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Eni SpA (NYSE:E)

Q3 2012 Earnings Call

October 30, 2012 9:00 am ET

Executives

Alessandro Bernini - Chief Financial Officer

Umberto Francesco Vergine - Chief Operating Officer of Gas & Power Division

Claudio Descalzi - Chief Operating Officer of Exploration & Production Division

Daniele Ferrari

Camilla Palladino

Analysts

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Iain Reid - Jefferies & Company, Inc., Research Division

Jon Rigby - UBS Investment Bank, Research Division

Nitin Sharma - JP Morgan Chase & Co, Research Division

Michele della Vigna - Goldman Sachs Group Inc., Research Division

Hootan Yazhari - BofA Merrill Lynch, Research Division

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

Irene Himona - Societe Generale Cross Asset Research

Andrea Scauri - Mediobanca Securities, Research Division

Rahim Karim - Barclays Capital, Research Division

Operator

Good afternoon, ladies and gentlemen, and welcome to Eni's 2012 Third Quarter Results Conference Call, hosted by Alessandro Bernini, Chief Financial Officer. [Operator Instructions] I'm now handing you over to your host to begin today's conference. Thank you.

Alessandro Bernini

Good afternoon, ladies and gentlemen, and welcome to our third quarter results conference call. Let's start off with the highlights. With the sale of Snam and Galp progressing, the new Eni is starting to emerge. Our balance sheet at the end of Q3 is stronger, benefiting from cash inflows from the disposals of 5% of Snam reported as an equity to our section and 5% of Galp and the debt deconsolidation for a total of around EUR 11.1 billion. You should also bear in mind that this figure doesn't include the EUR 3.5 billion consideration from the completion of the sale of 30% of Snam to CDP, and further debt deconsolidation from Snam in the region of EUR 1 billion.

Our business is increasingly focused on E&P division, which in the third quarter continued to show strong performances, driven by the ramp-up of Libyan production and exceptional exploration success.

Looking at the Gas & Power, Refinery Marketing and Chemicals, we are making good progress on our plans to tackle challenging market conditions. In Gas & Power, we are working on the renegotiation of our supply costs and have opened negotiations with counterparties, including Statoil and GasTerra. On the commercial front, we continued to grow in our target markets, with sales in France, Germany and Austria up by 43% year-on-year, and to focus on higher-margin segments, such as retail and international LNG.

In Refining & Marketing, while benefiting from the current spike in refining margins, we continued to work on reducing overall capacity, with an agreement to reconvert our Venice plant into a green refinery, and on cost-cutting, which we expect to total almost EUR 100 million by year end 2012.

Lastly, we are working to improve our chemical footprint in the context of a very weak market. In particular, in the quarter, we have signed joint ventures agreements leveraging on our elastom expertise to grow our presence in the favorable Asian market.

And now I will take you through our Q3 results in more detail. In the third quarter of 2012, the market environment was broadly positive. The Brent price averaged $109.6 a barrel in the quarter, up 1% versus last quarter and down over 3% year-on-year. The appreciation of the dollar versus the euro continued also in this quarter, up over 2% versus last quarter and over 11% compared to 1 year ago. The European refining scenario was also supportive, with a leveraged Brent/Ural margin of $7.35 a barrel, almost a threefold increase from the third quarter of 2011.

Turning now to our results. You should remember that following the divestment of Snam, the regulated businesses in Italy and being deconsolidated from Gas & Power results and represented as discontinued operations, in accordance with the applicable reporting standard. Consequently, margins generated by transaction between Snam and any group companies are considered as a part of the EBIT adjusted and net income adjusted from continuing operations, whilst margins generated by transaction within Snam and third parties have been classified as discontinuing operation. The same reporting standard has been applied also to Q3 2011 results in order to facilitate the year-on-year comparison.

In the third quarter 2012, adjusted operating profit from continuing operation was EUR 4.36 billion, up 2.2% from the third quarter 2011. The result reflected a better operating performance reported by the Exploration & Production division, up 10.8%, due to an ongoing production recovery in Libya. The Refining & Marketing division improved its results, supported by a positive trading environment and efficiency and optimization gains. These increases were partially offset by a larger operating loss incurred in Gas & Power, down by 53%. In the third quarter 2012, adjusted net profit from continuing operation was EUR 1.78 billion, increasing by 3.1% from the corresponding period of the previous year.

In the third quarter 2012, Eni's reported liquid and gas production of 1,718,000 some [ph] barrel of oil equivalent per day was calculated assuming a new conversion rate of gas-to-barrels equivalent, which ended 9,000 barrel of oil equivalent per day to Q3 production. On a comparable basis, i.e. when excluding the effect of the new gas conversion rate, production increased by 16% in the quarter. The performance was driven by an ongoing recovery in Libyan production, as well as the startup and ramp-up of the new fields in Australia and Russia. These positives were partially offset by the shutdown of the Elgin/Franklin field in the U.K. and the impact of unexpected production standstills, in particular, in the Gulf of Mexico due to hurricanes, in addition to mature field declines. In the third quarter of 2012, the Exploration & Production division reported an adjusted operating profit of EUR 4.3 billion, representing an increase of EUR 422 million from the third quarter of 2011, up by 10.8%.

Turning now to Gas & Power. Despite sluggish gas demand and the rise in competitive pressure, sales of natural gas from the third quarter of 2012 were 18.8 bcm, an increase of 8.7% from the third quarter of 2011. The better performance was due to increased volumes sold in European and international markets, is also partially offset by lower sales on the Italian market, in particular, in the power generation segment. Despite the increase in volumes, adjusted operating losses in the marketing segment increased by 18% to EUR 354 million, owing to deteriorating competitive environment, partially offset by the cost benefits of supply renegotiation and the increase in Libyan volumes. This number doesn't include the negative effects of price revisions with the short- and long-term gas suppliers, pertaining to previous reporting periods, as this had been presented as special items. It does, however, reflect temporarily inflated supply costs for these contracts, an issue which we have -- which we are already addressing through further renegotiations.

Gas & Power results also reflect a sharply lower contribution from International Transport, down from EUR 104 million to EUR 50 million, due to the divestment of the company's interest in Snam and Transit Gas executed at the end of 2011.

Let's now take a look at Gas & Power adjusted pro forma EBITDA. Compared to EBIT, this metric shows a deterioration versus Q3 2011, mainly caused by the lower contribution from associates. You should note that the marketing segment is impacted by the reclassification of Galp in asset available for sale, while International Transport results reflected the divestment of the company's interest in TAG, as well as those in Snam [ph] and Transit Gas.

In the third quarter of 2012, the Refining & Marketing division reported improved operating results amounting to EUR 51 million, up by EUR 49 million from the year earlier quarter. This increase reflected the recovery in Refining margins and gains achieved on efficiency and optimization measures. These positives were partially offset by shrinking price differentials between light and heavy crudes that impacted the profitability and complex refineries and lower demand of products due to the current economic downturn. Lower profit demand also impacted result in the Marketing business, where we reacted to the difficult scenario with an high-profile promotion during summer weekends.

In the quarter, the Chemical division reported an adjusted operating loss of EUR 173 million, increasing by EUR 96 million from the third quarter of 2011. The escalating cost of oil-based feedstock against a backdrop of a weak product demand led to a negative benchmark margin of criteria. Saipem reported a solid operating performance, up by 15.9% in the third quarter to EUR 386 million. Other activities and Corporate showed an aggregate loss of EUR 106 million versus EUR 146 million in the previous year.

Net cash generated by operating activities was EUR 1.9 billion in the quarter. Cash outflows in the quarter included dividend payments of EUR 2 billion, which reflected a payment of the interim 2012 dividend. Capital expenditure amounted to EUR 3.2 billion and mainly relates to the continuing development of oil and gas reserves and the upgrading of the Saipem offshore vessels and drilling units.

Disposals of assets mainly regarded the divestment of a 5% interest in Galp for an amount close to EUR 590 million, the sale of 5% of Snam for EUR 612 million and other minor nonstrategic assets.

The change in net debt was impacted by other items, including the refinancing of the intercompany loan by Snam for around EUR 9.9 billion in the quarter. As a result, net financial debt at 30 September 2012 was down by EUR 7.3 billion from June 30, 2012.

Thank you for your attention. And now with Claudio Descalzi and Umberto Vergine, we are ready to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Mr. Theepan Jothilingam from Nomura International.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

A few questions, please. Alessandro, you talked about, in the press release, say, debt-to-equity ratio in line with other majors. I was just wondering if you can provide a little bit more color what the appropriate level you think for ENI is given your credit rating. Secondly, and just in that context, I was wondering where you thought your debt-to-equity ratio would be at the end of this year. And then moving on to gas marketing, clearly, still very difficult markets. Could you just talk about your thoughts on if or how and when you make about potential renegotiating contracts over the next 12 months?

Alessandro Bernini

I will answer to the first 2 questions you have raised, and then I'll pass to my friend Umberto Vergine for the appropriate answer to the question relating to gas business. So as far as the -- what we deem appropriate in terms of leverage, after having disposed Snam and when we will have realized the disposal of the residual stake, we believe that an appropriate debt-to-equity ratio could be in the range between 20% and 25%, which more or less is the average of debt-to-equity ratio of most of the companies in our peers group. So this is what we deem appropriate, but for sure, we have the possibility to achieve a better ratio, thanks also to the disposal of the other investment that we have to realize, where I'm referring to Galp in particular. Then as you know, as you have realized from our third quarter report, we have a debt-to-equity ratio of 0.32 by the end of September, and thanks to the monetization of the 30% stake that we have sold to CDP, as well as some other minor disposals in the last part of the year. But predominantly because of the strong cash flow generated by the recurring operation, which we expected to achieve in the last part of the year, we expected that the debt-to-equity ratio will be much lower compared to the level existing by the end of September.

Umberto Francesco Vergine

Okay. If, how and when we are going to renegotiate Eni is currently involved in several discussion with the supplier in order to guarantee constantly that the cost of gas is competitive. In 2012, this will relate to a significant portion of our portfolio, and it is equivalent to 30% in volume. And we expect that some of this renegotiation will be closed by the end of the year. In 2013, our contract will allow us to renegotiate another 40% of our portfolio.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Okay. And just coming back then, if gearing does go below those levels, your preference will be to use the buyback to return cash to shareholders rather than any further rebasing of the dividend, is that right?

Alessandro Bernini

Buyback is one of the element which the board has already proposed to the shareholders, to the Shareholders' Meeting, but as far as the buyback policy is concerned, this will be more -- it will be announced in more detail when we will present our next 4-year plan at the next strategy presentation in early March 2013.

Operator

Next question comes from Mr. Iain Reid from Jefferies.

Iain Reid - Jefferies & Company, Inc., Research Division

Can I ask another question about the marketing supply contracts? I think Mr. Scaroni was talking a few weeks ago, perhaps, a more radical solution to the gas supply contracts, potentially assigning them to some other company or maybe even the government itself. Is this something, which you are discussing internally and perhaps, with the government?

Umberto Francesco Vergine

The statement of Mr. Scaroni that was made in front of the parliament reflected the need of recognizing the value of the security of supply and therefore, the cost associated with this value, particularly at a time when the marketing is moving very rapidly.

Iain Reid - Jefferies & Company, Inc., Research Division

Okay. And just one other point on this. Given your expectation for the renegotiations as they're currently taking place, what's your view on the recovery of the business into profit going into 2013? Do you think that's reasonable given your expectation of where prices might end up?

Umberto Francesco Vergine

This year, we are still busy on the committee of renegotiation. And the ability to bring back the supply cost to the market price is the key to achieve these results. Of course, as you can understand, the game is played by 2 players, which are us and the supplier. So our intention is to use all the contractual means to achieve this result.

Iain Reid - Jefferies & Company, Inc., Research Division

And in Q3, you'll be back in profit in marketing sometime in 2013, is that what you're saying?

Umberto Francesco Vergine

You see, our guidance is to improve in operating profit compared to 2011. And this, of course, comes a lot on the result on the renegotiation of Gazprom, the same achievement with the current Rosneft renegotiation in our 2013 results.

Operator

Next question comes from Mr. Jon Rigby from UBS.

Jon Rigby - UBS Investment Bank, Research Division

Just a couple of questions I see. One is just to go back to a labor point on these gas contracts. In the issue that you have structural is that you're selling on a part an indexation, probably the spot to buying on the indexation of oil. So ultimately, wouldn't the best solution, and is this the way you're going, lead to re-base everything, whether you're buying or selling on the same basis to remove some basic trend? Is that sort of ultimately the way you'd like to go on this, to remove this kind of volatility? And I guess following up with one of Iain's question is, are we to understand that at some point or other, there will be adjustments made in terms of catch up that will restore, on average, the level of profitability for the Gas & Power business, although it will be lumpy, so that 2013, late-2013 or 2014, some sort of catch up that will make the average for 2012, '13 something more recognizable for us to look at? The second question is just on CapEx. I think Mr. Scaroni said that -- at the E&P seminar recently, that his expectation was that there will be a sort of slowly rising CapEx figure but nothing outstanding. Sort of based on this year, it's been rising a little. How should we understand, as you see it right now, that the CapEx burden for the rest of the business is, I guess, with the removal of Snam, optically, it will be lower, but what are we seeing around the rest of the business? And is there more CapEx to come in the downstream businesses, Refining & Marketing, that came to try and realize some of the benefits you talked about to finally bring these businesses back to profit?

Umberto Francesco Vergine

Okay, on the gas contract, you are right, we have 2 ways to achieve the market reflectivity in our contract: one is to introduce more element that link directly to price to the spot-market prices; the other one is to work on the formula on the income [ph] mainly the P Zero [ph] that qualifies the 6 element of the formula. Depending on the type of contract and the structure of the contract that we are applying, either one or the other strategy or both at the same time.

Alessandro Bernini

Well, as far as CapEx, the question relating to CapEx, of course, we can provide the guidance as we have -- we already did in our press release with reference to 2012, Jon. As far as 2013 is concerned, now we are preparing our new estimates for both 2013 and subsequent year. So I believe that it is too early to provide a specific guidance on what we are targeting for next year. But however, since most of the spending relates to the upstream, we can already anticipate that we don't see any specific reason why the number -- the amount of the spending for next year should be significantly different compared to what we are forecasting for 2012. As far as any particular transaction, sale transaction, affecting other businesses, presently, we are not targeting any major transaction in this respect.

Jon Rigby - UBS Investment Bank, Research Division

Right. Can I just follow up on -- I'm trying to hint a bit, but if I take a quick glance back to my model, it might be wrong, but it looks to me that the Petrochemicals earnings are just about the worst quarterly earnings figure you've recorded in that business and yet there is an ongoing restructuring. I mean, when should we expect to see -- taking into account, obviously, the prevailing market, but when should we expect to see something that we, as outsiders, can judge as being progress towards at least starting to stem some of these losses?

Alessandro Bernini

You are right, we have already announced at our strategy presentation, but more specifically, or over the last few months with a specific press release, we -- it is, I believe, that what we have already announced confirm the intention of any to perform a complete downturn in our Petrochemical business. For sure, these moves can be divided into 2 big groups: one, which depend -- which affected predominantly the cost optimization; and the other one, we are addressing the business into the production of those products which are capable to provide in higher return compared to what we are producing so far, and as well as expanding the activity outside the Italian territory. And this has been confirmed through the signature of joint venture, in particular, with other operators in the Far East market. The effect of those actions partially had been already realized, and I am referring to those action which has already delivered some reduction -- some cost reduction and efficiency. Unfortunately, these positive effect had been destroyed by the negative market environment. But the more significant effect are expected, not starting probably something in 2013, but more significantly from 2014 onwards because from 2014 onwards, some of the initiatives, which are presently under realization, I am referring to, for example, to the new biochemical plants we are realizing in Sardinia, these will be capable to provide a significant return only as from 2014 onwards. So still, let me say, 1 year of sufferance but after that, we expect a significant downturn in the earning generation.

Operator

Next question comes from Mr. Nitin Sharma from JPMorgan.

Nitin Sharma - JP Morgan Chase & Co, Research Division

Two questions, if I may. First one on upstream. Could you please explain the decline in liquid realizations in this quarter despite the increase in benchmarks, so why is it going that way? And second one, you mentioned likely divestment of Galp stake by end 2013. Could you provide some more details on your plans? And is offloading the stake in the market an option?

First, upstream. The lower realization on Q3 versus Q2 are mainly due to 2 effects. One, the weakness of some condensate prices and crude, with high naster [ph] content, and so mainly caused by low demand in the bed cam [ph] . And secondly, some light sweet in the granite crude. So as far as Eni in particularly, we have flow realization -- lower realization price in Libya with uatina [ph] condensate in NC41, in Egypt, [indiscernible] and in [indiscernible] that are the main reason of the lower realization for our cost.

Alessandro Bernini

Well, with respect to Galp, you have mentioned, you have remembered that in one of our previous statement, we have committed ourself, based on your statement, that we will sell our residual stake in Galp within the end of 2013. Well, is -- for sure, we are committed to monetize our stake in Galp as soon as possible, but only to the extent we will be in a position to realize a consideration which satisfy our minimum expectation. And this depends, of course, on the market value of Galp shares. But let me emphasize one issue. Since today, our financial situation has been improved dramatically as a consequence of the disposal of the Snam shares and due to -- and thanks to the reimbursement of the loans that we have previously granted to Snam, now we are not in a hurry to monetize nor Snam's stake and Galp as well. And only to the extent, I repeat, it will be possible to realize a consideration capable to satisfy at least our minimum expectation, then we will proceed. Otherwise, since the investment is granting a quite remarkable return, we will keep it. However, just to give you an update, we have received quite recently a lot of interest from many financial institutions, some potential financial investors, and a market transaction -- based on this demonstration of interest, a market transaction could be easily realized very soon. But since the benchmark is the prevailing market price, today, this doesn't satisfy our minimum expectation.

Operator

Next question comes from Mr. Michele della Vigna from Goldman Sachs.

Michele della Vigna - Goldman Sachs Group Inc., Research Division

I had 2 quick questions. For the first one, sorry to go back to Gas & Power, but what we're seeing in the last couple of months is strengthening in the spot gas prices in northern Europe, and I was wondering if that would help the business reducing this price to the cost of your long-term contracts, or if to see a recovery in marketing, you really need to see a recovery in European and, in particular, in Italian demand. And then the second question was on E&P. You clearly had high-margins value upstream this quarter, the Gulf of Mexico, also Elgin/Franklin. I was wondering how quickly you thought you could resume these volumes.

Umberto Francesco Vergine

On the Gas & Power, the increase in spotting the new -- in the northern Europe is one of the phenomenon that, as I've said before, we will try to reflect in our contract renegotiation, particularly, in Doza [ph], Dakar, directly supply gas in Northern Europe. The issue of the demand that is a peculiarity of these times is [indiscernible], both in Europe and in Italy, the impact of the lower demand, of course, has a peculiar impact on the inflation of spread between the long-term contract and the market price.

Claudio Descalzi

Okay. So talking about Elgin/Franklin, as a nonoperational that [ph] means that [indiscernible], while G4 has been killed, and now completely under control? And in the -- in November, the same thing also now on well G5. So I think that our expectation is to resume production on these fields in the first quarter. But as you know that we are not the operator, and we are owing constantly to other team running the -- all operation is also the interface and with the authorities in U.K., that, that is our expectation.

Michele della Vigna - Goldman Sachs Group Inc., Research Division

And for the Gulf of Mexico field?

Claudio Descalzi

Now for the Gulf of Mexico field, I think that we are -- processing completed, we are 95%. And by the end of the year, we can reach 100% of -- that we resume completely our production.

Operator

Next question comes from Mr. Hootan Yazhari from Bank of America Merrill Lynch.

Hootan Yazhari - BofA Merrill Lynch, Research Division

Just a couple of questions. Let's start with Kashagan, maybe a quick update in terms of whether where you are there, how comfortable you are about the March startup as you recently guided, how much cash contribution we can expect from this in 2013. And then also, just to go back to the Pet chems business, you have some pretty ambitious plans there in terms of cutting costs and the like. However, if we start to look towards the United States, the increase in petrochemicals capacity and the ability to export there within an innate cost advantage on the natural gas side, that have to be spread in the longer term. How do you feel about this? And at what stage would you consider stepping down your Petrochemical operation, or is that just unfavorable given political practice?

Claudio Descalzi

Regarding Kashagan, there is no major news, it's exactly what I presented just 10 days ago, during the Upstream seminar. I can say that we continue the mechanical completion is going alright, and we forecast to finish completely all the mechanical completion on the first rig by the year end. And so -- and the commissioning as well, it's continuing, and the weekly progress is in line with the budget. So we are still confident that we can reach this target end of March. And in -- absolutely, we are sure that we can reach the target -- complete target by production by the end of June. So, so far so good in terms of expecting our project target.

Alessandro Bernini

With that answer to your question, relating to the Petrochemical business, since there is with us, Daniele Ferrari, the Managing Director of Versalis, he will provide you with the detailed answer to your question.

Daniele Ferrari

Yes, Mr. Yazhari. Let me go back to the petrochemical description of the strategy that Alessandro did before. What we are trying to do is essentially to deemphasize our business on the auditing side and try to maximize the outcome of our cracker, more on the heavy attraction of, call it, coprado, [ph] which are the most valuable product and which are the one that will not be available when you crack this gas molecule like the United States market. So we do realize that the shale game in the United States is going to create a lot of capacity, has generating capacity on process that we are not going to compete with because we couldn't do it. So we just target our strategy towards reducing our exposure on the products we cannot compete like polyethylene, coming from the Middle East, of course the United States, and Egypt [ph], and maximize the revenue that we've done from international expansion, new projects by refinery system that we use to convert all these petrochemicals unit and elastomers and serenics [ph], which are the products we feel the most strongly about and saw the products we have based our technology for the joint venture that Alessandro has mentioned before. I hope I answered in detail your question.

Operator

Next question comes from Mr. Oswald Clint from Sanford Bernstein.

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

Can I ask just on the Gas & Power business, is there a limit in terms of how far you can push gas -- something like gas promo on the long-term contract versus your ambitions to be ever present in the Russian upstream and part of projects like sidestream, et cetera? Or is it 2 separate divisions, separately having these discussions? And then the second question, just on Iraq, if you could just let us know what the volumes were in the third quarter. And also, if you have -- have you started recovering some of the early CapEx from that development?

Umberto Francesco Vergine

Well, we treat the matter of the renegotiation independently from other business. With Gazprom, we don't have upstream activity anyway. Of course, the general partnership is always behind the company relationship. But on the commercial side, the matters are very separate.

Claudio Descalzi

So for Iraq, with respect to last year, Iraq is doing quite well. With respect to 2011, we added about 11,000, 12,000 barrel per day. So the budget for Iraq is now about 18,000 barrels per day. And the projects -- the rehabilitation project is progressing now, we are producing about 250,000 barrels per day. And we hope that in 2013, we can increase this figure at about 350,000 barrels per day, in line with our target.

Operator

Next question comes from Ms. Irene Himona from Societe Generale.

Irene Himona - Societe Generale Cross Asset Research

I had 3 short questions. So first of all, Libya, if you can please update us on what we should expect for full year production from Libya. And then secondly, the tax rate in Q3 was below expectations, again, if you can remind us of your guidance for the full year on tax. And also on depreciation, I note the 9 months depreciation charge was up about 22%. Is that the right sort of level for the full year?

Claudio Descalzi

So first, for Libya, this quarter, we have a good production. It was 250,000 barrels per day, a little bit more. We think we can confirm our outlook for 2012 of 240,000 barrels per day because we pushed through the ARN and some maintenance program. So that is the update on Libya. And we are - as I already said a few days ago, we are working on Heliocene [ph], very positive and constructive way on seismic projects, and seismic projects that are relating mainly to gas and condensates and oil that we hope that we can perform in the next 4-year plan. For tax rate...

Alessandro Bernini

Tax rate, you are right. A lower tax rate in the first quarter was -- tax rate adjusted was 54%, significantly lower compared either to the second quarter or to the corresponding quarter of last year. The main reason why the tax rate was so low in the third quarter, there is -- most important reason are predominantly 2. The first relates to the income from associates, the amount which -- the amount of dividends distributed by associate in the third quarter was significantly higher compared to both the third quarter of last year and the second quarter. And you know that dividends are under their participation exemption rules, so they are almost without any taxation effect. And then in the third quarter, there was also a contribution of the fair value valuation of some currency derivatives, which by the way, supported also the lower financial charge in the third quarter, which are taxed normally at a lower tax rate. And these are the 2 most important reason why the tax rate in the third quarter was significantly lower compared to the normal tax -- adjusted tax rate. As far as what we expect for the full year, I believe that it is useful to remember that the tax rate can fluctuate over the quarter because of some, let me say, extraordinary effect like dividends, which I have mentioned before. But for the full year, our guidance remains in the region of 60%, as we already announced previously. Since there will be -- and this 60% will be a little bit higher compared to 2011 since, of course, we expect a higher contribution from the earnings generated in Libya, where the tax rate -- local tax rate is significantly higher than the average tax rate of the impact of the upstream business.

Unknown Executive

Excuse me, depreciation.

Alessandro Bernini

As far as depreciation is concerned, yes, you are right, we have already accounted for why the important increase both in the third quarter compared to last year and in the 9-month period, and this, of course, relates to the startup of new projects, projects which had been realized in the recent years, which carried normally in higher depreciation compared to the previous project. So it is -- it was expected, it was in line, absolutely in line, with our expectation. And what we have registered so far is expected to be almost in line also for the rest of the year.

Operator

Next question comes from Mr. Andrea Scauri from Mediobanca.

Andrea Scauri - Mediobanca Securities, Research Division

A question on Mozambique,if I may. I was wondering if you could provide an update on the exploration activity on the latest upstream. When you said that you are in your plans between 4 additional wells, when do you expect the exploration is going to be finished?

Umberto Francesco Vergine

So we just have finished today the one that we're drilling on Mamba South East 2, and we tested that in the first test that we are performing in the area, that is very successful. We have not yet issued a press release, but it's really more than confirming the quality of the reservoir. And now we're going to move the rig for -- to drill Coral 2, the reservoir entirely in the Area 4. So that is the second well and I think that we can -- there is still space to drill an additional fracture toward the end of the year. That is the update on this.

Andrea Scauri - Mediobanca Securities, Research Division

Okay. And, if I may, are there chances to see further increase in the 73 [indiscernible] drilling capability of the Russo [ph] [indiscernible] place that you announced recently?

Umberto Francesco Vergine

That is our hope. But you know, 73 is a really big figure. So that is our hope and now we are testing because with this -- the last well, we increased, not with the risk other [indiscernible] on is in the region of 72, 73, but at the moment, our action is to really to be sure about the 73. Now we are more or less at 65, and we are to derisk it, the other 73. So we have this out, especially with the future steps. As you know, by March, April, we'll finish the Mamba campaign and Coral, and then we start new campaigns around -- with other prospect, new fresh prospect. And that we really hope an increase in the amount of the resources on that.

Operator

No more question at the moment. [Operator Instructions] Next question comes from Mr. Rahim Karim from Barclays.

Rahim Karim - Barclays Capital, Research Division

Two questions, if I may. The first was just around the cash flow statement for the quarter. It seems to have been quite a weak cash conversion during 3Q. Just wondering if there was anything specific that you would draw towards our attention, perhaps, around working capital, and how that might evolve over the course of 4Q. And the second question was just around take-or-pay liabilities, if there was any guidance that you could give around that at this stage?

Alessandro Bernini

Well, you're right. In the third quarter, the cash flow generated by, say, a recurring operation, was a little bit disappointing. But at the same time, we are extremely confident that this situation will be improved. And my sense is this already supported what is already happening during the month of October. In particular, in the third quarter, I believe that it is useful to remember that the third quarter is traditionally lower in terms of cash generation, in particular because of the lower cash generated by our Gas & Power division since during the summer season, a portion -- quite important portion of the gas purchased is addressed to the gas storage in view of the new thermal season. So we have -- we incurred a liability, we have to pay our supplier. But in the meantime, we have no proceeds generated by the disposal. Then of course, this situation is due to change in the last quarter because traditionally, the last quarter of the year is quite important in terms of sales volume and, say, in the cash flow generated by the normal sales of the Gas & Power division. Then, as already announced also, Saipem, which we consolidate with an integral criterion, Saipem has already announced that has experienced the quite significant increase in the working capital in the third quarter, but also -- for also Saipem is expecting to reverse significantly this situation in the last quarter of the year. So all in all, the third quarter had been disappointing, but because affected by all seasonal or extraordinary elements, which are due to be reversed completely in the last part of the year, so we are confident. As I already mentioned in another previous -- answer to another question, that the last quarter will be extremely important in terms of cash flow generated by the recurring operations.

Umberto Francesco Vergine

And on gas, despite having reduced 2012 minimum contractual quantity by our renegotiation, we still expect to incur some take-or-pay repayments in 2012, mainly due to the significant demand reduction, particularly in Italy. This extra take-or-pay volume are anyway [indiscernible] but will be able to recover within the full life of the contract.

Alessandro Bernini

Just to complete -- excuse me, just to come back for a while. So to my previous sentence, the third quarter had been also negatively affected by a payment to one of our supplier, GasTerra, as a consequence of the arbitration proceeding, which has been published by the end of -- within the end of September. And as a consequence, some of this arbitration proceeding, we had to pay within the end of September, the relevant amount, which is -- it was a quite remarkable amount of money.

Rahim Karim - Barclays Capital, Research Division

Perfect. And if I could just press you, is there a number that you could provide in terms of the take-or-pay liability that we can expect for the end of the year? I understand you'll be able to reach that in the future years. But just to help us model the cash flow, is there a number that you're able to give us?

Alessandro Bernini

Well, I will integrate the answer, which was provided by Umberto. I am not so confident to provide a specific figure because it will depend a lot on the volumes of the sales that would be realized in the last quarter of the year. And you know that the sales volume are also can be significantly affected by, for example, the weather conditions during the last part of the year and could be also affected by the ongoing -- the already ongoing renegotiation, which normally affect both prices, but also, as well as the minimum quantity that we have to pay to our suppliers. So I repeat, we expect to face a payment within the end of the year in terms of take-or-pay, but it is too early to provide a number, which could be significantly modified, thanks to the elements which I have mentioned before.

Operator

No more question at the moment.

Camilla Palladino

Great. If there's no more questions, I have to bring the conference to a close. And if you have any questions at a later date, feel free to call us on the Investor Relations number. Thank you.

Operator

Ladies and gentlemen, the conference call is over. Thank you for calling Eni.

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