greenhouse gas warming effect using, as a reference, the amount of CO2 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).
⁴See table on page 14.
⁵Dividends are not entitled to tax credit and, depending on the receiver, are subject to a withholding tax on distribution or are partially cumulated to the receivers' taxable income.}

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