Eni Reports $2.38B in 3Q Earnings
Eni announced its group results for the third quarter and first nine months of 2010 1 (unaudited).
- Adjusted operating profit: €4.11 billion in the quarter (up 31.7%); €12.57 billion in the first nine months (up 33.4%).
- Adjusted net profit: €1.70 billion ($2.36B) in the quarter (up 47.5%); €5.15 billion in the first nine months (up 35%).
- Net profit: €1.72 billion in the quarter (up 39%); €5.77 billion in the first nine months (up 45.1%).
- Cash flow: €2.41 billion in the quarter; €11.55 billion in the first nine months.
- Oil and natural gas production: 1.705 million barrels per day in the quarter, unchanged from 2009 on a comparable basis2 (up 0.7% in the first nine months).
- Natural gas sales: down 17.4% to 18.60 billion cubic meters in the quarter (down 9.3% in the first nine months).
- Achieved project milestones at the giant Zubair field in Iraq with first production expected to be reported in the next quarter. Started production at 8 fields out of the 12 planned for the year.
- Important exploration successes achieved in Venezuela, Angola and the UK.
- Awarded licenses in new high potential areas (Democratic Republic of Congo and Togo).
Paolo Scaroni, Chief Executive Officer, commented, "In the third quarter, Eni has achieved excellent results against a backdrop of ongoing challenging conditions in the gas market. We have moved forward in developing the giant Zubair oilfield in Iraq, and have delivered significant discoveries in Angola, Venezuela and in the North Sea as well as access to the Democratic Republic of Congo and Togo, two new countries with high mineral potential. We continue to invest for future growth in particular in E&P. I am confident that the 2010 full year results will show a marked improvement on last year."
Adjusted operating profit
Adjusted operating profit for the third quarter of 2010 was €4.11 billion, an increase of 31.7% compared with the third quarter of 2009. For the first nine months of 2010, adjusted operating profit was €12.57 billion, an increase of 33.4% from a year ago. These results reflected an excellent operating performance reported by the Exploration & Production division (an increase of 34.9% compared with the third quarter of 2009) driven by higher oil prices and the appreciation of the dollar vs. the euro. The downstream refining and petrochemical businesses both turned a profit reversing prior-year losses thanks to a more favorable trading environment. In contrast, the Gas & Power division reported sharply lower results as margins and sales volumes were hit by strong competitive pressures.
Adjusted net profit
Adjusted net profit for the third quarter of 2010 was €1.70 billion, up 47.5% compared with a year ago. In the first nine months of 2010, net profit increased by 35% to €5.15 billion. Both reporting periods benefited from an improved operating performance. In addition, the nine-month result was supported by higher profits reported by equity-accounted entities, while the quarterly result was helped by a lowered adjusted tax rate (down by 5 percentage points in the third quarter; it was stable in the first nine months).
Capital expenditures amounted to €2.85 billion for the quarter and €9.96 billion for the first nine months, mainly relating to the continuing development of oil and gas reserves, the upgrading of rigs and offshore vessels in the Engineering & Construction segment and of the gas transport infrastructures.
The main cash inflows for the quarter were net cash generated by operating activities amounting to €2,409 million (€11,548 million in the first nine months of 2010) and proceeds from divestments of €107 million (€902 million in the first nine months of 2010). These inflows were used to fund part of the financing requirements associated with capital expenditures of €2,851 million (€9,958 million in the first nine months of 2010) and the dividend payments to Eni's shareholders amounting to €1,811 million in the quarter, relating to the interim dividend for fiscal year 2010 (they amounted to €3,622 million in the nine months of 2010 and also included payment of balance for the 2009 dividend). Other dividend payments to non-controlling interests amounted to €354 million in the nine months. As a result, net borrowings 3 as of September 30, 2010 amounted to €25,261 million, representing an increase of €1,919 million from June 30, 2010 and €2,206 million from December 31, 2009.
Ratio of net borrowings to shareholders' equity including non-controlling interest – leverage 4 – slightly declined to 0.47 at September 30, 2010 from 0.46 as of December 31, 2009. However, compared to the first-half results the ratio decline was more marked as it was down by 0.06 points due to the depreciation of the US dollar against the euro as recorded at September 30, 2010 vs. June 30, 2010 (down by 11%) which caused a reduction in total equity of €3.4 billion in the period, in addition to increased net borrowings.
Return on Average Capital Employed (ROACE) 4 calculated on an adjusted basis for the twelve-month period to September 30, 2010 was 10.6% (10% at September 30, 2009).
Exploration & Production
In the third quarter of 2010, Eni's reported liquids and gas production was 1,705 kboe/d (1,768 kboe/d in the first nine months of 2010). This was calculated assuming a conversion rate of gas to barrel equivalent which was updated to 5,550 cubic feet of gas equals 1 barrel of oil (it was 5,742 cubic feet of gas per barrel in previous reporting periods; for further disclosures on this matter see page 6). On a comparable basis, i.e. when excluding the effect of updating the gas conversion rate, production was nearly unchanged on a quarter-to-quarter basis, while reporting an increase of 0.7% for the first nine months of 2010. Production increases were driven by continued organic growth achieved in Nigeria, Congo and Italy, new field start-ups and production ramp-up at fields which were started-up in 2009. Those trends were offset by planned facility downtime in Kazakhstan and Libya, and mature field declines mainly in the North Sea. The positive impact of lower OPEC restrictions offset lower entitlements in the Company's PSAs due to higher oil prices as well as lower gas uplifts in Libya as a result of oversupply conditions in the European market.
Gas & Power
Against the backdrop of strong competitive pressures both in the domestic and European markets, Eni's gas sales in the third quarter of 2010 registered a decrease of 17.4% compared with the third quarter of 2009, to 18.60 bcm. In the first nine months of 2010, gas sales declined by 9.3% from the first nine months of 2009 to 68.30 bcm. Sales volumes on the Italian market experienced the greatest declines (down by 2.32 bcm and 6.29 bcm, or 26% and 20.9% in the third quarter and in the first nine months of 2010, respectively) as all market segments posted volume losses. In the third quarter of 2010, sales in European markets declined by 11.2%, mainly in Belgium, Turkey and Hungary. In the first nine months of 2010 they were unchanged.
Refining & Marketing
Refining margins remained on a downward trend as sales prices of refined products failed to fully recover the cost of oil-based feedstock due to weak underlying fundamentals (sluggish demand, excess capacity and high inventory levels). In the third quarter of 2010, the marker Brent margin was $2.09 (down $0.25 per barrel in the quarter, or 10.7%, and down $1.13 per barrel, or 30.1%, in the first nine months). Eni's margins in the same period profited from a slight re-opening of light-heavy crude differentials in the Mediterranean area and from the fact that inland refineries benefited from higher premium on final prices compared to exporting refineries (CIF vs. FOB spreads). Also the appreciation of the dollar over the euro helped Eni's realized margins.
Volumes of refined products marketed on the Italian network declined by 3.4% and 4.6% in the quarter and first nine months of 2010, respectively. The performance was affected by weak domestic consumption of fuels and increasing competitive pressures causing Eni's market share to drop by almost one percentage point to 30.7% in the quarter. On the positive side, volumes marketed on the European markets increased by 13.8% and 4.4% in the third quarter and first nine months respectively benefiting in the quarter from the purchase of a network of service stations in Austria and an improved performance in Eastern Europe.
Results of operations were helped by the depreciation of the euro vs. the US dollar, down 9.8% and 3.6% in the third quarter and first nine months of 2010, respectively.
Start-up of the Zubair project in Iraq
Development activity has progressed at the giant Zubair oilfield in Iraq throughout the year and all project milestones have been achieved in line with contract arrangements. The Company expects to book its share of production in the year. Eni with a 32.8% interest, leads the consortium in charge of developing the field over 20 years targeting a production plateau of 1.2 mmbbl/d over the next six years.
Main production start-ups
Main production start-ups for the quarter were Arcadia 1 and Tuna in Egypt and Morvin in Norway, reaching production at 8 out of the 12 fields planned for the year.
Acquisition of exploration assets in the Democratic Republic of Congo
On August 16, 2010, Eni signed an agreement with UK-based Surestream Petroleum to acquire a stake of 55% and operatorship in the Ndunda block located in the Democratic Republic of Congo. The agreement has already been sanctioned by the relevant authorities and marks the implementation of the strategic partnership signed with the Democratic Republic of Congo in August 2009 to cooperate in developing the Country's oil resources.
In the third quarter of 2010, significant exploratory success was achieved in Venezuela with the appraisal well Perla 3 (Eni 50%), Angola with the exploratory wells Cabaca South East-2 and Mpungi 2 located in the 15/06 offshore block (Eni 35%, operator) and United Kingdom with the appraisal well Culzean 2.
Developments in the Hewett area
In October 2010, as part of the development project intended to build an offshore storage facility in the Hewett area located in the North Sea basin, Eni was granted from the relevant British authorities all the necessary permits to use the Deborah field as a storage site, as well a gas storage license. A final investment decision of the project is expected to be made by the first quarter of 2011.
Divestment of assets in the Exploration & Production division
On October 19, 2010, with a view to rationalizing its upstream portfolio, Eni closed the divestment of the entire share capital of its subsidiary Padana Energia to Gas Plus. The divested subsidiary includes exploration leases and concessions for developing and producing oil and natural gas in Northern Italy. Cash consideration for the deal amounted to €179 million, subject to a possible adjustment of up to €25 million related to achieving certain production targets at assets under development. Further price adjustments are foreseen in connection with appraising the underlying exploration potential. The agreement also encompasses, on the part of Gas Plus a call option to purchase 100% of Eni's wholly-owned subsidiary Adriatica Idrocarburi, which owns oil and gas assets in Central Italy. The option expires on November 30, 2010.
European Commission's investigations on players active in the natural gas sector
On September 29, 2010, the European Commission resolved to accept certain commitments presented by Eni to settle an antitrust proceeding without the ascertainment of any illicit behavior and consequently without imposition of any fines or sanctions. The proceeding related to alleged anti-competitive behavior in the natural gas market ascribed to the Company, associated with an alleged unjustified refusal to grant access to the TAG (Austria) and TENP/Transitgas (Germany/Switzerland) pipelines, connected with the Italian gas transport system. The commitments presented by Eni which have become mandatory following the Commission's decision, include the divestment of Eni's interests in the German TENP, in the Swiss Transitgas and in the Austrian TAG gas pipelines and associated carrier companies. Given the strategic importance of the Austrian Tag gas pipeline, which transports gas from Russia to Italy, Eni has negotiated a solution with the Commission which calls for the transfer of its stake to an entity controlled by the Italian State. The Company will take all the necessary steps to execute those commitments in accordance with such terms and time schedules as agreed upon with the Commission (a non-confidential version of the agreed commitments will be released subject to the Commission's consent).
As a result of the European Commission's approval of Eni's divestment plan, as of September 30, 2010, assets and liabilities of the interested Eni entities (which include both controlling and non-controlling shareholdings in 7 entities) have been reclassified to the balance-sheet line item "assets held for sale".
In what remains an uncertain and volatile energy environment, Eni forecasts a modest improvement in global oil demand and a Brent price of 77 $/barrel for the full year 2010. Against this backdrop, key volumes trends for the year are expected to be the following:
- Production of liquids and natural gas is forecast to be in line with 2009 (production in 2009 was 1.769 million boe/d). This estimate is based on the Company's assumption for a Brent price of 77 $/barrel for the full year, the same level of OPEC restrictions as in the first nine months of 2010 and asset disposals underway. It excludes the effect of updating the gas conversion rate. Growth will be driven by continuing field start-ups, mainly in Italy, Congo and Norway and marginally by the Zubair project in Iraq, as well as production ramp-up at the Company's recently started fields, mainly in Nigeria and Angola. These additions will be offset by mature field declines, lower gas uplifts in Libya due to oversupply conditions on the European market and the rescheduling of certain projects expected in the Gulf of Mexico as a consequence of the accident at the BP-operated Macondo well;
- Worldwide gas sales are forecasted to decrease compared with 2009 (approximately 104 bcm were achieved in 2009). Increasing competitive pressures, mainly in Italy, are expected to be partly offset by an anticipated recovery in European gas demand as well as a benefit associated with integrating Distrigas operations;
- Regulated businesses in Italy will benefit from the pre-set regulatory return on new capital expenditures and cost savings from integrating the full chain of transport, storage and distribution activities;
- Refining throughputs on Eni's account are planned to be in line with 2009 (actual throughputs in 2009 were 34.55 mmtonnes), due to higher rates of capacity utilization at Eni's refineries and entry into operation of a new hydrocracking unit at the Taranto refinery, offset by lowered volumes on third party refineries reflecting the Company's decision to terminate certain processing agreements;
- Retail sales of refined products in Italy and the rest of Europe are expected to decline slightly from 2009 (12.02 mmtonnes in 2009) reflecting sluggish consumption. Marketing initiatives are planned in order to support sales volumes and margins in the Italian retail market and to develop the Company's market share in European markets;
- The Engineering & Construction business is expected to see solid results due to a robust order backlog.
In 2010, management plans to slightly increase capital expenditures compared with 2009 (€13.69 billion was invested in 2009) with the aim of optimizing production and taking into account the impact of the appreciation of the US dollar over the euro. Capital expenditures will mainly be directed to the development of oil and natural gas reserves, exploration projects, the upgrading of construction vessels and rigs, and the upgrading of the natural gas transport infrastructure. The Company expects that the divestment of Eni's interests in the German TENP, in the Swiss Transitgas and in the Austrian TAG gas pipelines may be finalized by mid-2011, as financing, legal and technical due diligence is ongoing. Management forecasts that ratio of net borrowings to total equity (leverage) at year-end will be at the same level as at 2009 year-end supported by the effect of certain defined measures, a part of which has been already implemented throughout the course of the year.
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