Eni S.p.A. (NYSE:E) Q4 2023 Earnings Call Transcript

Eni S.p.A. (NYSE:E) Q4 2023 Earnings Call Transcript February 16, 2024

Eni S.p.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. And welcome to Eni’s 2023 Fourth Quarter Results Conference Call hosted by Mr. Claudio Descalzi, Chief Executive 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.

Claudio Descalzi: Thank you. Good afternoon and welcome to our 2023 Full Year and Q4 Result presentation. 2023 was an excellent year for Eni. Our continuous focus has been on mitigating the impact of a market characterized by price and margin volatility, as well as a critical geopolitical contest. We maintain a direction aligned with our strategy and successfully achieved or beat our targets for the year while also improving the efficiency of our assets. This resulted in the second best financial performance by Eni in its current structure. Our aim was to capture strong results but also to foster our growth ambitions, meaning we also advanced our transition strategy very significantly. It has been a very active year, so now let’s go through the highlights.

In the upstream, we brought on stream two important operated projects in line with our fast track model of phased development. Baleine Phase 1 started production at the end of August, less than 18 months from the FID. At the end of December, we announced the first production of gas into the Tango facility at our Congo LNG project, only 12 months after sanction. Key to our EMP strategy is fitting in new advantage resources from our industry-leading exploration. The highlight was Geng North, the largest commercial discovery in the industry last year. Indonesia will become an area of major focus for our upstream in the coming years, benefiting from a network of facilities with spare capacity that will help to fast-track future production at competitive costs.

But Indonesia was not a standalone success. In fact, our Nargis exploration well in Egypt, offshore was also a top five discovery. A distinctive feature of Eni strategy is our organic model, but also focus portfolio management plays a critical role as we shape our business. Undoubtedly, our highest profile deal was the purchase of Neptune, announced in June and completed at the end of January, a few months earlier than expected. I will update you a little more on that shortly. We are constantly looking high grade our portfolio also via divestment. And in the year, we announced the sale of noncore reproducing asset in Congo and Nigeria onshore, both of which were approaching completion. In December, we were delighted to announce the investment by Energy Infrastructure Partners into Plenitude, providing new and aligned capital to support its growth path, while also confirming and valorizing part of the value we have already created.

The satellite model of which Plenitude is an example with its circa 10 EUR 10 billion of enterprise value is a key enabler for Eni to sustain growth and deliver shareholder value across the multiple energy vectors we are focused on. In EniLive, our purchase of a 50% stake in the Chalmette biorefinery in the US marked a new stage of in establishing a leading international and integrated biorefining business. In addition, we acquire full control of Novamont, a market leader in biochemical sector, which will become another pillar in our strategy of transformation. In CCS, we reached an agreement with the UK government on key terms of the economic, regulatory and governance model for the transportation and storage of CO2 on INET. This is a major step forward for a line of business that will be increasingly important over the coming years and where Eni has a leading European position.

The progress we have made from a strategic perspective was also echoed in Eni’s operating performance. Full year production of 1.65 million barrel per day in the upper end of the guidance range and 3% higher year-on-year. We discovered around 900 million barrel of new resources which more than covers 2023 production. A mid-lower European demand of gas, our GDP was effective in meeting customer needs in the absence of Russian volumes, and also recorded the highest result in the East Israel. Plenitude to end of the year with a 3 gigawatt of historic renewable capacity, up by more than one-third year-on-year and in line with guidance. 2023 biorefineries throughputs were up almost 60% year-on-year, while biofuel capacity at 1.65 million ton per year was 50% higher after our US acquisition.

Our upstream net carbon scope 1 and 2 footprint, fell by 10% in 2023 and is now down by 40% versus the 2018 baseline, in line with our aim to net zero in the upstream by 2030. Turning to our financial results, the news is also positive. EBIT performance of EUR 17.8 billion including EUR 4 billion from associate is second highest result in the history of the company in its current form. Net profit of EUR 8.3 billion converts to EUR 16.5 billion of CFFO and both confirm the historical top end of our yearly performance. In fact, this excellent result reflects a very significant improvement versus our expectations. Around EUR 3.5 billion on EBIT and EUR 2 billion on cash flow, that offset the impact of the weaker scenario. CapEx of EUR 9.2 billion was below our budget of EUR 9.5 billion, confirming that we are at efficiently investing in the context of a rigorous capital discipline.

We stepped up, shared buyback in the fourth quarter to EUR 790 million, totaling EUR 1.8 billion for the year with a round of EUR 400 million to finish our program in Q1. Our full payout is equivalent to around 32% of our 2023 adjusted CFFO, above our original guidance. Shares issue is down 9% over the past two years, enhancing the participation in a business that is also increasingly bigger and better. Indeed, in the past two years, Eni distributed almost EUR 11 billion to its shareholders, the highest amount since our listing. Leverage at 20% remains low by historical standards, and the balance sheet provides us with flexibility to pursue our strategy while retaining considerable resilience. That is an overview of the strategic, operational, and financial delivery for the year.

I’ll now move on the business division in a little more detail. Starting with EMP production for the fuel year was 1.66 million barrel per day, up 3% year-on-year, and up 6% in the quarter to 1.71 million barrel per day. In the quarter, we saw higher activity in Algeria, seasonal effects in the North Sea, and the benefit of strong regularity in Kazakhstan. Baleine ramp up and better performance and entitlement in Libya. Full year proforma EBIT in EMP of EUR 13.3 billion mainly reflect the impact of lower prices when compared with 2022, partly compensated by higher volumes while Q4 earnings include higher exploration write-offs which is typical of the quarter. GGP reported EBIT of EUR 680 million in Q4, benefiting from a favorable outcome to an arbitration in the quarter, but with an underlying result muted by lower gas prices and reduced trading flexibility, as we had expected it to be.

Record full year EBIT of almost EUR 3.3 billion took the benefit of strong optimization activity in the first half of the year, in particular highlighting the leverage to favorable conditions that GDP retains by virtue of its diverse supply and infrastructure position. Our Neptune acquisition was one of the key events of 2023. After announcing the deal in late June, we achieved completion on the 31st of January for an investment of $2.4 billion in cash out and debt acquired. Adjusted down from the headline of $2.6 billion as a result of the cash flows accruing since the deal’s reference date. Net production consolidated directly by Eni and through our share of Var is currently over 100, 000 barrel per day. The high proportion of gas production currently around 75%, and the low scope 1 and 2 emission profile precisely aligned with our strategic direction.

The value proposition is clear with synergies estimated at $0.5 billion and with material upside which includes the new discovery of Geng and the higher share of IDD field in Indonesia, additional gas supply optimization, and potential CCUS project. Our portfolio activity will also progress as we continue to high grade with announced divestment in West Africa to complete in 2024. Turning to energy evolution, EniLive reported around a 10% improvement in EBIT year-on-year despite weaker product markets, mainly reflecting improved biorefinery performance both in terms of asset optimization and the feedstock flexibility confirming our vertically integrated model is delivering. With activities now in eight countries, agri feedstock production has increased to more than 40, 000 tons per year and it is on track to provide meaningful earnings over time.

Our refining earnings were impacted by the fall in the SEM but also by the narrowing in light, heavy and sweet sour differential. Our chemicals result reflects the very challenging market conditions, especially for European manufacturers, and confirm our strategic intent to transform this business and also to increase focus on specialties and bioplastics. Plenitude delivers on its target for store renewables capacity of 3 gigawatts at the end up by more than one third. Renewable energy production actually grew more, up by over 50%. But more importantly, Plenitude to deliver financial result with a full year EBIT up 50% year-on-year to over EUR 500 million and EBITDA up 40% year-on-year to over EUR 900 million. After the remarkably strong first month, Q4 EBIT as expected made a more moderate contribution reflecting higher depreciation charges as new renewable capacity and EV charging points enter service.

The 2023 result of Plenitude came in the context of another highly volatile and challenging year for energy suppliers and again emphasized the quality of the model. This fact is recognized in the enterprise value of EUR 10 billion placed on the business by the recent agreement with Energy Infrastructure Partners to invest in Plenitude. Before concluding I would like to highlight the key results of the year that exceeded all the regional metrics both operating and financial right across the business. This strong financial outcome driven by the operating performance of the underlying businesses and the delivery of significant strategic progress all helped in outcome where we deliver the best shareholder returns among our peers group in 2023. We will update on our strategic progress and future targets when we meet again on the 14th of March for our Capital Markets Day.

We will elaborate on how Eni is the changes in energy markets to build a stronger company leveraging the growth potential of new business while preserving the full value of traditional sources, team that are evident in our 2023 result. And now with our top manager, we are ready to answer your question.

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Q&A Session

Operator: [Operator Instructions] The first question is from Biraj Borkhataria of Royal Bank of Canada.

Biraj Borkhataria: Hi, thanks for taking my question. The first one is on the chemicals business. You suffered weak results for several quarters in a row now and it’s obviously been quite a tough environment for European chemicals. What more can you do to stop the bleeding there? Can you talk about some of the plans in place that you can control? And secondly, the question is on Egypt. This is a big country for ENI and obviously the country is having a number of issues on the financing front. What do you expect for the summer in terms of LNG exports? And also, have you adjusted the activity levels at all given the issues with payments? And maybe you can talk about the receivable balance as it stands today. Thank you.

Claudio Descalzi: Just a few words about chemical. And then I give the floor to Alfani , the CEO of Versalis. No, we are conscious about chemicals. We tried in the past and we are continuing trying to change some line, but now it’s time to consider more radical initiatives that are going to a transformation in the same way we did for our biorefineries. So we have to transform the plan. And clearly the direction to go to a biochemicals. Also, in light of the acquisition we made of Enimont and also the other project that we developed implemented from our R&D, that is one, but it’s not enough. Go through all especially is not enough. So we have to do some more strong action because it’s really an area where we can create a huge value. So now I can give the floor to Adriano to maybe elaborate a little bit more on this topic.

Adriano Alfani : Sure, thanks, Claudio. Thanks for the question. I mean, first of all, as Claudio was saying, we need to go extremely bullish in terms of the efficiency of the entire business. Clearly, we have some case of inefficiency that has been increased due to the recent situation that we are facing in Europe. Of course, in some cases, we are getting a little more inefficient. So we are developing a stronger process in order to improve our efficiency across the entire value chain and entire process. But in terms of the other three pillars that we are focusing on is one is the specialization portfolio with the recent acquisition of a [inaudible] project and some other development in relation of integration of the business with our portfolio.

We decided to further speed up the growth in thermal specialization diversification of the portfolio. So this is one. The second one is circularity. And we are moving very fast on circularity. This year we are going to start the phase one of the mechanical recycling in Porto Marghera. And by the end of 2024, we expect to complete the construction of the first chemical recycling plant in Mantua. It is a pilot plant or semi-industrial plant with intention then to speed up in terms of industrial processes. And of course, as also Claudio was saying about the acquisition of Novamont, the acquisition of Novamont is another big cluster to differentiate and to grow this platform. Not only in the direction Novamont was already doing, but also integrating the portfolio with our specialized portfolio and so to really double digit to grow in terms of biochemistry.

Claudio Descalzi: Thank you. Adriano, so a few words about Egypt. Then I give the floor to Guido, Head of Natural Resources. So first of all, clearly, Egypt is passing through as all North African Middle East through a quite difficult situation in light of the event we had now with Gaza. So clearly, it’s not in a very simple situation. In spite of that, I have to say that Egypt is reacting. And we have to say also that Egypt is quite crucial, important, critical in the area for everybody, for the Mediterranean, for North Africa, for Middle Easters. So what I think and what is my perception that everybody is trying now to help them. So saying that if you talk about receivable, there is a small margin of buildup. They are paying, maybe less, little installment that they are paying.

So there is a willingness to preserve and protect investors. So there is a very positive attitude. So now I’ll give the floor and the question is also about LNG, because the cargo we receive in January and the rest. So now Guido is talking a bit more, elaborate on LNG.

Guido Brusco : Yes, on LNG the question was in the summer, I think. And summer historically, there is very little, if no, export in Egypt, given the high increase in the domestic demand. Currently, in the past couple of months, the end of Q4 2023, because of the Israeli-Palestinian conflict, there was a reduction, a sharp reduction of the import to Israel. So the export of LNG in Egypt was impacted. In December, they restarted with some volumes. And we have seen from Eni side three cargoes in December. And we are foreseeing between 8 to 10 cargos in the forthcoming months before the end of the winter season.

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

Oswald Clint: Good afternoon. Thank you. Yes, first question, I mean, a bit of a step up in gearing towards the end of the year. So I wanted just to get your thoughts around divestments and really the potential for more sizeable or more aggressive upstream focus divestments. So in still a lot of continued expression success, your folding in Neptune, it feels like you’ve been buying a lot. So maybe a good time to start selling some of what is a high quality infantry. It could free up capacity to potentially signal some peer leading shareholder returns all the way through the plan and keep the balance sheet flexibility that Claudio just mentioned around executing the strategy. So that’s the first question. Secondly, I wanted to ask about SAF, Sustainable Aviation Fuel.

I remember the great trip we had last year in Venice and we talked about SAF upside of up to 2 million tons per annum based on demand. It seems like demand is taking off. You’ve had this more sizable Ryanair deal recently. Much more material than the DHL deal a couple years ago. So the question is there, are you starting to see SAF customer demand track at the high end of your expectations and really, I’d love to get an idea of the price you’re selling this for. Is this three times jet fuel? Is this five times jet fuel? It’s hard to get an idea of what this might mean financially for the company. Thank you.

Claudio Descalzi: Thank you for the question. So the first question is for Francesco and the second one for Stefano, Yes.

Francesco Gattei : Okay, thank you. The question is about the gearing. Clearly, you have seen us step up in the quarter. The quarter increase was expected. Actually, we had a result towards this line with our target. Taking into account that there were some save variations in the exchange rate, that was a bit more higher for the euro, and also because of the lack of the income that we were expecting to come before the end of the year related to Plenitude. Anyway, that increase was generated mainly by the inclusion of a Novamont adapt inside after the acquisition. Some, as we said, the exchange rate effect and some cash related to leasing. In the plan, what you are going to expect is clearly exactly what you are mentioning. If you remember, the past plan was a plan where we had a relatively balanced in our management of portfolio with only EUR 1 billion of positive effect.

And that was originated by the fact that we are still in a position where we are buyer. While you will see that in the coming plan, you will have more, let’s say, a stronger valorization of our assets, the upstream with all the discovery that we have made and continuing to make. And on the satellites that as you well know is a way also to accumulate cash in advance for fueling our future growth. So you will see a material impact of M&A and this will have a clear, strong effect on the net amount of CapEx we are going to pay.

Claudio Descalzi: Hello for SAF trends and —

Stefano Ballista : yes, on SAF, I definitely confirmed the trend we discussed even in Venice. So we are seeing exactly what you see. Let’s say voluntary demand coming in place. In an increasing, with increasing target. Just to make some examples, we see airline companies targeting 10% at 2030. And logistic players targeting up to 30% still at 2030. In Europe, we got refuel aviation already approved. It means starting from 2025, 2% of global fuel will be bio jet. This means more than a million tons, let’s say from one day to the other. On top recently, the IEA said an increased target for bio jet demand already in 2027 by up to 30% and definitely confirmed a 50 million ton at 2030. Just give a high level number. In 2050, we see 500 million ton of jet fuel.

Even assuming only 20% of bio jet, we jump at 100 million ton of bio jet demand. This means that the market is going to be in strong demand for bio jet and given the time to get facility in place, we are in a very good position to take advantage from this tide market, we are going to see in the medium term.

Oswald Clint: Anything you could say about pricing? Sorry?

Stefano Ballista : Yes, no, pricing and profitability is expected around 1.3, 1.5 above HVO. This is not right now. Right now it’s higher but it’s given to the very short market. So today doesn’t make too much sense to look at current number. A reason for that is exactly what I said. The market is going to be short in terms of supply given the current state of the art and the expected demand evolution on the other side. So that’s the profitability we are going to expect. So good boost on our results in the next future.

Operator: The next question is from Alessandro Pozzi of Mediobanca.

Alessandro Pozzi: Hi there. I have two questions. The first one is related to the production in Q4 which was really strong and I was wondering if you can give us more color on the various moving parts. What I’ve seen is that Kazakhstan was very strong and also North Africa had a big jump quarter-on-quarter, part I believe was Algeria but maybe also Libya. So if you can give us some color on whether maybe that could be sustainable going into 2024. And also, I think Zohr is well Egypt production from Egypt is coming down a little bit and what should we expect from Zohr in terms of production going forward. The second question is on Cronos-2. The recent positive results on the appraisal well are that a catalyst for developing Cronos on a standalone basis or if not, can you give us the thoughts on where we are on Cyprus in terms of moving those resources forward. Thank you.

Claudio Descalzi: That’s our question for Guido. So please Guido.

Guido Brusco : Yes, indeed. I mean you spotted rightly the production in Q4 was strong and this was thanks to the ramp up of Baleine, the recovery maintenance in Kazakhstan, higher contribution from Libya. This production as we move in 2024, in Q1 will be quite in line, the net portfolio effect will be partially compensated by lower entitlement in certain geographies. And while for what concern the Cronos, we can of course confirm that the recent uprisings as well gave us comfort on the extension of the field, confirming the upper side of the estimation, while deliverability is excellent. And of course, we are still assessing with our partner and the authority the best and most appropriate development scheme to bring these resources into production.

Operator: The next question is from Matt Smith of Bank of America.

Matt Smith: Hi there, good afternoon. Thanks for taking my questions. A couple please. The first one would be on GDP, another extraordinary year for the division. But I suppose the arbitration award aside in 4Q, it’s very much been a year of two-halves in regard to profitability. I just wondered whether you could sort of speak to the current market conditions in terms of arbitrage opportunities and also touch upon the visibility you have in 2024. And then the second one on exploration was just whether there was any news on the Orion -1X well in Egypt or whether that should be due soon. Any time on there be useful please. Thanks.

Claudio Descalzi: Okay. Cristian Signoretto for GGP please.

Cristian Signoretto: So thanks for the questions. Surely 2023 has been a very unusual let’s say year and exceptional year because of important optimization and trading opportunities and also positive arbitration and settlements in our results. When we look at 2024, clearly, I mean the market has been reducing its flag price and this is let’s say you can see that but we feel that the volatility is still there because the market is very tight in the sense that demand and supply are very finely balanced. Because new LNG coming on stream is very little. And demand is still very latent. If you look at European demand, Asian demand, and also weather-driven demand is still very latent. So we expect 2024 still to be a very volatile year with opportunities to be captured via trading optimization activities.

Claudio Descalzi: Okay, so I think that [inaudible] is very fast because we are drilling so we cannot say anything. Anything. Is correct?

Cristian Signoretto : Yes, correct. I mean, we have yet to reach the target.

Operator: The next question is from Irene Himona with Societe Generale.