Eni: first quarter results of 2014

Rome, April 29, 2014 -  Eni, the international oil and gas company, today announces its group results  for the first quarter of 2014¹ (unaudited).

Financial highlights

• Adjusted operating profit: €3.49 billion, down 6.8% from the first quarter 2013;
• Adjusted net profit: €1.19 billion, down 14.3% from the first quarter 2013;
• Net profit: €1.30 billion, down 15.6% from the first quarter 2013;
• Operating cash flow²: €2.15 billion;
• Leverage at 0.22 compared to 0.25 at December 31, 2013.

Operational highlights

• Oil and gas production: 1.583 mmboe/d, up by 0.6% on homogeneous basis³;
• Renegotiated the Norwegian long-term gas supply contract;
• Cashed the €2.2 billion of the Artic Russia deal;
• Divested a 7% interest in Galp Energia for a cash consideration of €0.7 billion⁴;
• Buy back program: repurchased 8.85 million shares at a cost of €0.15 billion as of March 31, 2014;
• Discovered 200 million boe of resources.

Paolo Scaroni, Chief Executive Officer, commented:
“Eni delivered solid results in the first quarter 2014, despite a difficult market environment, thanks to a good performance in E&P and progress in the mid and downstream businesses, in particular with the renegotiation of the Statoil gas supply contract. The outlook for 2014 is in line with our expectations, benefiting from the ramp-up of new projects and restructuring activities in G&P, R&M and Chemicals, in the context of continued volatility in Libya and weakness in European demand.‘

(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) Net cash provided by operating activities.
(3) Excluding the effect of Artic Russia divestment.
(4) Cashed in April 2014.

(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 first quarter of 2014, adjusted operating profit was €3.49 billion, down 6.8% compared to the first quarter of 2013. This decline was driven by lower results achieved by the Exploration & Production Division (adjusted operating profit down by 13.7%), negatively influenced by a weak oil price environment (Brent benchmark down 3.9%) and the appreciation of the euro against the dollar (up 3.7%), and the Refining & Marketing Division, where operating losses were 66.4% more than in the previous-year quarter due to a continuing deterioration in the refining scenario and lower fuels demand. The Engineering & Construction segment reported a 37.3% reduction in operating profit due to the lower profitability of current contract works. The Gas & Power Division reported a better operating performance (from a €211 million operating loss in the first quarter of 2013 to an operating profit of €241 million) against the backdrop of declining demand and ongoing competitive pressure. The division benefited in particular from the renegotiation of the Norwegian long-term gas supply contract with economic effects retroactive to the previous thermal year.

Adjusted net profit
Adjusted net profit of the first quarter of 2014 amounted to €1.19 billion, down by 14.3% from the first quarter of 2013. This was driven by a lower operating performance and an increased adjusted consolidated tax rate (up 3 percentage points) due mainly to the Exploration & Production Division as a growing share of taxable profit was earned by subsidiaries subject to a higher tax rate.

Capital expenditure
Capital expenditure for the first quarter of 2014 amounted to €2.54 billion, mainly related to the development of oil and gas reserves and exploration projects.

Balance sheet and cash flow
As of March 31, 2014, net borrowings⁵ amounted to €13.8 billion, down €1.16 billion from the close of the previous reporting period. This decline reflected net cash provided by operating activities (€2.15 billion), which nonetheless was impacted by lower trade receivables due beyond the end of the quarter transferred to factoring institutions as compared with the end of 2013 (down €750 million), and the proceeds from disposals mainly relating to the divestment of Eni's interest in Artic Russia (€2.18 billion). These inflows were partially offset by cash outflows relating to capital expenditure of the period. The ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage⁶ – decreased to 0.22 at March 31, 2014 with respect to 0.25 at December 31, 2013.

(5) Information on net borrowings composition is furnished on page 25.
(6) Non-GA AP 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 25 for leverage.

Exploration & Production
In the first quarter of 2014, Eni’s liquids and gas production was 1.583 million boe/d. On a homogeneous basis, excluding the effects of the assets disposal in Siberia (26 kboe/d), production increased by 0.6% due to production ramp-ups mainly in the United Kingdom and Algeria, partially offset by continuing political instability in Libya and mature fields declines.

Gas & Power
In the first quarter of 2014, Eni’s natural gas sales were 26.76 bcm, decreasing by 3.41 bcm, or 11.3%, from the first quarter of 2013, down by 11.3%. The decline was caused by continuing weakness in demand, competitive pressure and oversupplies as well as unusual weather conditions. Sales in the domestic market (11.18 bcm) declined by 10.8% in almost all segments. Sales in Europe (12.13 bcm) decreased by 12.9% mainly in Germany/Austria, Benelux and France.

Refining & Marketing
In the first quarter of 2014, European refining margins remained at depressed levels (2.07$/barrel on average for the Brent/ Ural benchmark, down by 51.9% from the first quarter of 2013) driven by structural headwinds in the industry: overcapacity, lower demand and increasing competitive pressure from import streams of refined products from Russia, Middle East and the USA. Furthermore, Eni’s refining margins were affected by narrowing differentials between the heavy crudes processed by Eni’s refineries and the marker Brent, reflecting the lower availability of the former in the Mediterranean area. In the first quarter of 2014, retail sales in Italy were 1.45 mmtonnes, decreasing by 12.1% driven by reduced domestic consumption and increasing competitive pressure. Eni’s retail market share decreased by 2.9 percentage points to 26.2%, from 29.1% in the corresponding period of 2013. Retail sales in the European market slightly increased due to the higher volumes marketed mainly in Germany, Austria and Hungary (up by 4.4% to 0.71 mmtonnes).

Business developments

Gas contract renegotiations
On March 31, 2014, Eni and Statoil signed final agreements on the revision of the long-term gas supply contract currently in force between the two parties. The revision reflects the changed fundamentals in the gas sector and is retroactive to the previous thermal year. The final agreement, which follows the Heads of Agreement signed on February 27, 2014, implies the end of the arbitration proceedings previously initiated by Eni.

Divestment of Galp SGPS SA
On March 28, 2014, through an accelerated book-building process aimed at institutional investors, Eni sold approximately 7% of the share capital of Galp Energia SGPS SA at the price of €12.10 per share, for a total consideration of €702.4 million, cashed in April 2014. Following this transaction, Eni retains a 9% interest in Galp, of which 8% underlying the approximately €1,028 million exchangeable bond due on November 30, 2015.

Versalis
As part of Eni’s strategy of developing new initiatives aimed at the reduction of the company’s exposure to commodity chemicals and at diversification into the use of environmentally friendly chemicals, Versalis commenced the renovation of the Porto Marghera complex. This process will involve capital expenditure of €200 million aimed at optimizing the cracking plant, upgrading plant utilities able to deliver significant energy savings, and developing innovative green chemical projects in partnership with the American company Elevance Renewable Science Inc. The green projects will develop, through unique world-scale plants, new technologies to produce bio-chemical intermediates from vegetable oils destined for use in industrial sectors with high added value industrial applications such as detergents, bio-lubricants and chemicals for the oil industry. The project will take advantage of existing infrastructures and product streams.

Acquisition of Acam Clienti
Eni acquired the entire share capital of the company Acam Clienti SpA, increasing its existing stake of 49% with the acquisition of the remaining 51% interest from third parties. Acam Clienti operates primarily in the province of La Spezia, with a portfolio of 98,000 residential gas customers and around 12,000 electricity customers (small to mid-sized enterprises). The acquisition is in line with Eni’s commitment to develop its market share in the retail gas and electricity segment, where the Company boasts established expertise.

Framework Agreement with the Italian Consiglio Nazionale delle Ricerche
Eni has renewed its Framework Agreement with the Italian Consiglio Nazionale delle Ricerche (CNR) as the two parties close cooperation on the research of strategic issues for the European and the Italian energy system and protecting the environmental continues. The research guidelines will focus on the testing of new techniques for the characterization of hydrocarbon reservoirs; environmental monitoring activity aimed at the sustainability of the production of oil and gas, eco ­sustainable solutions for mobility and environmental protection; the experimentation of advanced solar energy cells.

Outlook
The 2014 outlook is linked in part to a moderate strengthening of the global economic recovery. A number of uncertainties surrounding this outlook remain due to weak growth prospects in the Euro-zone and risks from the emerging economies. Crude oil prices are forecast on a solid trend driven by geopolitical factors and the resulting technical issues in a number of important producing Countries against the backdrop of well supplied global markets. Management expects that the trading environment will remain challenging for the Company’s businesses. We expect continuing weak conditions in the European industries of gas distribution, refining and marketing of fuels and chemical products, where we do not anticipate any meaningful improvement in demand, while competition, excess supplies and overcapacity will continue to weigh on selling margins of energy commodities. In light of this, management reaffirms its commitment to restoring profitability and preserving cash generation at the Company’s mid and downstream businesses leveraging on cost cuts and continuing renegotiation of long-term gas supply contracts, capacity restructuring and reconversion and product and marketing innovation.

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

• Production of liquids and natural gas: production is expected to remain substantially in line to 2013, excluding the impact of the divestment of Eni’s interest in the Artic Russia gas assets;
• Gas sales: natural gas sales are expected to be slightly lower than 2013. Management plans to strengthen marketing efforts and innovation to fend off competitive pressures both in the large customers segment and in the retail segment considering an ongoing demand downturn and oversupplies, particularly in Italy;
• Refining throughputs on Eni’s account: volumes are expected to be slightly lower than those processed in 2013, due to capacity reductions only partially offset by higher output at the new EST technology conversion plant at the Sannazzaro Refinery;
• Retail sales of refined products in Italy and the Rest of Europe: retail sales are expected to be slightly lower than in 2013 due to an ongoing demand downturn in Italy and the expected impact of network reorganisation in Italy and in Europe;
• Engineering & Construction: 2014 will be a transitional year with profitability expected to recover, the extent of which will be determined by the effective execution of operational and commercial activities on low-margin contracts still present in the current portfolio and by how quickly bids currently under consideration are awarded.

In 2014, management expects a capital budget in line with 2013 (€12.80 billion in capital expenditure and €0.32 billion in financial investments in 2013). Assuming a Brent price of $106 a barrel and an euro/dollar exchange rate of 1.33 on average for the full year 2014, the ratio of net borrowings to total equity - leverage - is projected to be almost in line with the level achieved at the end of 2013, due to cash flows from operations and portfolio transactions.

This press release for the first quarter of 2014 (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 first quarter of 2014 and for the first quarter and the fourth quarter of 2013. Information on liquidity and capital resources relates to end of the period as of March 31, 2014, and December 31, 2013. 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, which differ from those used in preparing Eni annual report for the year 2013 as explained below.

With effect from January 1, 2014, Eni adopted, among others, the new accounting standards IFRS 10 "Consolidated Financial Statements", and IFRS 11 ”Joint Arrangements’ which were issued by the IASB in May 2011 and were adopted by the European Commission in December 2012 with regulation No. 1254. Therefore the comparative data presented in this press release has been restated as a result of the adoption of the above mentioned new accounting standards which were illustrated in the explanatory notes to the consolidated financial statements for the year 2013 filed with the Italian securities and exchange authorities on April 10, 2014. We note that those new accounting standard have been instead used in preparing Eni’s Annual report on Form 20-F that was filed with the US Securities and Exchange Commission the same day. The main impact of this suite of new standards for Eni is that certain of the group’s jointly controlled entities, which were previously equity-accounted, now fall under the definition of a joint operation under IFRS 11 and so we now recognize the group’s assets, liabilities, revenue and expenses relating to these arrangements. Whilst the effect on the group’s reported income and net assets as a result of the new requirements is not material, the change impacts certain of the component lines of the income statement, balance sheet and cash flow statement. On the balance sheet, there was a reduction in investments in joint ventures of approximately €781 million as at December 31, 2013, which has been replaced with the recognition (on the relevant line items, principally property, plant and equipment) of our share of the assets and liabilities relating to these arrangements.

The following tables set out the adjustments made to certain selected line items of the comparative amounts as a result of the adoption of the accounting standards. Full restated quarterly information and annual restated information for 2013 is disclosed on pages 31-39 of this press release.

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, 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.

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, buy-back program, 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 fourth quarter of the year cannot be extrapolated on an annual basis. The all sources reserve replacement ratio disclosed elsewhere in this press release is calculated as ratio of changes in proved reserves for the year resulting from revisions of previously reported reserves, improved recovery, extensions, discoveries and sales or purchases of minerals in place, to production for the year. A ratio higher than 100% indicates that more proved reserves were added than produced in a year. The Reserve Replacement Ratio is a measure used by management to indicate the extent to which production is replaced by proved oil and gas reserves. The Reserve Replacement Ratio is not an indicator of future production because the ultimate development and production of reserves is subject to a number of risks and uncertainties. These include the risks associated with the successful completion of large-scale projects, including addressing ongoing regulatory issues and completion of infrastructure, as well as changes in oil and gas prices, political risks and geological and other environmental risks.