Eni Announces Preliminary Results for the fourth Quarter and Fullyear 2007

 

San Donato Milanese, February 15, 2008 - Eni, the international oil and gas company today announces its group results for the fourth quarter and for the full year 2007 (unaudited).

 

Paolo Scaroni, Chief Executive Officer, commented:

"Eni delivered excellent results for the full year 2007 despite the euro's strong appreciation versus the US dollar. We reinforced our growth strategy by completing a number of competitively-priced cquisitions which will deliver further value in years to come, starting from 2008."

(a) For a detailed explanation of adjusted operating profit and net profit see page 22.

(b) Profit attributable to Eni shareholders.

(c) Fully diluted. Dollar amounts are converted on the basis of the average EUR/USD exchange rate quoted by the ECB for the periods presented.

(d) One ADR (American Depositary Receipt) is equal to two Eni ordinary shares.

(1 ) Includes Eni's share of proved reserves of equity-accounted entities.The year-end amount of proved reserves comprised 30% of proved reserves of the three equity-accounted Russian companies purchased as part of a bid procedure for assets of bankrupt Yukos and participated by Eni with a 60% interest, considering that it is probable that Gazprom will exercise a call option to acquire a 51% interest in these companies.

Financial highlights

Fourth quarter

• Reported operating profit was €5.17 billion, up 30.6% from the fourth quarter of 2006. On an adjusted basis, operating profit was €5.29 billion, up 10.8% due to a better operating performance reported mainly by the Exploration & Production division, driven by higher realizations. Partly offsetting this, was the euro's appreciation against the dollar (up 12.3%) and rising costs. Both the Petrochemicals and Refining and Marketing divisions incurred an operating loss due to an unfavourable trading environment.
• Reported net profit was €3 billion, up 98%. On an adjusted basis, net profit was up 13.7% to €2.68 billion, mainly as a result of the stronger operating performance and a decrease recorded in the Group tax rate on an adjusted basis (from 49.2% to 47.7%).
• Capital and exploratory expenditures for the fourth quarter were up 24.2% from a year ago to €3.66 billion mainly related to the finding and development of oil and gas reserves and the upgrading of gas transportation infrastructure and refineries.
• Net borrowings amounted to €16.33 billion as of December 31, 2007 and increased by €4.90 billion in the fourth quarter in relation to capital and exploratory expenditures (€3.66 billion), investments (€1.20 billion), cash returns to shareholders of €2.20 billion as interim dividend and €195 million through the repurchase of 7.94 million own shares. These outflows were partly absorbed by net cash generated by operating activities² of €2.47 billion.

 

Full Year

• Reported operating profit was €18.87 billion, down 2.4% from a year ago. On an adjusted basis, operating profit was €18.99 billion, down 7.3%, due to a weaker operating performance in the Exploration & Production and Refining & Marketing divisions.
• Reported net profit was €10 billion, up 8.6%. On an adjusted basis, net profit (€9.47 billion) was down 9%, mainly as a result of the lower operating performance.
• Net cash provided by operating activities of €15.52 billion, combined with cash from divestments of €0.66 billion, were absorbed by cash needs for: (i) capital and exploratory expenditures of €10.59 billion; (ii) investments and asset acquisitions (€9.91 billion) including the acquisition of 20% and 60% interests in OAO Gazprom Neft and three Russian gas companies respectively, as part of a bid procedure for assets of bankrupt Yukos (€3.73 billion) and the acquisition of oil and gas assets in the Gulf of Mexico and Congo (€4.52 billion); (iii) cash returns to shareholders of €5.26 billion. Net borrowings at year end were €16.33 billion, up €9.56 billion from December 31, 2006.
• Repurchase of own shares: a total of 27.56 million of own shares were purchased at a cost of €681 million. Since the inception of the programme, a total of 363 million of own shares were repurchased at a cost of €6,193 million, reducing by approximately 9% the shares outstanding and improving 2007 earnings per share by the same amount.
• Return on Average Capital Employed (ROACE)³ calculated on an adjusted basis for the twelve-month period ending December 31, 2007 was 19.3% (22.7% in 2006).
• Leverage³  – ratio of net borrowings to shareholders' equity including minority interest – increased to 0.38 from 0.16 at the end of 2006.

 

2007 Dividend

The Board of Directors intends to submit to the Annual Shareholders' Meeting the proposal of distributing a cash dividend of €1.30 per share⁴ (€1.25 in 2006, up 4%). Included in this annual payment is €0.60 per share which was distributed as interim dividend in October 2007. The balance of  €0.70 per share is payable on May 22, 2008 to shareholders on the register on May 19, 2008.

(2 ) See disclaimer below.
(3 ) Non-CAAP financial measures disclosed throughout this press release are accompanied by explanatory notes and tables to help investors to gain a full understanding of said measures in line with guidance provided for by CESR recommendation No. 2005-178b.
(4 ) Dividends do not entitle to a tax credit and, depending on the receiver, are subject to a withholding tax on distribution or ora partially cumulated to the receiver'staxable income.

 

Operational highlights and trading environment

(a) Upstream sales include volumes marketed by the Exploration & Production division in Europe for 3.59 bcm and in the Gulf of Mexico for 1.8 bcm for the year 2007. Data for the full year 2006 were 4.07 and 0.62 bcm respectively.

 

Fourth quarter

• Oil and natural gas production for the fourth quarter averaged 1.815 mmboe/d, an increase of 1.1% compared with the fourth quarter of 2006 mainly due to the benefit of the acquired assets in the Gulf of Mexico and Congo, as well as the organic growth achieved in Libya and Egypt. These positives were partially offset by mature field declines, disruptions in Nigeria owing to continuing social unrest and the impact of year end price revisions in certain Eni's Production Sharing Agreements (PSAs). Excluding the impact of lower entitlements in PSAs, production was approximately up 4%.
• Eni's worldwide natural gas sales were 29.75 bcm, up 9.8% driven by higher sales volumes achieved in the European market and in LNG sales in both the Asian and North American markets.
• The trading environment was favourable in the upstream sector, supported by higher Brent crude prices averaging $88.70 per barrel (up 48.6% compared to the fourth quarter of  2006) and a reduction in sour crude discounts helping Eni oil average realizations to increase by the same amount as Brent prices. The increase in oil prices was partly offset by the appreciation of the euro over the dollar (up 12.3%). Eni's refining profits were off sharply in spite of the positive trend recorded in margins of the Brent market marker (Brent refining margins were up 86.7% in the quarter). This negative result was due to lower margins for Eni's complex refineries that were negatively affected by narrowed sour crude discounts reducing the competitive advantage to process low-cost feedstock, and lower margins for the refining's secondary products (lubricants and bitumen).

 

Full year

• Oil and natural gas production for the year averaged 1.736 mmboe/d, down by 1.9% compared with 2006. Production performance was impacted by events in Nigeria, unplanned shutdowns and technical issues in the North Sea, mature field declines, mainly in Italy and the United Kingdom, as well as price impacts in certain PSAs. Full year production was also affected by the Venezuela expropriation of the Dación asset (down 15 kboe/d) which took place on April 1, 2006. Partially offsetting these effects was the benefit of the acquired assets in the Gulf of Mexico and Congo as well as the organic growth achieved in Libya, Egypt and Kazakhstan.
• Eni's worldwide natural gas sales were up 0.9% to 98.96 bcm driven by the organic growth on international markets partially offset by the lower European gas demand registered in the first quarter 2007 due to unusually mild winter weather.
• Overall the trading environment was unfavourable due to the appreciation of the euro over the dollar (up 9.2%) and sharply lower realized refining margins reflecting a decrease in sour crude discounts that affected Eni's complex refineries. These negatives were partly offset by higher Brent crude oil prices averaging $72.52 per barrel for the year (up 11.3%).

 

2007 portfolio developments

• Made important transactions to acquire oil and gas assets in the Gulf of Mexico and in Congo onshore with total expenditures amounting to €4.52 billion. In 2008 these assets are expected to produce approximately 100 kboe/d under Eni scenario.
• Purchased in partnership with Enel (60% Eni, 40% Enel) a 100% interest in OAO Arctic Gas Company, ZAO Urengoil Inc and OAO Neftegaztechnologia as part of the liquidation procedure of bankrupt Russian company Yukos. The acquired entities are engaged in exploration and development of large predominantly gas reserves, amounting to approximately 2.5 bboe of resources net to Eni according to a 30% interest determined assuming Gazprom exercises its call options to acquire a 51% stake in the three companies. Through the same transaction Eni also purchased a 20% stake in the oil and gas company OAO Gazprom Neft. Eni granted Gazprom a call option to purchase the 20% stake in OAO Gazprom Neft. The cash consideration for these transactions amounted to €3.73 billion.
• Announced in November 2007 the terms of recommended cash offer to acquire the entire issued share capital of the UK-based oil company Burren Energy plc. Total cash consideration is expected to amount to approximately €2.4 billion. Burren holds producing assets in Congo and Turkmenistan flowing at a rate of over 25 kboe/d and partners Eni in the Congolese assets that Eni bought from Maurel & Prom. On February 1, 2008 Eni declared its recommended offer to be wholly unconditional. At the same date, Eni held an 85% stake in the company share capital including received valid acceptances representing 60% of Burren's share capital and a 24.9% of share capital purchased on the open market in December 2007.
• Signed a major petroleum agreement with NOC, the Libyan National Oil Corporation. The agreement provides for the extention of the duration of Eni's mineral rights in Libya and the launch of large projects aiming at monetizing substantial gas reserves and overhauling offshore exploration activities.
• Signed a gas sale agreement between the consortium conducting operations at the Karachaganak field (Eni is co-operator with a 32.5% stake) and KazRosGaz, a joint venture established by the Kazakh and Russian companies KazMunaiGaz and Gazprom. This agreement lays the foundations for the development of gas reserves of the field.
• Acquired a 13.6% stake in Angola LNG Ltd Consortium responsible for the construction of an LNG plant. It will be designed with a capacity to process one bcf/d of natural gas and produce 5.2 mmtonnes a year of LNG and related products.
• Acquired a 70% interest in the Nikaitchuq oilfield in Alaska, in which Eni reached both the 100% ownership and the operatorship. Production start-up is expected at the end of 2009.
• Awarded 26 new exploration licenses in Gulf of Mexico following an international bid procedure. The acquired acreage is estimated to have a significant mineral potential and is located near to Eni's production facilities in the area.
• Signed an agreement to extend duration of the development and production licence for oil fields of Block 403 (Eni 50%) with Sonatrach in Algeria. In 2007 production from this block represented approximately 14% of Eni's total production in the country.
• Signed a framework agreement with Gazprom to build the South Stream pipeline system which is expected to import to Europe volumes of natural gas produced in Russia across the Black Sea.
• Acquired a significant stake in Altergaz, the main independent operator in the French gas market. Eni plans to support Altergaz development in the French retail and small enterprises segments, through a 10 years supply contract of 1.3 bcm gas volumes per year.
• Purchased 102 retail stations in Central-Eastern Europe and a 16.11% stake in the Czech Refining Company, increasing Eni's ownership interest to 32.4% equal to a local refining capacity of 2.6 mmtonnes per year.
• Galp Energia, in accordance with the agreements signed in December 2005 between majority shareholders (Eni 33.34%, AmorimEnergia and Caixa Geral de Depósitos), exercised its call option for the acquisition of Eni's Agip branded oil products marketing activities in the Iberian region both in the retail and wholesale markets. The transaction, subject to approval from antitrust authorities, includes 371 Eni'service stations. The closing is expected in June 2008.

 

Post closing events
Agreement for the development project of the Kashagan oilfield
On January 14, 2008, all parties to the North Caspian Sea Production Sharing Agreement (NCSPSA) consortium and the Kazakh authorities signed a memorandum of understanding to settle a dispute commenced in August 2007 regarding conditions and rights for developing and exploiting the Kashagan field. Management believes this field to be the most important discovery in the world in the past thirty years. The agreement establishes a renewed economic equilibrium of the contract in consideration of changed market conditions and provides stability for the project execution. The material terms of the agreement are: (i) the proportional dilution of the participating interests of all the international members of the Kashagan consortium allowing the national Kazakh company KazMunayGas' stake to increase matching that of the four major shareholders at 16.81%, effective January 1, 2008. The Kazakh partner will pay to the other co-venturers an aggregate amount of US $1.78 billion; (ii) a value transfer package to be implemented through changes to the terms of the NCSPSA, the amount of which will vary in proportion to future levels of oil prices. Eni is expected to contribute to the value transfer package according to its new participating interest in the project (16.81%); (iii) an increased role of the Kazakh partner in operations and a new operating and governance model which will entail a greater involvement of the major international partners.
Although the project was continuing during the negotiation process, its progress was delayed. Parties have therefore agreed that Eni as operator will file with the Kazakh authorities a revised expenditure and schedule for the execution of the phase one by the end of March.

 

Outlook
Eni will present in detail its strategy, targets and outlook for its 2008-2011 plan at 4:00 P.M.CET today. Management's expectations regarding key Eni's business trends for the year 2008 are as follows:

• Production of liquids and natural gas is forecast to increase (actual oil and gas production averaged 1.736 mmboe/d in 2007), under Eni' s Brent price scenario. Full year contribution from the assets acquired in 2007 in the Gulf of Mexico and in Congo and, starting from January 2008, of Burren Energy, as well as the organic growth expected in Nigeria, Angola and Libya will sustain the production performance. Mature field declines are expected in the United Kingdom and in Italy;
• Sales volumes of natural gas worldwide are forecast to increase from 2007 level (actual sales volumes in 2007 were 98.96 bcm). Growth is expected to be achieved in the European target markets, mainly in France, Germany/Austria and Spain;
• Sales volumes of electricity are expected to increase over 2007 (actual volumes in 2007 were 33.19 TWh) due to the planned start-up of new production capacity at the Ferrara plant;
• Refining throughputs are expected slightly increase from 2007 (actual throughputs were 37.15 mmtonnes in 2007). Higher throughputs are expected at the Ceska Rafinerska as a result of the acquisition of a stake made in 2007. This will be offset by planned downtime at the Venice and Taranto refineries in order to execute certain activities intended to enhance plant performance;
• Retail sales of refined products are expected to increase from 2007 level, excluding expected divestments (12.65 mmtonnes in 2007). Sales in Italy are expected to remain stable, despite a decline in domestic consumption, counterbalanced by the effect of ongoing marketing initiatives. In Europe, when factoring in the impact of the planned divestment of retail activities in the Iberian region, sales are expected to increase mainly due to the full contribution of assets acquired in 2007 in Central-Eastern Europe.

In 2008 management expects to increase capital expenditures from 2007 (€10.59 billion in 2007). Major increases are expected in the development of oil and natural gas reserves, upgrading of construction vessels and rigs, and upgrading of natural gas transport infrastructure. Investments are also planned in order to complete the acquisition of Burren Energy.
On the basis of the expected cash outflows for planned capital expenditures and shareholders remuneration and also assuming Eni's scenario for Brent prices, management expects group leverage to achieve a level that will be lower or higher than the level of 0.38 reported in 2007, depending on the exercising of the already mentioned call options by Gazprom.

Eni 's Chief Financial Officer, Marco Mangiagalli in his position as manager responsible for the preparation of financial reports, certifies pursuant to article 154-bis paragraph 2 of legislative decree No. 58/1998, that data and information disclosed in this press release correspond to the company 's evidence and accounting books and entries.

Disclaimer
Due to the seasonality in demand for natural gas and certain refined products and the changes in a number of external factors affecting Eni 's operations, such as prices and margins of hydrocarbons and refined products, Eni 's results from operations and changes in net borrowings for the fourth quarter cannot be extrapolated on an annual basis.

Cautionary statement
This press release, in particular the statements under the section "Outlook ", contains certain forward-looking statements particularly those regarding capital expenditure, development and management of oil and gas resources, dividends, share repurchases, allocation of future cash flow from operations, future operating performance, gearing, targets of production and sales growth, new markets, and the progress and timing of projects. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future.
Actual results may differ from those expressed in such statements, depending on a variety of factors, including the timing of bringing new fields on stream; management 's ability in carrying out industrial plans and in succeeding in commercial transactions; future levels of industry product supply; demand and pricing; operational problems; general economic conditions; political stability and economic growth in relevant areas of the world; changes in laws and governmental regulations; development and use of new technology; changes in public expectations and other changes in business conditions; the actions of competitors and other factors discussed elsewhere in this document.

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Eni
Società per Azioni, Rome, 1 Piazzale Enrico Mattei Capital Stock: euro 4,005,358,876 fully paid Registro Imprese di Roma, c. f. 00484960588
Tel.: +39-0659821 - Fax: +39-0659822141

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This press release for the Fourth Quarter and Full Year results of 2007 (unaudited) is also available on the Eni web site:
www.eni.it .

About Eni
Eni is one of the leading integrated energy companies in the world operating in the oil and gas, power generation, petrochemicals, engineering and construction industries. Eni is present in 70 countries and is Italy 's largest company by market capitalization.