Eni: first quarter 2015 results

Financial highlights

• Cash flow²: €2.30 billion;
• Leverage: 0.22 unchanged compared to end of 2014 despite the oil price halving;
• Adjusted operating profit: €1.57 billion, down 55% from the first quarter 2014; positive in all the businesses;
• Adjusted net profit: €0.65 billion, down 46% from the first quarter 2014;
• Net profit: €0.70 billion, down 46% from the first quarter 2014.

Operational highlights

• Hydrocarbon production: 1.697 million boe/d, up 7.2% from the first quarter 2014 (up 3.7% when excluding positive price effects in PSAs and portfolio developments);
• Final investment decision for the integrated oil&gas OCTP project in Ghana taken;
• Production start-up of the Hadrian South and Lucius projects in the United States, West Franklin in the United Kingdom, Eldfisk 2 Phase 1 in Norway and Nené Marine in Congo;
• Near-field discoveries made in Egypt and Libya; exploration resources of the gas discovery Merakes in Indonesia increased;
• New exploration licences acquired in Egypt, Norway, the United Kingdom and Myanmar.

 Claudio Descalzi, Chief Executive Officer, commented:
"I am pleased with the results announced this morning. In line with our strategy, we put in place actions which recovered over €600 million to cope with the difficult trading environment caused by the steep drop in the Brent oil price. Upstream production is increasing, and development plans supporting 2015-2016 production growth are in line with our forecasts. Further, all mid-downstream businesses have returned to profitability benefitting from our actions as well as the positive trading environment, thus proving the effectiveness of the upgrading initiatives implemented so far. These results, along with our focus on efficiency and working capital optimization, contributed to keeping leverage unchanged compared to December 2014, despite the Brent oil price halving."

Adjusted operating profit
In the first quarter of 2015, Eni reported a consolidated adjusted operating profit of €1.57 billion which was down by 55% from the first quarter of 2014, driven by sharply lower oil prices (down by 50%), only partly offset by a better performance recorded in upstream activity and in all other business segments. The G&P segment increased the operating profit by 21.5%, or €0.05 billion, due to an improved competitiveness of the long-term gas supply portfolio on the back of the renegotiation of a large part of it and a positive performance of the retail and other high-value segments. These positives were partly offset by lower one-off effects relating to contracts renegotiations.
The R&M and Chemicals segment reported an adjusted operating profit of €0.12 billion, compared to an operating loss of €0.31 billion in the first quarter of 2014, reflecting a recovery in margins of oil products and chemical commodities, as well as efficiency and optimization initiatives. Finally, the subsidiary Saipem reported an increase in operating profit of 25%.

Adjusted net profit
In the first quarter of 2015, adjusted net profit of €0.65 billion declined by 45.6% from the first quarter of 2014 due to lower operating profit (down by €1.92 billion), which was offset in part by higher income from investments following a recovery in the share prices of Galp and Snam on which basis Eni’s interests are measured and which underlay two convertible bonds (up €0.18 billion). The Group’s adjusted tax rate decreased by approximately 6 percentage points reflecting a lower share of taxable profit reported by the E&P segment and the aforementioned interest gains which are non taxable items.

Operating cash flow
Cash flow from operating activities for the quarter amounted to €2.30 billion. This was positively influenced by higher receivables due beyond the end of the reporting period, being transferred to financing institutions compared to the amount transferred at the end of the previous reporting period (up by €352 million from December 31, 2014). Divestment proceeds amounted to €0.55 billion. These cash inflows funded most of the capital expenditure incurred in the quarter of €2.9 billion, which were mainly directed to exploration and development of oil&gas resources. Those inflows and outflows determined an increase of €1.46 billion in net borrowings ³ to €15.14 billion, as of March 31, 2015, which was also effected by exchange rate differences of €0.46 billion.
As of March 31, 2015, ratio of net borrowings to shareholders’ equity including non-controlling interest – leverage ⁴ – was 0.22, unchanged from December 31, 2014.
An increase in total equity more than offset the effect of higher net borrowings, helped by a sizable appreciation of the US dollar against the euro in the translation of the financial statements of Eni’s subsidiaries that uses the US dollar as functional currency, resulting in an equity gain of €5.29 billion. The US dollar was up by 11.4% against the euro at the closing rates of March 31, 2015 compared to December 31, 2014.

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 Information on net borrowings composition is furnished on page 30.
⁴ 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 30 for leverage.

Exploration & Production
In the first quarter of 2015, Eni’s hydrocarbon production was 1.697 million boe/d, up by 7.2% y-o-y. When excluding price effects in the Company’s Production Sharing Agreements (PSAs) and portfolio developments, production increased by 3.7%. This was due to the start-ups achieved in the quarter and higher production in Libya, as well as continuing production ramp-up at the fields in Angola, Congo, Egypt and the United States which started production in 2014. These increases were partially offset by mature fields declines.

Gas & Power
In the first quarter of 2015, natural gas sales amounted to 25.62 bcm, down by 1.14 bcm or 4.3% compared to the same period of 2014, against the backdrop of persistent competitive pressure and oversupplies. Sales in Italy (10.08 bcm) decreased by 9.8%, mainly driven by lower spot sales and the declining demand in the thermoelectric segment. These effects were partially offset by a positive performance registered by the retail segment also due to more typical winter weather conditions compared to the first quarter of 2014. Sales in the European markets were 12.29 bcm, which were barely unchanged from the first quarter of 2014 due to higher spot sales and a positive performance of the retail segment in France, partially offset by the divestment of GVS joint venture in Germany.

Refining & Marketing and Chemicals
In the first quarter of 2015, the Standard Eni Refining Margin (SERM) increased sixfold from the first quarter of 2014 due to a fall in the price of the crude oil feedstock. However, the European refining business continued to be affected by structural headwinds from lower demand, overcapacity and increasing competitive pressure from streams of oil products imported from Russia, Asia and the United States with more efficient cost structures. Retail sales in Italy were 1.35 mmtonnes, down by 6.9% mainly driven by strong competitive pressure. Eni’s retail market share dropped by 1.7 percentage points to 24.2% in the first quarter of 2015, compared to 25.9% in the same quarter of the previous year. Retail sales in the rest of Europe in the first quarter of 2015 were slightly lower due to decreasing volumes sold in Eastern Europe. The Chemicals benefitted from a temporary shortage of certain commodities, which led to a partial recovery of margins.

Currency
The first quarter’s results were positively impacted by the depreciation of the euro vs. the US dollar (down by 17.8%).

Business developments

In Ghana, the Offshore Cape Three Point (OCTP) integrated oil and gas project (Eni 47.22%, operator) was sanctioned, after obtaining approval from the relevant Authorities of the Country. First oil is expected in 2017, first gas in 2018 and production is expected to peak at 80,000 boe/d by 2019.

In Egypt, a framework agreement was signed whereby Eni committed to assessing a plan to invest $5 billion to develop the Country’s oil and gas reserves in the next 4 years and possibly to start negotiations to revise terms of certain ongoing oil contracts. The agreement comprised  an evaluation of  measures intended to  reduce overdue amounts of trade receivables relating to hydrocarbons supplies to Egyptian state-owned companies.
In addition, Eni was awarded three Concession Agreements for the operatorship of the Southwest Melehia lease in the western Egyptian desert, in Karawan and North Leil blocks, offshore the Mediterranean Sea.

In Myanmar, following an International Bid Round, Eni was awarded two Production Sharing Contracts for the exploration of the offshore MD-02 and MD-04 leases.
In Congo, two agreements were signed to promote development of the country’s energy sector and to contribute to local growth.
Following a competitive bid round in Norway, two exploration licences were awarded: (i) the operatorship of the PL 806 licence (Eni 40%) in the Barents Sea; and (ii) the PL 044C (Eni 13.12%) in the North Sea.
In the United Kingdom, Eni was awarded four exploration licences located in the Central North Sea and three licences in the Southern North Sea.
In Angola, a three-year extension of the exploration activities on Block 15/06 was agreed with the Country’s authorities. In this block, the first oil of the West Hub operated project was achieved at the end of 2014.
Near field discoveries were made in the quarter: (i) in Egypt, new oil and gas discoveries in the onshore Melehia field in the western desert; (ii) in Libya, a gas and condensates discovery in the offshore Bahr Essalam Sud exploration prospect, which is located in the contractual area D, in proximity of the production facilities of the Bahr Essalam field.
In Indonesia, evaluation activities at the Merakes gas discovery, located in the deep offshore of the East Sepinngan block (Eni 85%, operator), increased significantly the gas reserves in place. Eni will anticipate the appraisal campaign in order to evaluate the possible fast track development of the discovery optimizing the synergies with the nearby Jangkrik field, also operated by Eni.        
In addition the following start-ups were achieved in the quarter:
(i) Nené discovery, in Marine XII block in Congo just eight months after obtaining the production permit. The early production phase is yielding 7,500 boe/d leveraging on the synergies with the front-end loading and the infrastructures of the fields located in the area. The full-field development will take place in several stages and will include the installation of production platforms and the drilling of over 30 wells, with a plateau of over 120,000 boe/d;
(ii) Hadrian South field, in the Gulf of Mexico with an estimated daily production of 10 million cubic of gas and 2,250 barrels of liquids (approximately 16 kboe/d net to Eni) and Lucius field with a daily production of approximately 7 kboe/day net to Eni;
(iii) Other field start-ups were West Franklin in the United Kingdom and Eldfisk 2 phase 1 in Norway.

Outlook

The Company is forecasting a moderate strengthening in global economic growth in 2015, driven by the United States. However, certain risks have the potential to mitigate this outlook: uncertainty remains around the strength of the Eurozone recovery, the extent of the slowdown of the Chinese economy and of other emerging economies, as well as financial stability. Oil prices are forecast to be significantly lower than the last year, due to oversupplied global markets. In the Exploration & Production segment, management will perform efficiency initiatives of operating costs and investment optimizations, while retaining a strong focus on project execution and time-to-market in order to cope with the negative impact of a lower oil price environment. Looking at the Company’s other business segments mainly exposed to the European economic outlook, Eni’s management anticipates challenging trading conditions reflecting structural headwinds due to weak commodity demand, oversupply/overcapacity and competitive pressure. The fall in oil prices may only lessen the negative impact of such trends. A recovery in profitability in these sectors will leverage on the continued renegotiation of gas supply contracts, restructuring/reconversion of the production capacity tied to the oil cycle, cost efficiencies and margin optimization.

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

• Hydrocarbon production: production is expected to increase compared to the previous year even excluding positive price effects in the Company PSAs, thanks to new fields start-ups and the ramp-ups of the projects launched in 2014, mainly in Angola, Congo, Egypt, Venezuela, the United States and Norway, as well as expectations of higher volumes in Libya;
• Gas sales: excluding the impact of the divestment of Eni’s assets in Germany and the unusual weather conditions in 2014, natural gas sales are expected to remain stable compared to 2014. Management intends to leverage on marketing innovation in the wholesale and retail markets in order to mitigate competitive pressures;
• Refining throughputs on Eni’s account: volumes are expected to increase in order to capture short-term opportunities in the current scenario, as well as due to a better performance expected at the Eni EST conversion unit at the Sannazzaro refinery and lower planned downtime. Those increases will be partly offset by the shutdown of the Gela plant, which is undergoing a reconversion plan;
• Retail sales of refined products in Italy and the Rest of Europe: retail sales are expected to remain stable compared to 2014. While we anticipate weak demand trends and strong competitive pressure, we plan to leverage on marketing initiatives to maintain the Company’s market share.

In 2015, in the context of lower oil prices, Eni’s management plans to implement capital project optimization and rescheduling which will reduce expenditure compared to the 2014 levels, excluding the impact of the US dollar exchange rate. These initiatives are estimated to have a limited impact on our production growth outlook in the near to medium term. Management expects that based on projected cash flows from operations and portfolio transactions, leverage at year end will remain within the 0.30 threshold.

This press release for the first quarter of 2015 (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 2015 and for the first quarter and the fourth quarter of 2014. Information on liquidity and capital resources relates to end of the periods as of March 31, 2015, and December 31, 2014. Statements presented in this press release are comparable with those presented in the statutory financial statements of the Company’s consolidated annual report on Form 20-F 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. Those criteria are unchanged from the 2014 annual report on form 20-F filed with the US SEC on April 2, 2015 which investors are urged to read.

New segmental reporting of Eni

With effect from January 1, 2015, Eni’s reportable segments in accordance to IFRS 8 have been regrouped as follows:

• E&P: is engaged in exploring for and recovering crude oil and natural gas, including participation to projects for the liquefaction of natural gas;
• G&P: is engaged in supply and marketing of natural gas at wholesale and retail markets, supply and marketing of LNG and supply, production and marketing of power at retail and wholesale markets. G&P is engaged in supply and marketing of crude oil and oil products targeting the operational requirements of Eni’s refining business and in commodity trading (including crude oil, natural gas, oil products, power, emission allowances, etc.) targeting to both hedge and stabilize the Group industrial and commercial margins according to an integrated view and to optimize margins. Those activities of crude oil supply and marketing and commodity risk management are the responsibility of the G&P segment manager, the latter in order to exploit in a better way the benefits of pooling different exposure to the commodity risk of the Group business units. In previous reporting periods, results of the activity of supply and marketing of crude oil and the activity of commodity risk management due to exposure to crude oil prices were reported in the Refining & Marketing segment;
• R&M and Chemicals: is engaged in manufacturing, supply and distribution and marketing activities for oil products and chemicals. In previous reporting periods, these two operating segments were reported separately. The R&M and Chemicals operating segments are combined into a single reportable segment because a single manager is accountable for both the two segments, show similar long-term economic performance, have comparable products, share a similarity of production processes due to existing technical and plant interconnections and exchanges of streams of products and utilities as a result of the proximity of refineries and cracking units, have comparable customer industries and distribution channels and operate in similar competitive environments;
• Engineering & Construction: Eni through its subsidiary Saipem which is listed on the Italian Stock Exchange (Eni’s share being 43%) is engaged in the design, procurement and construction of industrial complexes, plants and infrastructures for the oil&gas industries and in supplying drilling and other oilfield services;
• Corporate and other activities: represents the key support functions, comprising holdings and treasury, headquarters, central functions like IT, HR, real estate, self-insurance activities, as well as the Group environmental clean-up and remediation activities performed by the subsidiary Syndial (this latter was reported separately in previous reporting periods).

The segmental financial information reported to the Group Board of Directors comprises segment revenues, operating profit, as well as segmental assets and liabilities which are reviewed only on occasion of the statutory reports (the annual and the interim reports). Furthermore, management also assesses the adjusted operating and net profit by business segment. Adjusted results represent non-GAAP measures and are disclosed elsewhere in this press release.
The comparative reporting periods of this press release have been restated consistently with the new segmental reporting adopted by the Group.
In the table below the key performance indicators of segmental reporting are furnished with reference to the full year 2014 and quarterly reporting periods as restated in accordance with the new reportable segments adopted by Eni.

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.

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, 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 first quarter of the year cannot be extrapolated on an annual basis.

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Eni
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.