Eni S.p.A. (NYSE:E) Q3 2023 Earnings Call Transcript

Eni S.p.A. (NYSE:E) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Welcome to Eni’s 2023 Third Quarter Results Conference Call hosted by Mr. Francesco Gattei, Chief Financial Officer. For the duration of the call, you will be in listen-only mode. [Operator Instructions] I am now handing you over to your hosts to begin today’s conference. Thank you.

Francesco Gattei: Good afternoon and welcome to Eni third quarter and nine month 2023 results conference call. Energy markets remain volatile, but at Eni our focus is on delivering results in all scenarios, while at the same time advancing our longer-term strategy. Q3 has seen as successfully achieving both these things. Before digging deeper into the numbers, let me emphasize the key strategic accomplishment for the quarter. We are evolving and strengthening core business such as E&P and GGP for the challenge of transitioning energy markets and taking opportunity to build new relevant businesses such as Plenitude, Enilive, Biochemical and CCUS. In upstream, in August, we began production of Baleine offshore Ivory Coast less than two years after discovery, further evidence of the efficient integration of world-class exploration with a development strategy focusing on time to market and value maximization.

Production from Baleine is a contributor to this quarter and year-on-year growth and its phases ramp-up is an important element in the 3%, 4% growth in our current four-year plan. This approach continues to deliver. We are therefore delighted to significantly exceed our full year target of 700 million BOE of discovered resources. The recently announced Geng North Discovery offshore Indonesia is assessed by third-party provider as the largest in the industry in 2023. Indeed, along with Nargis, announced earlier this year, Eni currently has two of the top five. I will revisit Geng in more detail later. Meanwhile, we are also upgrading our upstream portfolio. In September, we announced the sale of our Nigerian onshore production company, NAOC, following the divestment of mature Congo’s assets earlier this year.

At the same time, we have been advancing our agreed purchase of Neptune, a portfolio that represents an exceptional feat for us. Closing of Neptune remains on track for Q1 2024. Geng and Neptune will be important contributor to the shifting balance of our upstream portfolio towards gas. Obtaining full value of our equity production is of course critical and so we were pleased in the past few days to announce new LNG supply agreement with Congo, Qatar and Indonesia. We have seen really positive progress as we work to establish a leading CCUS position. Our Bacton UE project was awarded a CO2 appraisal and storage license by the UK government, while we also agreed at the term with the UK for the world’s first asset-based regulated CCS business model for our operated high net project.

In energy evolution, we are also very active. Our team met with many of you in September to update on our unique biorefining agree up strategy. We were also pleased to confirm an agreement to explore the development operation of a new biorefinery in South Korea, supporting the strong global growth target in that business. Moreover, this month we have closed the purchase of Novamont, advancing Versalis Progress in specializing its portfolio towards the growing market of biochemical and bioplastics. And now to group results. Strong segmental EBIT from each of our main businesses results in over 3 billion group EBIT for the quarter, driven by E&P and 11 billion over the nine months. Including associate, the pro forma EBIT of the company in the quarter was EUR4 billion and EUR14 billion over the nine months.

With a tax rate in the mid of 40% consistent with the oil price, business performance and associate contribution. Net income for the quarter was EUR1.8 billion, resulting in a nine-month net income of EUR6.6 billion. We continue to have an excellent cash conversion. Underline three quarters cash flow from operation of EUR3.4 billion and EUR12. 9 billion for the nine months stand out at the top of our historical performance, with an organic free cash flow date of around 6.2 billion, which more than covers our 2023 distribution. We accelerated share buyback this quarter, repurchasing EUR600 million, meaning we have repurchased over 2% of our share in the year-to-end September. And our buyback will continue at accelerated pace in the fourth quarter.

Sharing issues are down almost 6% year-on-year. September also saw the first payment of the EUR0.94 quarterly dividend. As anticipated, CapEx of 1. 9 billion this quarter reflects lower spend than the first half. We have also made the second payment in respect of the PBF joint venture in this quarter. And even as we invest organically and into portfolio and buy back shares, the balance sheet remains in exceptionally good shape, with leverage [indiscernible] change from the second quarter at 15% and only up modestly over the last year. Let’s now take a look at the business segment performance quarter. Taking natural resource first. Upstream production averaged 1.635 million barrels per day, up 4% year on year, with the start-up of Baleine, as I noted, but also higher production in Algeria, ramp-ups in Mexico and Mozambique, recovery in Kazakhstan after last year, and planned outages.

Higher production and higher oil prices helped push EBIT to EUR2.6 billion euro, up 26% quarter-on=quarter, and with our upstream satellites where we generated EUR3.4 billion euro of adjusted EBIT. GGP had a softer quarter as we said it would. The second half of the year is benefiting from less available portfolio flexibility and could result fewer optimization opportunities as spreads narrowed. As promised, I want to focus further on our recently announced Geng North discovery in the Kutei Basin offshore Indonesia. It is worth refreshing on the main characteristic of our exploration strategy because Geng North is such a good example. We are focused on gas. We seek a larger equity share that allows us to have greater control of the project and the option of early valorization through our dual exploration strategy.

We explore close to existing infrastructure, which benefits time to market and reduce the development cost and enhancing value. Our distinctive power-in house development process helps us optimize time to market and as a result, not only Eni is consistently the leading global explorer in multiple basins among our peers, but also deliver the best full cycle returns. In terms of Geng specifically, it is a very significant discovery with 5 TCF of gas and 400 million barrels of condensate in place, equivalent to around a recoverable volume of 800 million barrels of oil equivalent. It is an industry-large discovery year to date. Well productivity, confirmed by the DST, is excellent. After completing the Neptune purchase, Eni will have an 88% participation.

Development of a field of this scale will require some new infrastructure, including a floating production unit, but this can now be optimized as a new app development and include reserves for an additional 5 TCF on our recently acquired IDD acreage. Furthermore, the proximity to infrastructure the existing Bontang LNG plant which has available capacity makes development highly efficient and provides higher value for the gas. Last but not least, it is also worth noting the discovery, the risk, further, multi-TCF exploration potential in the area. So, by virtue of scale, participation level, efficiency of development, access to market and cycle time, Geng is a very meaningful addition to Eni future upstream project pipeline. And now turning to energy evolution.

A stronger SERM refining margin and higher refining availability, as we anticipated on our second quarter call, have combined for a good quarter from traditional refining with EBIT of 328 million up versus a loss at Q2, down somewhat year-on-year on scenario effect not fully reflected in the SERM. Similarly, the strengthening scenario plus better utilization at Venice and Gela and the seasonally normal improvement in marketing have driven a solid 270 million EBIT results from any live. We were also pleased to have booked our first contribution of positive net income from our biorefinery joint venture with PBF at the Chalmette Refinery in Louisiana, well in advance of our original plan. And as a reminder, income from investment in the downstream is primarily our stake in the ADNOC Refinery.

Versalis continue to be impacted by weak demand, high energy cost and intense competition in the chemical sector. This emphasises the importance of the recently completed Novamont acquisition with our intention to shift towards specialised and sustainable chemistry activities. It is now important to say that Plenitude even as energy markets continue to be so challenging, is meeting or even exceeding all its operational and financial targets, confirming the strength of a unique and integrated business model. EBIT for Plenitude for the quarter was 180 million, equivalent to 280 million of EBITDA. Along with power, EBIT of 219 million was 23% up year-on-year, despite the significant results from open market power sales in 2022. With a strong contribution from retail and a significant increase in renewable power sold, we now expect Plenitude 2023 EBITDA to be 30% higher than the original guidance.

Start-up offshore wind generation at Dogger Bank and Photovoltaic in Kazakhstan emphasised the operational momentum while the deal agreed by GreenIT Plenitude joint venture with CDP to develop four new photovoltaic projects in Italy adds to medium-term progress also. This distinctive growth profile will continue to be a feature of Plenitude as we double 2023 EBITDA by 2026, reaching 7 GW of renewable capacity as well as increasing customers to over 11 million and charging points to over 30,000 by the same date. That leads me to update guidance for 2023. We have narrowed the full year guidance for oil and gas production to between 1.64 to 1.66 million barrels of oil equivalent, which at the midpoint implies 2.4% growth year-on-year and a four-quarter exit rate of close to 5% growth year-on-year.

We can confirm our GGP guidance in the range of EUR2.73 billion. We are raising pro forma adjusted downstream EBIT to 1 billion from 0.8 billion, reflecting the stronger third quarter and a better outlook for the last quarter in both traditional biorefining. This is part of set by continued challenging condition faced by Versalis. Within downstream Enilive pro forma EBITDA is raised to EUR1 billion from guidance of more than 0.9 previously. As we have highlighted, we are also raising our full year guidance for Plenitude EBITDA to around 0.9 billion. With this change, we now expect replacement cost CFFO to be around EUR16.5 billion up from EUR15.5, EUR16 previously and EBIT to be around EUR14 billion, 2 billion higher than our mid-year view.

We are on track to deliver all our original target despite weaker scenario, conditions and planned with business outperformance across Eni delivering around 2.6 billion of additional underlying EBIT. Our planned buyback remains at 2.2. And while we continue to spread to complete by April 2024, we are also accelerating its pace in the final month of 2023. With our dividend EUR0.94 per share for 2023, our distribution is equivalent to 33% of expected cash flow from operation. We expect CapEx about 9 billion over 5% lower than our initial plan with a price with a precise figure determined by timing around the project activity. This all means we continue to expect leverage in the 10%, 20% range. In conclusion, we continue to deliver excellent operating and financial results and strategic progress.

We can reinvest in the business for future value and maintain a resilient financial position in volatile times. Meanwhile, we are also transforming, building on our strengths and developing new line of business as opportunity presents themselves. This concludes my prepared remarks and together with Eni top management, I am ready to answer your questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Giacomo Romeo of Jefferies.

Giacomo Romeo: Yes, good afternoon. Thank you for giving me this opportunity. First question is around your shares buyback program. Francesco, you hinted the fact that you are accelerating in Q4 the pace of the buyback. At current pace, it indicates that you should reach around 2 billion by the end of the year. I just wanted to check whether when you think that the 2. 2 billion will be completed, is it going to be Q4 results in February? And also, how should we think about how you will use the flexibility given by the 3.5 billion mandate from the AGM in order to bridge the period when you finish the 2.2 and the next AGM in May. The second question is on GGP. You left EBIT guidance and change. Year-to-date, you’re basically 100 million from the lower end of this.

Just trying to understand where the cautious outlook is coming from here. Is it related to the increased tensions in the Middle East? Is there any sort of you have any visibility on potential negative impacts from contract negotiations next year, in the next quarter. Just if you can share some color that would be helpful. Thank you.

Francesco Gattei: Thank you. I will reply to the share buyback while I will leave the floor to Cristian Signoretto for the GGP guidance. About the share buyback, first of all, you know that we have, as you mentioned, currently the 2.2 as a target and the flexibility up to 3.5 subject clearly to the improvement towards our cash flow from operation expectation. So that flexibility will be, let’s say, optional in case we will see an improvement above the 17 billion threshold that under the current assumption we are not, let’s say, yet achieved. In the quarter, you mentioned that it will close according to your estimate around the 2 billion. I think that under the current estimate so far the past pace of 60 million per week of buying back.

This is a bit higher. So I will say that clearly you will see in the coming weeks from the report that we published substantially at the beginning of each, the increase of the pace. The expectation is to accelerate the buyback. It means that instead of concluding that within April, we will think to have an acceleration. I do not disclose what will be, but you will see the figure in the acquisition in the time that we will publish every week. Then now I leave to Cristian for more call on.

Cristian Signoretto: Yeah, so thank you. So the third quarter results were in line with the expectations as gathered in the last conference call. And you know the mild market actually guided us to that kind of guidance. When it comes to the fourth quarter and the range in the fourth quarter that we left unchanged. This is actually a result of the scenario uncertainties in terms of volatility, spreads, supply availability as well as expected outcome of an ongoing arbitration, which is going to be ruled in the next quarter.

Giacomo Romeo: Thank you.

Operator: The next question is from Biraj Borkhataria of RBC.

Biraj Borkhataria: Hi. Thanks for taking my questions. The first one was on exploration. Very helpful slide that you put in today obviously this is probably the way Eni has created the most value over the last decade and clearly a strength of the company. So I was wondering how you’re thinking about your exploration budget going forward and into the next couple of years. You see your US peers buying upstream resource in quite a big way and clearly these on oil and gas demand are evolving. Do you think your exploration budget is appropriate as it currently stands or should you be doing more? And the second question is on Egypt. You have a big position there. I just wanted to get some thoughts from the ground because energy exports there have been minimal, which is kind of normal for the summer, but also we’re not seeing much in terms of exports for October either.

So I was wondering if you’d comment on, you know, production levels of projects like Azure and the broader situation there. And then finally, just a quick one on the Indonesia discoveries. Is it fair to assume the target will be for these to feed the Bontang and for LNG and then assuming there’s capacity there for more exports, right? Thank you.

Francesco Gattei: Thank you, Biraj. First of all, about exploration, just to have you seen the past that we continue to perform. We perform through a budget that were maintained probably let’s say in a steady way not to standing in industry are substantially reduced to this kind of activity because we also selected the capacity the opportunity near field and we were able also clearly to take advantage of our internal skills and the capability to process to our supercomputer seismic imaging and therefore to the risk of this activity. I will leave it to Guido the answer about additional color on the exploration clearly Indonesia plan of valorization and the Egypt Zohr production.

Guido Brusco: Yeah on exploration we may say that we have a very balanced and disciplined budget as you know we basically allocate money on ILX and near field opportunities and but also a minor component to the high impact well. And this was the strategy of the last seven years which proved to be very solid and which we delivered upon. About Geng, Geng is clearly, it shows the successful of our distinctive strategy focusing on gas, focusing on nearby infrastructure availability, reinforcing our equity position in a very strategic area and also supporting our dual exploration model and fast track development. So Geng, it includes all these features. As you may have appreciated in the slide, we have quite a significant amount of resources discovered, but also a significant exploration upside, which would allow us on one hand to extend and expand the plateau of the current floating production unit in the southern area, but will also allow to build a new hub in the North area where we have a significant upside potential on the exploration which could extend significantly the plateau.

In front of us there is an LNG plant, Bontang, with a capacity of 22 million tonnes per year, which is, I would say, almost empty. At the moment, the capacity utilised is 5.6 million tonnes per year, so we will be plenty of capacity to accommodate the plateau production coming from Geng Discovery and the stranded assets which we bought from IDD both in the north and in the southern area. I would also underline that this discovery is very liquid rich and this helps also a lot to enhance the value of the asset. As far as Zohr, Zohr is producing from 2.1 to 2.2 BCF per day. Now we are and it’s in line with our plans, we are now running a number of projects and activities, drilling activities in filling specifically, but also other plateau extension activity to enhance the capacity of the facility to handle the current level of production of Zohr.

Biraj Borkhataria: Just one quick follow up on Egypt. Are you having any issues on the currency side given the devaluation and so on in terms of getting money in and out?

Guido Brusco: We are not having issues with the currency because our contracts are in dollars so we don’t have any impact on the devaluation of the currency. Okay. Thank you.

Biraj Borkhataria:

Operator: The next question is from Oswald Clint of Bernstein.