Eni: first quarter 2020 results

Eni's Board of Directors yesterday approved the consolidated results for the first quarter of 2020 (not subject to audit).

Having examined the results, Eni CEO Claudio Descalzi said:

“The period since March has been the most complex period the global economy has seen for more than 70 years. For the energy industry, and in particular for Oil&Gas, the complexity is even greater given the overlap of the effects of the pandemic with the collapse in oil prices. Eni is tackling this period by relying on a safe operating organisation for its employees, contractors, and the populations of its host countries. Furthermore, Eni’s people have shown an incredible capacity and willingness to adapt to the difficult circumstances at the moment, allowing the Group to operate with full continuity. I would like to thank them for this. The business portfolio is more resilient than ever before, while the capital structure is very solid thanks to actions taken in recent years. The Upstream portfolio, in particular, has a competitive break-even point and is flexible, allowing for activities and financial commitments to be adjusted as the situation develops. The Mid-Downstream portfolio is reacting well to the consumer crisis, recording EBIT that was higher than the same period in 2019. Overall, EBIT was above market forecasts, while cash flow from operations before working capital financed investments of €1.9 billion. The balance sheet is robust and above all shows €16 billion of cash on hand, which will allow the Group to manage the drop in business due to prices and the pandemic. Like everyone, we expect a complicated 2020, but thanks to our strengths we are sure we can swiftly resume our journey towards an even more profitable and sustainable future, as set out in our latest strategic plan.” 

Quarterly highlights

Exploration & Production

• Hydrocarbon production: 1.774 million boe/d, 3.6% lower than the first quarter of 2019. Net of price effects, the decline was 50% due to lower volumes in Libya driven by an anticipated contractual trigger, force majeure and lower entitlements/spending, more than offsetting positive portfolio contribution mainly from Norway. The remaining 50% of the reduced output for the quarter was due to the impact of lower gas demand, mainly in Egypt.
• Started up oil production at the Agogo field, in Block 15/06 offshore Angola, just nine months after the discovery, thanks to the synergies with the Ngoma FPSO vessel operating the West Hub fields.
• Completed a “fast track” project for exporting volumes of associated gas produced in Block 403 in Algeria, paving the way for the synergic development of the gas fields in the North Berkine leases.
• Portfolio developments:
  • Awarded the operatorship of Block 28 (Eni’s interest 60%) in the Namibe and Benguela unexplored basins offshore Angola;
  • Awarded to the JV Vår Energi 17 new exploration licences (7 of which operated) in the three main basins of the Norwegian continental shelf
• Exploration success:
  • Drilled a second successful appraisal well at the Agogo discovery in Block 15/06 increasing the block’s resources by 1 billion barrels of oil in place;
  • Made an oil discovery in the Saasken exploration prospect in Block 10, offshore Mexico. Expected oil in place in the range of 200-300 million bbl;
  • Made a gas and condensates discovery in the exploration prospect Mahani-1, onshore the Sharjah Emirate (UAE), in the Concession B area, just one year after signing the concession agreement.
• E&P’s adjusted operating profit of €1.04 billion, 55% lower y-o-y mainly driven by a significantly deteriorated trading environment and, to a lesser extent, by lower production volumes.

Gas & Power

• Finalized the acquisition of a 70% interest in the Evolvere company. With this deal Eni becomes the leader in the market of distributed generation from renewables in Italy.
• G&P’s adjusted operating of €0.43 billion, 29% higher y-o-y driven by optimizations at the gas and power assets portfolio in a volatile market and a growing performance in the retail business notwithstanding lower seasonal sales due to particularly mild winter weather and the impact of the economic downturn on consumption in the thermoelectric and industrial segments and on the provision for doubtful accounts. The LNG business reported lower results negatively affected by a downturn in Asian economies due to COVID-19 effects with fallout on LNG demand and prices.

Refining & Marketing and Chemicals

• Completed the upgrading of the Crescentino plant for the production of bioethanol at industrial scale and restarted the biomass power plant for renewable electricity generation. R&D activities currently focused on developing a production process of bio-plastics from second-generation saccharose.
• Acquired a 40% interest in Finproject, a company engaged in the segment of high-performance formulated polymer applications, in an effort to strengthen the product mix by increasing the exposure to products that are more resilient to the volatility of the chemical scenario. Closing is subject to customer antitrust review.
• Signed an agreement with an Italian engineering company for developing a pyrolysis-based technology to transform mixed plastic waste, that cannot be mechanically recycled, into re-usable raw material.
• R&M’s adjusted operating profit of €81 million in the first quarter was a significant improvement over the year-ago quarter (up by €53 million, almost 200%) more than offsetting an ongoing contraction in consumer demand due to the COVID-19. The improved quarterly performance was driven by better plant operations, cost reductions, as well as growth in the bio business with the ramp-up of the Gela biorefinery and steady results reported at marketing activities.
• Chemicals’ adjusted operating loss of €65 million in the quarter was due to a weaker margin scenario and lower sales volumes in all the main end-markets impacted by the economic downturn.

Energy Solutions, decarbonization and circular economy

• Started up a photovoltaic plant at the Porto Torres hub with a capacity of 31 MW.
• Started up a wind farm in Kazakhstan with a capacity of 48 MW.
• Started up construction works at the Batchelor and Manton projects in Australia targeting an installed capacity of 25 MW.
• Closed the acquisition of a 49% stake in Falck Renewables that is operating five photovoltaic plants in the US (for a total installed capacity of 116 MW), including storage capacity, with the aim of developing joint projects in this market.
• Started a collaboration with ENEA, an Italian energy agency, to develop a project to establish in the next seven years a scientific and technological center for studying and developing the DTT (Divertor Tokamak Test) fusion, with the participation of the European Union and various lenders including the EIB.
• Eni signed a Memorandum of Understanding with ADNOC Refining, for the joint development of research initiatives on the capture and confinement of CO₂ emissions.
• Signed an agreement with Cassa Depositi e Prestiti, an Italian governmental agency affiliated with the Ministry of Finance, for developing industrial projects intended to produce biofuel and water out of solid urban waste based on Eni’s proprietary technologies, in line with the circular development model.

Group results

Quarterly results affected by the combined impact of an ongoing economic recession due to the COVID-19 and falling energy prices.

• Adjusted operating profit: €1.31 billion, down by €1 billion, or by 44%, compared to the first quarter of 2019. Net of scenario effects of €1.1 billion and the negative impacts associated with COVID-19 of €0.15 billion¹, the performance was a positive of €0.2 billion, up by 16%.
• Adjusted net profit at €59 million.
• Net result: net loss of €2.93 billion (net profit of €1.1 billion in the first quarter of 2019) mainly due to the alignment of the book value of inventories to market prices current at the end of the quarter. Special charges also included impairment losses from oil&gas assets and negative fair-valued derivatives, which couldn’t be accounted as hedges, due to the scenario effects.
• Net cash before changes in working capital at replacement cost: €1.95 billion, 43% lower than the same period of 2019 due to scenario effects of -€1.5 billion, including a non-cash change in fair-valued derivatives and the negative impacts associated with COVID-19 of €0.15 billion¹, partly offset by a positive performance of €0.2 billion.
• Net cash from operations: approximately €1 billion (down by 54%), including a cash draw at the working capital which normally features the first quarter due to seasonal factors in gas and other products consumption.
• Net investments: €1.9 billion, fully funded through cash flow provided by operating activities before working capital effects.
• Net borrowings: €18.7 billion (€12.9 billion when excluding lease liabilities) increasing by about €1.6 billion (up 9%) from December 31, 2019.
• Leverage: 0.28, before the effect of IFRS 16, higher than the ratio at December 31, 2019 (0.24). Including IFRS 16, leverage was 0.41, or 0.37 excluding the share of lease liabilities attributable to E&P joint operators.

Outlook 2020

Eni assumes a gradual recovery in global consumption of oil, natural gas and power in the second half of the year, particularly in Eni’s reference markets.

Based on this macroeconomic scenario, Eni reduced the Company’s outlook for Brent crude oil prices, down to 45 $/bbl and 55 $/bbl respectively in 2020 and 2021. Spot gas prices at the Italian hub have been reduced by 15% in 2020 and by 30% in 2021, while refining margin is expected to decline by 18% in 2020. Considering a highly volatile scenario and ongoing disruptions in the global economy, management is going to disclose a sensitivity analysis of Eni’s 2020 results to changes in the scenario (see below).

Eni has promptly defined its responses to the current crisis scenario by reviewing the industrial plan for the year 2020 and 2021 in order to preserve the robustness of its balance sheet. The review of the industrial plan foresees:

• Capex curtailments of approximately €2.3 billion for 2020, 30% lower than the initial capital budget, and anticipated further reductions of €2.5-3 billion in 2021, i.e. 30%-35% lower than original plans.
• Expected a production level of 1.75 – 1.80 mboe/d in 2020, which is lower than initial projections due to capex curtailments, COVID-19 effects, a lower global gas demand also impacted by the pandemic effects and finally extension of force majeure in Libya for the entire first half of the year. This production guidance does not take into account any possible impacts associated with the recently announced OPEC+ cuts that are to be implemented on a field-by-field basis.
• Capex revisions focused in the E&P segment, with the re-phasing of a number of projects, which are nonetheless expected to resume quickly once market fundamentals improve, thus recovering any lost production volumes.
• Implemented widespread initiatives to save approximately €600 million of expenses in 2020.
• At management’s assumption of an average Brent price of 45 $/bbl for FY 2020, expected adjusted cash flow before working capital changes of €7.3 billion. The sensitivity of this cash flow to movements in crude oil prices is estimated at €180-190 million for each one-dollar change in the Brent crude oil prices and commensurate changes in gas prices applicable to deviation in a range of 5-10 $/bbl from the base-case scenario, also assuming no further management’s initiatives and excluding effects on dividends from equity accounted entities.
• 2020 Ebit adjusted mid-downstream (G&P, R&M with pro-forma ADNOC and Versalis): €0.6 billion.
• Suspended the share repurchase plan for 2020. The plan will be reconsidered when the Brent price for the referenced year, which is the benchmark for decisions relating to the buy-back plan activation, is at least equal to 60 $/barrel.
• Eni is well equipped to withstand the downturn leveraging the resilience of its portfolio of conventional oil and gas properties with low break-even prices and a robust financial position: at March 31, 2020, the Company can count on a liquidity reserve of €16 billion, consisting of cash on hands of €3.6 billion, €6.6 billion of readily disposable securities, €1.1 billion of short-term financing receivables and €4.7 billion of undrawn committed borrowing facilities.

_{1 They comprise a reduction in global gas demand, lower offtakes at LNG supply contracts in Asia, lower consumption of fuels and chemical products, operational impacts on hydrocarbon production, higher allowances for doubtful accounts due to an expected deterioration in the counterparty risk.}

The full version of the Press Release is available in PDF format.