Eni S.p.A. (NYSE:E) Q3 2023 Earnings Call Transcript

Eni S.p.A. (NYSE:E) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Welcome to Eni's 2023 Third Quarter Results Conference Call hosted by Mr. Francesco Gattei, Chief Financial Officer. For the duration of the call, you will be in listen-only mode. [Operator Instructions] I am now handing you over to your hosts to begin today's conference. Thank you.

Francesco Gattei: Good afternoon and welcome to Eni third quarter and nine month 2023 results conference call. Energy markets remain volatile, but at Eni our focus is on delivering results in all scenarios, while at the same time advancing our longer-term strategy. Q3 has seen as successfully achieving both these things. Before digging deeper into the numbers, let me emphasize the key strategic accomplishment for the quarter. We are evolving and strengthening core business such as E&P and GGP for the challenge of transitioning energy markets and taking opportunity to build new relevant businesses such as Plenitude, Enilive, Biochemical and CCUS. In upstream, in August, we began production of Baleine offshore Ivory Coast less than two years after discovery, further evidence of the efficient integration of world-class exploration with a development strategy focusing on time to market and value maximization.

An oil rig in the middle of the ocean, its towering structure standing stout in the horizon.

Production from Baleine is a contributor to this quarter and year-on-year growth and its phases ramp-up is an important element in the 3%, 4% growth in our current four-year plan. This approach continues to deliver. We are therefore delighted to significantly exceed our full year target of 700 million BOE of discovered resources. The recently announced Geng North Discovery offshore Indonesia is assessed by third-party provider as the largest in the industry in 2023. Indeed, along with Nargis, announced earlier this year, Eni currently has two of the top five. I will revisit Geng in more detail later. Meanwhile, we are also upgrading our upstream portfolio. In September, we announced the sale of our Nigerian onshore production company, NAOC, following the divestment of mature Congo's assets earlier this year.

At the same time, we have been advancing our agreed purchase of Neptune, a portfolio that represents an exceptional feat for us. Closing of Neptune remains on track for Q1 2024. Geng and Neptune will be important contributor to the shifting balance of our upstream portfolio towards gas. Obtaining full value of our equity production is of course critical and so we were pleased in the past few days to announce new LNG supply agreement with Congo, Qatar and Indonesia. We have seen really positive progress as we work to establish a leading CCUS position. Our Bacton UE project was awarded a CO2 appraisal and storage license by the UK government, while we also agreed at the term with the UK for the world's first asset-based regulated CCS business model for our operated high net project.

In energy evolution, we are also very active. Our team met with many of you in September to update on our unique biorefining agree up strategy. We were also pleased to confirm an agreement to explore the development operation of a new biorefinery in South Korea, supporting the strong global growth target in that business. Moreover, this month we have closed the purchase of Novamont, advancing Versalis Progress in specializing its portfolio towards the growing market of biochemical and bioplastics. And now to group results. Strong segmental EBIT from each of our main businesses results in over 3 billion group EBIT for the quarter, driven by E&P and 11 billion over the nine months. Including associate, the pro forma EBIT of the company in the quarter was EUR4 billion and EUR14 billion over the nine months.

With a tax rate in the mid of 40% consistent with the oil price, business performance and associate contribution. Net income for the quarter was EUR1.8 billion, resulting in a nine-month net income of EUR6.6 billion. We continue to have an excellent cash conversion. Underline three quarters cash flow from operation of EUR3.4 billion and EUR12. 9 billion for the nine months stand out at the top of our historical performance, with an organic free cash flow date of around 6.2 billion, which more than covers our 2023 distribution. We accelerated share buyback this quarter, repurchasing EUR600 million, meaning we have repurchased over 2% of our share in the year-to-end September. And our buyback will continue at accelerated pace in the fourth quarter.

Sharing issues are down almost 6% year-on-year. September also saw the first payment of the EUR0.94 quarterly dividend. As anticipated, CapEx of 1. 9 billion this quarter reflects lower spend than the first half. We have also made the second payment in respect of the PBF joint venture in this quarter. And even as we invest organically and into portfolio and buy back shares, the balance sheet remains in exceptionally good shape, with leverage [indiscernible] change from the second quarter at 15% and only up modestly over the last year. Let's now take a look at the business segment performance quarter. Taking natural resource first. Upstream production averaged 1.635 million barrels per day, up 4% year on year, with the start-up of Baleine, as I noted, but also higher production in Algeria, ramp-ups in Mexico and Mozambique, recovery in Kazakhstan after last year, and planned outages.

Higher production and higher oil prices helped push EBIT to EUR2.6 billion euro, up 26% quarter-on=quarter, and with our upstream satellites where we generated EUR3.4 billion euro of adjusted EBIT. GGP had a softer quarter as we said it would. The second half of the year is benefiting from less available portfolio flexibility and could result fewer optimization opportunities as spreads narrowed. As promised, I want to focus further on our recently announced Geng North discovery in the Kutei Basin offshore Indonesia. It is worth refreshing on the main characteristic of our exploration strategy because Geng North is such a good example. We are focused on gas. We seek a larger equity share that allows us to have greater control of the project and the option of early valorization through our dual exploration strategy.

We explore close to existing infrastructure, which benefits time to market and reduce the development cost and enhancing value. Our distinctive power-in house development process helps us optimize time to market and as a result, not only Eni is consistently the leading global explorer in multiple basins among our peers, but also deliver the best full cycle returns. In terms of Geng specifically, it is a very significant discovery with 5 TCF of gas and 400 million barrels of condensate in place, equivalent to around a recoverable volume of 800 million barrels of oil equivalent. It is an industry-large discovery year to date. Well productivity, confirmed by the DST, is excellent. After completing the Neptune purchase, Eni will have an 88% participation.

Development of a field of this scale will require some new infrastructure, including a floating production unit, but this can now be optimized as a new app development and include reserves for an additional 5 TCF on our recently acquired IDD acreage. Furthermore, the proximity to infrastructure the existing Bontang LNG plant which has available capacity makes development highly efficient and provides higher value for the gas. Last but not least, it is also worth noting the discovery, the risk, further, multi-TCF exploration potential in the area. So, by virtue of scale, participation level, efficiency of development, access to market and cycle time, Geng is a very meaningful addition to Eni future upstream project pipeline. And now turning to energy evolution.

A stronger SERM refining margin and higher refining availability, as we anticipated on our second quarter call, have combined for a good quarter from traditional refining with EBIT of 328 million up versus a loss at Q2, down somewhat year-on-year on scenario effect not fully reflected in the SERM. Similarly, the strengthening scenario plus better utilization at Venice and Gela and the seasonally normal improvement in marketing have driven a solid 270 million EBIT results from any live. We were also pleased to have booked our first contribution of positive net income from our biorefinery joint venture with PBF at the Chalmette Refinery in Louisiana, well in advance of our original plan. And as a reminder, income from investment in the downstream is primarily our stake in the ADNOC Refinery.

Versalis continue to be impacted by weak demand, high energy cost and intense competition in the chemical sector. This emphasises the importance of the recently completed Novamont acquisition with our intention to shift towards specialised and sustainable chemistry activities. It is now important to say that Plenitude even as energy markets continue to be so challenging, is meeting or even exceeding all its operational and financial targets, confirming the strength of a unique and integrated business model. EBIT for Plenitude for the quarter was 180 million, equivalent to 280 million of EBITDA. Along with power, EBIT of 219 million was 23% up year-on-year, despite the significant results from open market power sales in 2022. With a strong contribution from retail and a significant increase in renewable power sold, we now expect Plenitude 2023 EBITDA to be 30% higher than the original guidance.

Start-up offshore wind generation at Dogger Bank and Photovoltaic in Kazakhstan emphasised the operational momentum while the deal agreed by GreenIT Plenitude joint venture with CDP to develop four new photovoltaic projects in Italy adds to medium-term progress also. This distinctive growth profile will continue to be a feature of Plenitude as we double 2023 EBITDA by 2026, reaching 7 GW of renewable capacity as well as increasing customers to over 11 million and charging points to over 30,000 by the same date. That leads me to update guidance for 2023. We have narrowed the full year guidance for oil and gas production to between 1.64 to 1.66 million barrels of oil equivalent, which at the midpoint implies 2.4% growth year-on-year and a four-quarter exit rate of close to 5% growth year-on-year.

We can confirm our GGP guidance in the range of EUR2.73 billion. We are raising pro forma adjusted downstream EBIT to 1 billion from 0.8 billion, reflecting the stronger third quarter and a better outlook for the last quarter in both traditional biorefining. This is part of set by continued challenging condition faced by Versalis. Within downstream Enilive pro forma EBITDA is raised to EUR1 billion from guidance of more than 0.9 previously. As we have highlighted, we are also raising our full year guidance for Plenitude EBITDA to around 0.9 billion. With this change, we now expect replacement cost CFFO to be around EUR16.5 billion up from EUR15.5, EUR16 previously and EBIT to be around EUR14 billion, 2 billion higher than our mid-year view.

We are on track to deliver all our original target despite weaker scenario, conditions and planned with business outperformance across Eni delivering around 2.6 billion of additional underlying EBIT. Our planned buyback remains at 2.2. And while we continue to spread to complete by April 2024, we are also accelerating its pace in the final month of 2023. With our dividend EUR0.94 per share for 2023, our distribution is equivalent to 33% of expected cash flow from operation. We expect CapEx about 9 billion over 5% lower than our initial plan with a price with a precise figure determined by timing around the project activity. This all means we continue to expect leverage in the 10%, 20% range. In conclusion, we continue to deliver excellent operating and financial results and strategic progress.

We can reinvest in the business for future value and maintain a resilient financial position in volatile times. Meanwhile, we are also transforming, building on our strengths and developing new line of business as opportunity presents themselves. This concludes my prepared remarks and together with Eni top management, I am ready to answer your questions.

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