Eni: third quarter and nine months of 2014 results

San Donato Milanese, October 30, 2014 - Yesterday, Eni’s Board of Directors approved group results for the third quarter and nine months of 2014 (unaudited)¹.

Financial highlights

• Operating cash flow²: €3.98 billion for the quarter, the highest performing third quarter for the last five years. €9.72 billion in the nine months, up 24% from the nine months of 2013;
• Leverage at 0.25, unchanged from December 31, 2013;
• Adjusted operating profit: €3.03 billion for the quarter (down 11.8%); €9.25 billion for the nine months (up 1.2%);
• Adjusted net profit: €1.17 billion for the quarter (up 2.5%); €3.24 billion for the nine months (up 3.2%);
• Net profit: €1.71 billion for the quarter (down 57%); €3.68 billion for the nine months (down 36.7%); 2013 results included the gain on the divestment of a 20% interest in the Mozambique discovery for approximately €3 billion.

Operational highlights

• Oil and gas production: stable at 1.58 mmboe/d (1.59 mmboe/d in the FY’13³);
• Exploration: achieved great discoveries in Congo (Marine XII) and Indonesia (East Sepinggan) in addition to the recent near-field discoveries in Angola and Ecuador, all of which will be put into production shortly. Resource base increased by 700 million boe in the nine months, at an average cost of $1.9 per barrel;
• Development activities are ongoing in Angola, Congo, Norway and Indonesia where new fields start-ups will significantly contribute to production growth for the next four years. Pre-development activities are also in progress in Mozambique;
• Agreement with the Republic of Congo to extend existing permits and to develop new oil initiatives;
• Midstream: the ongoing turnaround is progressing in the refining and gas businesses in line with the plan announced in July.

Claudio Descalzi, Chief Executive Officer, commented:
 “I am very pleased with our excellent cash generation which reflects the efforts made in recent months. It has hit the highest level of the last five years in spite of continued weakness in the trading environment. This provides further evidence that we are on track to achieve our growth targets for cash generation which were announced to investors at our strategy day in July 2014. Our exploration is continuing to deliver extraordinary results which will drive future growth in our upstream portfolio. Furthermore, the development of new projects scheduled to begin production over the next four years is progressing in accordance with our plans, as is the restructuring of our gas and refining businesses. I am confident that our strategy and the results it will produce are the best way to ensure profitability and financial robustness for Eni in an environment of declining prices.‘

(1) This press release complies with the requirement to file a quarterly report in accordance to Italian listing standards as per 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 contribution of Artic Russia which was divested.

(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 third quarter of 2014, the Group adjusted operating profit was €3.03 billion, down by 11.8% compared to the third quarter of 2013. This reflected lower results in the Exploration & Production segment (down by €828 million or 21.1%) that was adversely impacted by falling oil (down by 7.7% for the marker Brent) and gas prices, as well as lower production.
Despite the continued decline in selling prices pressured by weak demand and competition, the Gas & Power segment reported significantly lower operating losses which were down by two thirds (€109 million in the third quarter of 2014, compared to €344 million in the same period of the previous year). This reflected improved competitiveness due to the renegotiation of a substantial portion of the long-term gas supply portfolio. The Refining & Marketing segment returned to profitability, recording an adjusted operating profit of €39 million, up from €55 million of adjusted operating losses in the same quarter of the previous year. This improvement was driven by lower losses reported by the refining activity reflecting a slow recovery in the trading environment and continuous efficiency and optimisation initiatives. The same drivers helped the performance of Versalis, which reported a slightly lower operating loss, down by 11.7%. Eni’s subsidiary Saipem reported a lower operating performance (down 29.5%) due to the still high percentage of legacy, low-margin contracts in the portfolio activity.
In the nine months of 2014, the consolidated adjusted operating profit was €9.25 billion, up by 1.2% from the nine months of 2013. The result for the nine months reflected the improved performance in the Gas & Power segment owing also to contract renegotiations partly relating to gas volumes procured in the previous thermal year and improved Saipem results from the exceptional contract losses incurred in 2013 (up by €702 million). These positive drivers helped to offset the reduced performance of the Exploration & Production segment and other businesses.

Adjusted net profit

In the third quarter of 2014, adjusted net profit amounted to €1.17 billion (up by 2.5% from the third quarter of 2013) despite a reduced operating performance and lower results from equity-accounted entities. This result was helped by the lower consolidated tax rate (down by 5 percentage points), due to the reduced contribution of the Exploration & Production segment to the consolidated taxable profit. In the nine months of 2014, adjusted net profit of €3.24 billion was 3.2% higher compared with the same period of 2013 reflecting the same drivers as in the quarter, as well as for the circumstance that in 2013 the Company could not accrue any tax benefits on Saipem’s losses (the consolidated tax rate was down by 5 percentage points).

Reported net profit

The reported net profit for the third quarter of 2014 amounted to €1.71 billion recognising a tax gain of €0.82 billion (plus accrued income of €0.01 billion). This was due to the settlement of a tax dispute with the Italian fiscal Authorities regarding how to determine a tax surcharge of 4% due by the parent company Eni SpA as provided by law No. 7/2009 (the so called Libyan tax) since 2009. In the third quarter of 2013, the net profit of €3.99 billion included a capital gain of about €3 billion for the sale of a 20% interest in the Mozambique discovery.

Capital expenditure 

Capital expenditure for the third quarter of 2014 amounted to €3.08 billion (€8.61 billion for the nine months) mainly related to the development of oil and gas reserves and exploration projects. In the nine months of 2014 the Group also incurred expenditure of €0.28 billion in financial investments.

Balance sheet and cash flow

As of September 30, 2014, net borrowings⁴ amounted to €15.84 billion (up by €0.87 billion from December 31, 2013) reflecting currency translation differences of €0.25 billion. In the nine months of 2014, net cash generated by operating activities of €9.72 billion was impacted by lower trade receivables due after the end of the quarter transferred to factoring institutions as compared with the end of 2013 (down by €0.78 billion). Divestment proceeds were €3.23 billion primarily relating to Eni’s interest in Artic Russia and a residual stake in Galp. These inflows substantially absorbed cash outflows relating to the payment of dividends (about €4 billion, of which about €2 billion related to the interim dividend 2014), share repurchases (€0.29 billion) and capital expenditure incurred in the period (€8.9 billion).
Compared to June 30, 2014, net borrowings increased by €1.24 billion due to the payment of the 2014 interim dividend to Eni’s shareholders and capital expenditure incurred in the period. These cash outlays were partially offset by net cash provided by operating activities (€3.98 billion) and asset disposals (€0.22 billion).
As of September 30, 2014, the ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage⁵  – remained unchanged at 0.25 compared to December 31, 2013. The effect of the increased net borrowings was neutralised by a corresponding increase in total equity. The latter reflected, besides the result of the period, the positive effect of the sizable appreciation of the US dollar against the euro (up by 9% from the closing rates between December 31, 2013 and September 30, 2014, respectively) in the translation of the financial statements of Eni’s subsidiaries that uses the US dollar as functional currency with an equity gain of €3.76 billion.

Exploration & Production

In the third quarter of 2014, Eni’s hydrocarbon production was 1.576 million boe/d, 3.5% lower compared to the third quarter of 2013 on a homogeneous basis i.e. excluding the impact of the divestment of Eni’s interest in Siberian assets (approximately 30 kboe/d), price effects in the Company’s Production Sharing Agreements (PSAs) and geopolitical factors. In the nine months, hydrocarbon production was down by 1% from the same period of the previous year to 1.581 million boe/d and stable compared to the 2013 full year average level. Production ramp-ups in the United Kingdom, Algeria and the United States were more than offset by mature fields’ declines and unscheduled facility downtime.

Gas & Power

In the third quarter of 2014, natural gas sales amounted to 19.62 bcm, up by 6.9% compared to the same period of 2013. This result was achieved in a difficult market scenario driven by weak demand and competitive pressure. Sales in Italy (7.24 bcm) increased by 18.1%, driven by higher spot sales and to wholesalers markets. Sales in the European markets were 9.21 bcm, up by 13% from the third quarter of 2013 reflecting increased sales mainly in Benelux. In the nine months, natural gas sales were down by 3.2% to 65.47 bcm due to unusual winter weather conditions in the first quarter of 2014 and industry headwinds.

Refining & Marketing

In the third quarter of 2014, the Standard Eni Refining Margin (SERM) that gauges the profitability of Eni’s refineries against the typical raw material slate and yields, reported a recovery compared to the particularly depressed scenario of the third quarter of 2013. However, the European refining business continues to be affected by structural headwinds due to lower demand, overcapacity and increasing competitive pressure from import streams of refined products from Russia, Asia and the United States. In the nine months, the Eni’s refining margin was down by 10.3%.
Retail sales in Italy were 1.58 mmtonnes, down by 7.6% due to a decrease in consumption in Italy and strong competitive pressure (4.63 mmtonnes, down by 8.7% in the nine months). Eni’s retail market share dropped to 25.4% in the third quarter, compared to 27.2% in the same quarter of the previous year. Retail sales in the European markets were unchanged compared to the third quarter of 2013.
 
Currency

The nine months’ results were negatively impacted by the appreciation of the euro vs. the US dollar (up by 2.9%).

Business developments

Angola

In September 2014, a significant oil discovery was made at the Ochigufu 1 NFW well, located in the deep waters of Block 15/06 (Eni operator with a 35% interest). This discovery with a potential in place estimated at approximately 300 million barrels of oil, located near the West Hub, will boost the resource base of the project, currently underway.

Ecuador

In September 2014, a significant oil discovery was made at the Oglan-2 exploration well, with a potential in place estimated at approximately 300 million barrels of oil. The commercial development of the discovery, located near the processing facilities of the Villano field, will begin shortly. The discovery is part of the exploration campaign which Eni is undertaking in line with its strategy to develop Block 10 under the new Service Contract signed with the Ecuadorian Government in 2010.

Egypt

In September 2014, three operated exploration licenses were awarded: the onshore South-West Meleiha block (100% interest), located near the producing Meleiha Development Lease, the offshore Block 9 (100% interest) and the Block 8 (50% interest), located in deep waters of the Mediterranean Sea, near the boundary with Cypriot waters. The licences will be formally awarded after the ratification and finalisation of the Concession Agreements.
In August 2014, the DEKA (Denis-Karawan) project was started up with a production of 1.8 million cubic meters of gas and about 800 barrels of associated condensates per day. Produced gas will be processed at the onshore El Gamil Gas Plant.
Peak production of 6.5 million cubic meters per day net to Eni is expected by the first quarter of 2015.

Gabon

In July 2014, Eni achieved an important gas and condensates discovery in the Nyonié Deep 1 exploration prospect, in the shallow waters of Block D4, with an estimated hydrocarbon potential of approximately 500 million boe. The discovery is the outcome of the exploration campaign which the Company is carrying out in the shallow waters of West Africa to “pre-salt‘ plays.

Indonesia

In October 2014, a significant gas discovery was made at Merakes 1 well, located offshore in East Sepinggan block (Eni operator with a 100% interest). This discovery with a potential in place estimated at approximately 1,3 Tcf, is located in proximity of the offshore Jangkrik operated field which is currently under development and could supply additional gas volumes to the Bontang LNG plant in the future.

Mozambique: cooperation agreement in the upstream and LNG segments

In October 2014, as part of its partnership with the South Korean company Korea Gas Corporation (KOGAS), Eni signed a cooperation agreement to undertake joint initiatives in the upstream and LNG segments, in particular in Area 4 in Mozambique.

Myanmar

In July 2014, Production Sharing Contracts (PSCs) were signed for the exploration of two onshore blocks in Myanmar. The activity will be carried out through a joint venture between Eni (90%) and the state-owned Myanmar Production and Exploration Company Ltd. The exploration period will last six years.

Republic of Congo

In July 2014, a cooperation agreement was signed with the Congolese government to extend existing permits and to develop new oil initiatives in the Country’s coastal basin, which extends from onshore Mayombe to frontage deep waters.
In October 2014, Eni achieved a new important  oil  discovery in the Minsala  Marine  exploration offshore prospect, with a preliminary estimated potential of approximately 1 billion barrels of oil equivalent in place, of which 80% oil. In Congo, Minsala Marine prospect is the third discovery to be successfully drilled in the Marine XII permit pre-salt play following the Litchjendily and Nene Marine discoveries, which are both already under development.

The United States

In August 2014 the Stallings 1H exploratory well was successfully completed, marking the first achievement under the agreement with Quicksilver Resources signed at the end of 2013. This agreement provides for joint evaluation, exploration and development of unconventional oil reservoirs (shale oil) in the southern part of the Delaware Basin in West Texas. The well had an initial start-up rate of 750 barrels of oil per day. The Eni-Quicksilver joint venture is currently drilling the Mitchell 1H, their second exploration well located in the same basin.

Vietnam

In October 2014, PSCs were signed for the exploration of Block 116 (Eni’s interest 100%) and Block 124 (Eni’s interest 60%) located offshore. The two blocks cover an area of approximately 11,000 square kilometers. The PSCs allow for an exploration period of seven years. The participation in these two blocks consolidates Eni’s presence in Vietnam and in the Pacific basin. The proximity of these blocks to those which Eni already operates will enable the company to take advantage of logistical and operational synergies, with considerable savings in terms of time and costs.

Outlook

The 2014 updated outlook is characterised by a slower than expected global economic recovery, affected by continued stagnation in the Euro-zone and a slowdown of the emerging economies. Despite lingering geopolitical risks and consequent technical issues in a number of important producing Countries, crude oil prices fell in the second half of the year to as low as $85 a barrel from an average of $109 in the first half of 2014, due to oversupply concerns driven by the continued growth of unconventional production in the United States. The competitive environment remains challenging due to the persistent weak fundamentals of the European industries of gas distribution, refining as well as fuels and chemical products marketing.
Eni’s management does not anticipate any meaningful improvement in demand in these segments, while competition, market liquidity and excess of supply and capacity will continue to weigh on the prices and sales margins of energy commodities. In light of this, Eni reaffirms its commitment to restoring profitability and preserving cash generation at the Company’s mid and downstream businesses by leveraging cost cuts and continuing renegotiation of long-term gas supply contracts, capacity restructuring and reconversion along with product and marketing innovation.

Management expects the following production and sales trends for Eni’s businesses:
-  Production of liquids and natural gas: production is expected to remain substantially in line with 2013, excluding the impact of the divestment of Eni’s interest in the Artic Russia;
-  Gas sales: natural gas sales are expected to be slightly lower than in 2013, excluding the impact of the expected divestment of Eni’s interest in a commercial joint venture in Germany, even due to unusual winter conditions in the first months of 2014;
-  Refining throughputs on Eni’s account: volumes are expected to be lower than those processed in 2013 due to capacity reductions and plants optimisation processes designed to mitigate the impact of a negative trading environment. This has only partially been offset by the start-up of the new EST conversion plant at the Sannazzaro Refinery;
-  Retail sales of refined products in Italy and the Rest of Europe: retail sales are expected to be lower than in 2013 due to an ongoing demand downturn in Italy and increasing competitive pressure;
-  Engineering & Construction: 2014 confirms to be a transitional year where Saipem acquired an unprecedented level of new orders. However, the continuing deterioration of the trading environment during 2014 negatively affected the timing of renegotiating legacy, low-margin contracts and made more challenging the execution of the new projects.

In 2014, management expects the optimisation and decrease in the capital budget compared to the 2013 level (€12.80 billion in capital expenditure and €0.32 billion in financial investments in 2013). Assuming the current level of Brent prices and euro/dollar exchange rates in the fourth quarter, the ratio of net borrowings to total equity – leverage – is projected to come in slightly better than the level achieved at the end of 2013, due to cash flows from operations and portfolio transactions.

In this press release on the Group consolidated accounts for the nine-month period ended September 30, 2014, results and cash flow are presented for the third and second quarter of 2014, and for the third quarter of 2013 and for the nine months 2014 and 2013. Information on liquidity and capital resources relates to the period ends as of September 30, 2014, June 30, 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 2011 and were adopted by the European Commission on December 11, 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. For a full disclosure about the impacts of the adoption of the new international accounting standards see the press release on Eni’s first quarter results of 2014, published on April 29, 2014 and interim report, published on August 1, 2014.

The following table sets out the main results of the comparative reporting periods presented in this press release including the full year results, which were restated following adoption of the new accounting standards.

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.

(4) Information on net borrowings composition is furnished on page 32.
(5) 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 32 for leverage.

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, buyback 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 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.