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Eni SpA (NYSE:E)

Q1 2011 Earnings Call

April 27, 2011 10:00 AM ET

Executives

Alessandro Bernini – CFO

Domenico Dispenza – COO, Gas and Power

Claudio Descalzi – COO, Exploration & Production

Analysts

Barry MacCarthy – Royal Bank of Scotland

Alejandro Demichelis – Merrill Lynch

John Reade – UBS

Alastair Syme – Citi

Lucy Haskins – Barclays Capital

Theepan Jothilingam – Morgan Stanley London

Domenico Ghilotti – Equita

Operator

The first quarter results conference call hosted by Alessandro Bernini Eni's Chief Financial Officer. For the duration of the call you will be listening-only mode. However at the end of the call you have the opportunity to ask questions. I am now handing you over to your host to begin today's conference call. Thank you.

Alessandro Bernini

Good afternoon ladies and gentlemen and welcome to our first quarter results conference call. Before I take you through the financial results, let me give you an update on the statements of our operations in Libya. As you will know, this situation in the count remains uncertain. So far the conflict has forced the shutdown of several of our producing sides as well as the closure of the Greenstream pipeline. This shutdowns reduce production by 129,000 BOE per day compared to the first quarter of last year an impact which was partially offset by improved performance year-over-year.

(Inaudible) is currently the only field in operation with an output as of April 1st has been of about 50,000 – 55,000 BOE per day entirely destined to local power generation. This is down from a production of around 90,000 BOE per day in early March. Each day in which production remains at current used levels with close at 600 BOE per day decrease in full year average daily production. We are constantly monitoring the progress of this highly volatile situation. Our assets have suffered no damage and we are technically able to resume production quickly once the situation stabilizes.

And now on to our results. In the first quarter of 2011, the macro environment was positive compared to the same period of last year. The brand price averaged $105 a barrel up 38% compared to the first quarter of '10. The average European refining margin brand euro was $3.30 per barrel. While it remained depressed compared to historical trends, it was higher than in the corresponding period of last year. Finally, the euro depreciated lastly versus the US dollar compared to the corresponding period last year.

Moving to our results, adjusted operating profit in the first quarter amounted to 5.1 billion euro, up 18% year-on-year. This result is mainly due to the strong contribution of the exploration and production which was partially offset by lower results in gas and power and refinery marketing. Adjusted net profit for the first quarter was 2.2 billion euro up 22% year-on-year. This result also reflects a lower adjusted tax rate down 2.5 percentage point to 50.5%.

In the first quarter of '11, Eni's hydrocarbon production amounted to 1,684,000 BOE per day, a decrease of 8.6% compared to the first quarter '10. This negative operating result was principally due to the ongoing instability in Libya which reduced production by 129,000 BOE per day compared to the first quarter of '10. Furthermore PSA entitlements were negatively affected by the sharp increase in the oil price with an estimated impact of 32,000 BOE per day. The increase in the oil price however boosted the division's adjusted operating profit which amounted to over 4.1 billion euro up 32% compared to the first quarter of last year.

In gas and power, overall the volumes sold including consolidated and associated companies totaled 31.6 bcm up around 9% year-on-year. However, adjusted operating profit decreased by 24% compared to the same period of '10 due to the sharply lower results delivered by the marketing business.

Gas and power adjusted proforma EBITDA for the first quarter of '11 was just over 1 billion euro compared to 1.4 billion euro in the first quarter of '10. International transportation results showed a 4% increase. The regulated businesses generated 393 million euro up 4% versus the corresponding period of last year. The increase is mainly due higher returns of (inaudible) and expenditures and efficiency actions.

Adjusted EBITDA in the marketing and power business was negatively impacted by increasing competitive pressure in Italy and Europe as well as unfavorable climate and scenario aspects. Furthermore the ongoing situation in Libya reduced volumes to shippers and the affected margins owing to the substitution of recently renegotiated Libyan gas with that from Russia and Algeria. It's worth reminding you that first quarter results do not include any benefits from renegotiations although this will be retroactive once agreements are finalized.

Turning to R&M. in the first quarter of '11 the division reported an adjusted operating loss 1.48 million euro versus a loss of 94 million euro in the same period of last year. The poor performance reflected an unfavorable scenario due to high cost for all feedstock. The result was partially offset by the improved profitability of Eni's complex refineries helped by the widening price differentials between sweet and sore (inaudible). Higher price in premiums for gasoline and gasoil compared to fuel oil. Utilization rates were up 9 percentage points year-over-year and refining also benefited from improved efficiency, the synergic integration of refineries and optimization of supply.

Marketing was affected by a rapid rise in the cost of (inaudible) rates that couldn't be negatively transferred to final prices and by lower retail sales initially. These negatives were partially offset by higher sales on European networks.

In the first quarter of '11 the petrochemical business had reported an adjusted operating loss of 12 million euro compared to a loss of 59 million euro in the first quarter of '10. The reason by higher selling prices mainly for (inaudible) only partially offset by higher feedstock cost.

Site and deliver as adjusted operating profit of 342 million euro up 18% versus first quarter '10. Other activities and corporate an aggregate loss of 129 million euro in line with the results reported in the first quarter of '10.

In the first quarter of '11 operating activities generated cash flows of 4.2 billion euros. The cash flow generated financed outflows of 3.1 billion euro predominately CapEx for 2.9 billion euro. Net financial debt as at the end of March amounted to 25 billion euro, a reduction of 1.2 billion euro versus the end of '10. The debt-to-equity ratio decreased 2.44 when compared 2.47 at the year-end despite a negative translation difference. Charge to equity of approximately 1.9 billion euro closed by the euro dollar exchange rate reduced rate at the end of March.

Thank you for your attention and now together we'll go ahead discuss and Domenico Dispenza, I would be happy to answer any question you may have.

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from Mr. Barry MacCarthy from Royal Bank of Scotland. Mr. MacCarthy please.

Barry MacCarthy – Royal Bank of Scotland

Good afternoon. Two questions please. Thank you for your commentary at the beginning of the presentation. I wanted to ask if you were aware of the condition of the more downstream equipment if you like from your fields. For example the export terminals and so on which you may not own but rely upon in order to get your oil to a purchaser and if those are in usable condition and second question was on Venezuela on the impact of the windfall tax. Firstly, is it right to think that Perla and gas generally is excluded and how it might have an effect on your prospect? Thank you.

Domenico Dispenza

Okay, excellent term in Libya at the moment for what is being reported there is no damages and there is no problems. All the installation are sent by and that they are running and there is no problem. For Venezuela the new deal has been issued this morning so we read this morning, the new deal and the new clauses and the project and the new project and the (inaudible) for that project are not subject until the recovery of the relevant investment to these. So at the moment there is no impact in our assets both gas and oil.

Barry MacCarthy – Royal Bank of Scotland

Okay, is gas specifically excluded?

Domenico Dispenza

No there is no mention to gas there, just mention to new project, new pricing investment. So the gas is something that we had to go deeper. As we got the tax dollar and the statement of gas this morning, but what we are sure about that there is no impact for our project because also gas, also Perla is a new project.

Operator

New question comes from Alejandro Demichelis from Merrill Lynch. Mr. Demichelis, please.

Alejandro Demichelis – Merrill Lynch

Two questions, one coming back to Venezuela. If the gas price situation with Perla is concluded or should we expect some more negotiations from that side. The second question is on Angola and Block 1506. We've seen you signing an MOU for the (gas). So maybe you can give us some kind of indication in terms of when you're expecting that project to be up and running and what's the cost for that project.

Domenico Dispenza

Venezuela, again the gas price has been agreed already, so what we're working on is on the term sheet and the hesitation is to sign our document in September-October and after that we are ready to sanction the project. But we won't focus any problem, any additional renegotiation on the gas.

For Angola, the rest have sanctioned and restarts and we are awarding the contracts, I think that for the overall cost, normally we don't disclose all the cost. You can say that the internal rate of the project is above the normal rate. Now that we have most of the contract awarded in term of cost, we are meeting the expectation, so it is no absolutely far from what we expected and we said the Brent price is below the $50 per barrel.

Alejandro Demichelis – Merrill Lynch

And for startup, are you changing that at all, no?

Domenico Dispenza

No the startup is always scheduled in the full year plan, so by 2013.

Operator

Next question comes from Mr. John Reade from UBS. Mr. Reade please.

John Reade – UBS

Two questions, just on the gas and power business and the marketing business, I know the strategy events in March you said that's 2014 for normalization of earnings, but flag that actually the conditions that already begun to look like that could be earlier. I mean clearly we've had a subsequent tightening of the market. So would you be able to characterize how you'd expect those changes in the market to start to impact your earnings across the balance of 2011. A way I know that you sort of renegotiate a lot of your marketing contracts in the summer and early autumn.

And the second question is on the recent Skrugard discovery in the Barents. I noted that there was a licensing round awarded just after that discovery. I wonder if I would ask Mr. Descalzi whether he was happy with what he got and whether the applications for those licenses were done with the knowledge or with the expectation or what you would find on that discovery. Thanks.

Claudio Descalzi

Well gas and power, I would say that the situation has not yet completely clean. Of course we expect some considering of how many events in Japan and from the nuclear diffusion taking in Germany, but really it's too early to understand how this could deal in to with the overall market situation. So what we can say at this stage is that we reconfirm our guidance on aiding the (inaudible) with respect to the (inaudible) last year.

Domenico Dispenza

Okay. On Norway I think that we are absolutely happy about the result of Skrugard that can be considered one of the best discovery in the last 20 years in Norway and that came after (inaudible) and other discoveries that we made. That is not new because we started our exploration in Norway in the Barent Sea in the '91, '92. So we had the rate of success of 70% and the two recent licensing that are being issued by the government is really to recognize the effort in term of the investment and good results we got in the last years. So I think that we are absolutely happy and we think that Barent Sea will be a very, very important harbor in the North Sea.

Operator

Next question comes from Mr. Alastair Syme from Citi. Mr. Syme please proceed with your question.

Alastair Syme – Citi

Hi good afternoon. Just a very quick question on the EMP gas prices, the realization dropped versus fourth quarter and I might have missed it in the prepared comments. Is that a mix effect or is there something else going on there?

Domenico Dispenza

I think that in the first quarter we got an increase of 5% and is the last (inaudible) due to the effect of the Libyan gas. And so that is the only reason, otherwise there is a good increase with respect to 2010.

Alastair Syme – Citi

Yes, my comment was there was quite a drop versus fourth quarter pricing. I agree year-on-year there is an increase but quarter-on-quarter.

Domenico Dispenza

The first part is due to Libya, the drop that is in the gas realization, nothing changed. When you talk about our equity production.

Alastair Syme – Citi

Right, okay. This is exclusively in the European.

Domenico Dispenza

Nothing changed because you know in Egypt, Nigeria and also in the rest of our natural gas in Norway everything is absolutely in line with the previous month and there is only really a drastic change in Libya. That's all.

Operator

The next question comes from Mrs. Lucy Haskins, Barclays Capital. Mrs. Haskins, please.

Lucy Haskins – Barclays Capital

Two questions please. The first is, if we assume Libyan exports were kept off the market for the remainder of this year, what would be tax guidance, the tax rate for the year and the second question is obviously you're trying to put self-help bring down in place in your downstream business, but I just wondered if there's anything superb or medial that's actually that you can do to stem the losses that we saw this quarter.

Domenico Dispenza

So as the tax rate, there's potential in there is a reduction of the early tax rates for the EMP because of the high tax rate in Libya at 63.5% (ph). So we're going to (inaudible) as we'll be able to reduce two points.

Lucy Haskins – Barclays Capital

I am sorry, a reduction of two points?

Domenico Dispenza

Two points.

Alessandro Bernini

This is as far as the EMP business is concerned then on the global basis, on the consolidated basis for the group taken as whole, we do not expect any major change compared to '10 because their reduction of the tax burden in the EMP business is compensated major incidents of the EMP results on the global results of the globe. So, you know that the EMP earnings are normally affected by the higher tax charge and since the EMP business will represent the most important part of the earnings in '11 this will result the combination of lower tax rate for EMP and higher incidence of the EMP business. As a result of this effect there will be no major changes compared to '10.

Lucy Haskins – Barclays Capital

Okay, thank you. And then the issue on the downstream again in this, the higher price environment and (inaudible) is sort of what do you need to do in order sort of try and correct of this.

Alessandro Bernini

So we do not expect any major changes also in the downstream business in particularly in the refining business for the rest of the year. What we have experienced in the first quarter in terms oil prices will remain more or less the same for the rest of the year apart from a limited effect generated by the seasonality of our business. But however the difference all over the year is negligible. So we do not expect any major changes also for the rest of the year.

Lucy Haskins – Barclays Capital

So you don't expect any improvement in your downstream profitability for the remainder of the year.

Alessandro Bernini

In the refining where we find the pure refining now, we do not expect any major changes since we report with the marketing business that the commercial, the marketing segment will be capable to recover in the remaining part of the year. So, all-in-all putting everything together, we expect a slight improvement but in particular the refining and it is the pure industrial refining business we do not expect any major change.

Operator

Next question comes from Mr. Theepan Jothilingam from Morgan Stanley London. Mr. Jothilingam please proceed.

Theepan Jothilingam – Morgan Stanley London

Just a quick question on Greenstream, could you just confirm or give us an order of magnitude on what the impact of the shutdown at Greenstream would be for Q2 and the rest of the year. And then secondly just on CapEx and the investment in Libya, I was just wondering if you give us again sort of just guidance on what type of investment that was you expected in Libya prior to disruption and then thirdly how many exploration wells did you have planned in your program for Libya? Thank you.

Alessandro Bernini

However in terms of Greenstream you know that we don't wanted to disclose any major information relating to the effect caused by the shutdown of the Greenstream pipeline. Of course in order to give detailed information to deem necessary to disclose sensible commercial information and we don't want to release such sensible information. As far as CapEx for Libya…

Domenico Dispenza

As in that within for just any big (inaudible) not just in 2011, for 2011 we have just $250 million for more investment you can say. And we shifted this investment for production optimization as accomplish to compensate what we are losing on Libya.

And inspirationally Libya we are on the force measure for all the element comfort. We have a lot of big airports (inaudible) in Libya. We drew the inspirational wells in the offshore in the last two or couple of years so we just few hours in the desert, one or two (inaudible) now we are of course (inaudible) but it maybe inspiration campaign and be an example to it.

Claudio Descalzi

If I can go back for a moment to the first question, we offered a decline taking Libyan gas (inaudible) most of the customs are (inaudible) because we are taking more ration and more gas to supply them active is there but we are trying to compensate (inaudible).

Operator

No more question at the moment. (Operator Instructions). Next question comes from Mr. Domenico Ghilotti from Equita. Mr. Equita please.

Domenico Ghilotti – Equita

Could you provide the breakdown in RNM between marketing and refining contribution also to better understand the evolution based on your guidance?

Alessandro Bernini

In terms of results achieved by the end of March, you can consider that predominately the loss has been generated almost entirely by the refining business whilst the marketing activity has delivered more or less a breakeven situation. And I believe is enough.

Domenico Ghilotti – Equita

Okay, so the improvement is a starting from a breakeven point while you were expecting refining steel for a few weeks.

Alessandro Bernini

For sure, I would see that the marketing in particular segment is effected normally by seasonality is quite normal to have a low level of activity volumes and earning generating first quarter of the year and we expect recovery in the coming months.

Domenico Ghilotti – Equita

And last question is on the disposal of the international pipelines. Can you give us an update on the timetable?

Alessandro Bernini

Yes, yes you know that we are disposing three pipelines (inaudible). As far as (inaudible) is concerned we are discussing with the (inaudible) and we are confident that we'll be able to close everything in over the next few weeks and as far as (inaudible) their situation is a little bit more complicated due to the process that we have selected for the disposal. Now we have opened the data room, we had given access to the data room to few selected bidders then we expected to receive their binding offer within the end of next week. After that we'll select those bidders, those entities with whom we will start the negotiations for exclusivity basis and we are confident also for them to be able to close the deal. This will require some more time. So we are targeting the second half of '11 for the closing of the two transactions.

Operator

Next question comes Mr. (inaudible).

Unidentified Analyst

Could you please give us some (inaudible) the possible disposable of your stake. There are rumors that Angola investment could take 25% direct stake on the company.

Alessandro Bernini

Well you are referring to some price speculation and we do not comment this type of speculation. What we can say is exactly the same situation that we have already to communicate to the market over the last few weeks meaning after we have received some unsolicited offer, now we are examining that proposal. Of course, these activity is done in coordination with the other partners in particular with the Portuguese government, but as you know, today due to the crisis of the Portuguese government, we have to stop to interrupt these process. So we are estimating that it will be necessary some more time but we are confident that in the next few weeks to be able to resume this activity and being capable to identify the final solution within the end of the year.

Operator

Next question comes from Mr. (inaudible).

Unidentified Analyst

I just had a couple of quick questions, both on (inaudible) actually. First thing you said you're offsetting the lower availability of gas through other supply sources and the other you mentioned Russia and Algeria. I am just wondering if you're able to quantify the contribution of these supply sources and not just between Russian Algeria but also possibility any gas stream from the north sea L&G and also your own storage.

Secondly I am just wondering how the current living situation changed, you're negotiating position vis-à-vis your major gas suppliers such as (inaudible). Thank you.

Domenico Dispenza

Well for the first question I would refer like normally to our customers portfolio. (Inaudible) Algeria is from Russia, more effective gas from portfolio that you know is one of the biggest suppliers portfolio any other company in the euro players.

The second question is some confidence on the Libyan negotiations. Up to now it's not been a question, it's a problem. Of course because of (inaudible) Libyan (inaudible) market together fund impact the overall market situation but this I can expect has not been (inaudible) to our non-negotiation but because gas form in Russia.

Operator

No more question at the moment. (Operator Instructions).

Alessandro Bernini

If there are no more other questions.

Operator

The counter has confirmed, there are no more questions.

Alessandro Bernini

Okay, thank you very much for your participation and see you at the next quarter results presentation.

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