Today, Eni's Board of Directors approved the consolidated results for the third quarter and the nine months of 2020 (not subject to audit). Having examined the results, Eni CEO Claudio Descalzi said:
“In a market environment that remains challenging, we are continuing to successfully mitigate the negative impact of this crisis and making progress with our decarbonization strategy. We achieved excellent results during the quarter, clearly exceeding market expectations in the face of a 30% decline in oil and gas prices, and a 90% decline in refining margins. In E&P, even with Brent at 43 $/barrel, we achieved production levels in line with our expectations, and an EBIT of €0.52 billion, double consensus estimates. In a quarter that is traditionally weaker seasonally, the Global Gas & LNG Portfolio has achieved significant results. R&M has shown its resilience in a particularly unfavourable scenario for traditional refining, driven by strong marketing performance, particularly in biofuels, as our two biorefineries allowed us to capture advantageous market opportunities. The growth of gas retail, driven by customer loyalty, and the stable results of the power and oil products marketing, helped to offset the impact of an extremely negative scenario in traditional refining and chemicals. Over the last nine months, thanks to the reduction in capex and costs efficiencies implemented earlier this year, we generated an operating cash flow of over €5 billion, compared to a level of capex equal to €3.8 billion. These results showcase our robust capital structure that has been further strengthened by the two hybrid bond issues of €3 billion made in October, which have allowed us to keep leverage below 30%. Faced with a crisis of unprecedented proportions, Eni has demonstrated great resilience and flexibility. In light of these results, we look forward to a recovery in demand, whilst continuing to pursue our energy transition program.”
Eni’s new organizational structure and segment reporting¹
On June 4, 2020, Eni’s Board of Directors established a new organizational structure with two business groups to align with an ongoing strategic shift. The “Natural Resources” business group is responsible for enhancing the upstream oil & gas portfolio in a sustainable manner, focusing also on energy efficiency activities, projects for forests conservation (REDD+) and carbon capture and storage projects. In addition to E&P, this business group comprises the results of the wholesale gas and LNG businesses as well as the activity of environmental clean-up and remediation managed by our subsidiary Eni Rewind. The other business group “Energy Evolution” is responsible for progressing the generation, transformation and retail and marketing businesses from fossil to bio, blue and green products. This business group comprises the results of the Refining & Marketing business, the chemical business managed by Versalis SpA and its subsidiaries, the retail gas and power business managed by Eni gas e luce and the business of producing and selling power from thermoelectric plants and renewable sources.
The new organizational structure is a fundamental step towards the implementation of Eni’s 2050 strategy aimed at leading the market for the supply of de-carbonized products, combining value creation, businesses sustainability and economic and financial robustness.
In re-designing the Group’s segmental information for financial reporting purposes, the management evaluated that the components of the Company whose operating results are regularly reviewed by the CEO (Chief Operating Decision Maker as defined by IFRS 8) to make decisions about the allocation of resources and to assess performances would continue being the single business units which are comprised in the two newly-established business groups, rather than the two groups themselves. Therefore, in order to comply with the provisions of the international reporting standard that regulates the segment reporting (IFRS 8), the new reportable segments of Eni, substantially confirming the pre-existing setup, are identified as follows:
- Exploration & Production, which also comprises the economics of the forestry projects (REDD+) and projects for CO2 capture and storage;
- Global Gas & LNG Portfolio (GGP): engages in the wholesale activity of supplying and selling natural gas via pipeline and LNG, and the international transport activity. It also comprises gas trading activities targeting to both hedge and stabilize the Group commercial margins and optimize the gas asset portfolio;
- Refining & Marketing and Chemicals: engages in the manufacturing, supply and distribution and marketing activities of oil products and chemical products and also in trading. Oil and products trading activities are designed to perform supply balancing transactions on the market and to stabilize or hedge commercial margins;
- Eni gas e luce, Power, Renewables: engages in the activities of retail marketing of gas, power and related services, as well as in the production and wholesale marketing of power produced by both thermoelectric plants and from renewable sources. It also comprises trading activities of CO2 emission allowances and of forward sales of power to help stabilize/hedge the clean crack spreads of power;
- Corporate and Other activities: include the costs of the main business support functions, as well as the results of the Group environmental clean-up and remediation activities performed by the subsidiary Eni Rewind.
Highlights for the third quarter and nine months
Exploration & Production
- Hydrocarbon production: 1.7 million boe/d in the third quarter 2020, down by 10% compared to the third quarter 2019 (1.74 million boe/d in the nine months, down by 6%).Net of price effects, the decline was due to COVID-19 impacts and related OPEC+ production cuts as well as lower gas demand, mainly in Egypt. Production start-ups/ramp-ups in Algeria and Mexico, a better performance in Nigeria, as well as portfolio contributions in Norway, were partly offset by lower volumes in Libya driven by an expected contractual trigger, lower entitlements/spending and losses due to force majeure, as well as mature field declines. In the nine months start-ups and ramp-ups added 104 kboe/d mainly in Mexico (ramp-up of Area 1), Algeria (Berkine gas field start-up), Congo (Nenè phase 2B start-up) and Angola (Agogo oilfield start-up).
New exploration acreage in the nine months: awarded the operatorship of Block 28 (Eni w.i. 60%) in the Namibe and Benguela basins offshore Angola; awarded to the JV Var Energi 17 new exploration licenses (7 of which operated) in the three main basins of the Norwegian continental shelf; awarded in Indonesia the West Ganal block (Eni operator, w.i. 40%).
Exploration: additions of more than 300 million boe of new resources expected for the full year at approximately 2 $/boe thanks to the successes achieved in the year:increased to 1 billion barrels the oil in place at the Agogo discovery in Block 15/06 (Eni operator, w.i. 36.8%), offshore Angola, following a successful appraisal well; made an oil discovery in the Saasken exploration prospect in Block 10 (Eni operator, w.i. 65%), offshore Mexico. Estimated 200-300 million barrels of oil in place; made a gas and condensate discovery in the exploration prospect Mahani-1 (Eni w.i. 50%), onshore the Sharjah Emirate (UAE), in the Concession B area, just one year after signing the concession agreement; made a gas discovery in the Bashrush prospect (Eni operator, w.i. 37.5%) in the Nile Delta, close to the Nooros and Baltim South West fields. The well was successfully tested delivered a production up to 32 million standard cubic feet per day of gas; made an oil discovery in the South West Meleiha concession (Eni operator, w.i. 100%), in the Western Desert of Egypt, which supported the production ramp-up at the concession up to 12 kboe/d, just one year after the start-up in July 2019; increased reserves estimates to 200-250 billion cubic meters of gas in place and 400-500 million of barrels of condensate in place at the Ken Bau discovery in Block 114 (Eni operator, w.i. 50%), offshore Vietnam; made a gas discovery in the Abu Madi West (Eni operator, w.i. 75%) concession in the Great Nooros Area in the Nile Delta.
Path to decarbonization: awarded by the UK Oil and Gas Authority a license for building a carbon storage project in depleted offshore fields located in the Liverpool Bay and the Irish Sea.
E&P’s adjusted operating profit of €0.52 billion for the third quarter 2020 increased strongly from the second quarter 2020 loss of €0.81 billion. It was still remarkably down compared to the third quarter of last year (-76%), driven by materially lower hydrocarbon prices and production losses due to the effects of the COVID-19 pandemic on the economy and the energy demand (adjusted operating profit of €0.75 billion in the nine months, down by 89% y-o-y).
Global Gas & LNG Portfolio
GGP’s adjusted operating result: €64 million in the third quarter, down by 7% compared to the same period of 2019 due to an unfavourable trading environment. In the nine months, adjusted operating profit was €0.43 billion, up by 79% compared to the same period of 2019 driven by the optimization of the gas and the LNG assets portfolio, leveraging elevated price volatility.
Refining & Marketing and Chemicals
Achieved stable run rates at the Gela bio-refinery with throughputs 60% higher than budgeted.
Restarted and upgraded the Crescentino plant for the production of a bioethanol disinfectant from corn glucose syrup, based on the formulation provided by the WHO for a medical application; restarted the biomass power plant for renewable electricity generation.
In July 2020, Versalis finalized the acquisition of a 40% interest in Finproject, a company engaged in the production of high-performance polymers, increasing exposure to products more resilient to the volatility of the chemicals scenario.
Versalis signed an agreement with COREPLA (National Consortium for the Collection, Recycling and Recovery of Plastic Packaging) to develop effective solutions to reutilize plastics applying Eni’s expertise in the fields of gasification and chemical recycling by means of pyrolysis.
Versalis signed an agreement with Forever S.p.A., a leading Italian company in the recovery and recycling of post-consumer plastic to develop and market a new range of solid polystyrene products made from recycled packaging.
R&M’s adjusted operating profit of €74 million in the third quarter, down by 66% y-o-y, was affected by a significantly depressed scenario affected by the crisis of fuels demand due to the COVID-19 pandemic, resulting in products crack spreads at multi-year lows, reduced refinery runs and lower sales volumes, in an overcapacity context and high inventory levels. Instead, bio-refineries performed strongly due to the ramp-up of the Gela plant with increasing volumes to satisfy growing demand needs. In the nine months 2020, adjusted operating profit of €294 million was down by 10% from the same period of the previous year.
Chemicals’ adjusted operating result: the third quarter result improved y-o-y (up by 24%) thanks to a moderate recovery in demand and better plant performance. In the nine months, the result (down by 28% y-o-y) was negatively affected by a significant drop in commodity demand due to the global downturn.
Eni gas e luce, Power, Renewables
- Acquired a 20% interest in Tate s.r.l., a start-up operating in the activation and management of electricity and gas contracts through digital solutions.
- Launched a strategic partnership with OVO targeting the residential market in France to raise customer awareness for a responsible use of energy and access to zero-emission technologies leveraging digitalization.
- Increased the customer base in the gas & power retail market by adding 120,000 delivery points from the end of 2019 (up by 1.3%) due to growth in Italy and in other markets in Europe, notwithstanding the pandemic impact.
- Expansion of the generation capacity in renewable energies: as of September 30, 2020, reached an installed capacity of 276 MW (up by 102 MW compared to December 31, 2019).
- Closed in the U.S.A. the acquisition from Falck Renewables of a 49% stake in five operating photovoltaic plants (for a total installed capacity of 56.6 MW net to Eni), including storage capacity.
- Within the partnership with Falck Renewables to develop joint activities in the USA, Eni signed, through its subsidiary Novis Renewables Holdings (Eni’s interest 49%), an agreement with Building Energy SpA to acquire Building Energy Holdings US (BEHUS) managing 62 MW of wind and solar capacity fully in operation in the U.S.A. and a pipeline of wind projects of up to 160 MW. Production from already in operation BEHUS assets is expected to avoid over 93 ktons of CO2/y.
- Acquired from Asja Ambiente three wind projects for a total capacity of 35.2 MW expected to produce approximately 81 GWh/y, avoiding around 33 ktons of CO2/y.
- Started in July a photovoltaic plant at Volpiano (total capacity of 18 MW), with an expected production of 27 GWh/y, avoiding 370 ktons of CO2 emissions over the service life of the plant.
EGL, Power, Renewables’ adjusted operating result: €57 million in the third quarter of 2020, an almost fourfold increase compared to the same period of 2019 (€333 million in the nine months of 2020, up by 56% from the same period of 2019). The positive performance leveraged on solid and growing results reported by the retail business, despite lower seasonal sales and the COVID-19 impact on demand and counterparty risk.
Positive assessment of our ESG (Environmental, Social and Governance) performance made by institutions including MSCI, CDP, Sustainalytics, Vigeo, Bloomberg ES and from the Transition Pathways Initiative, confirming the company's leading focus on sustainability.
Confirmed in the FTSE4Good Developed markets and this year in the ESG iTraxx index.
Results were significantly impacted by the combined effects of the economic downturn due to COVID-19 that suppressed energy demand and caused oversupplied markets. The third quarter performance showed a noticeable improvement over the previous quarter due to a better balance in oil market fundamentals, against the backdrop of a slow economic recovery and uncertainties about the containment of the pandemic with repercussions on travel.
Adjusted operating profit of €0.54 billion in the third quarter 2020 increased significantly from the second quarter 2020 loss (up by €1 billion). Compared to the year-ago quarter, the quarterly performance (down by 75%) was materially hit by the downturn in energy demand driven by the COVID-19 pandemic. In the nine months of 2020, adjusted operating profit was €1.41 billion (down by 79% compared to same period of 2019).
Net of scenario effects of -€1.6 billion in the quarter (-€5.1 billion in the nine months) and the operational effects of COVID-19 for -€0.3 billion (-€0.8 billion in the nine months)2, the underlying performance was a positive €0.3 billion in the quarter (+€0.5 billion in the nine months).
Adjusted net result: adjusted net loss at €0.15 billion in the third quarter and €0.81 billion in the nine months.
Net result: the Group reported a net loss of €0.5 billion in the third quarter of 2020, negatively impacted by lack of recognition of deferred tax assets for losses of the period. In the nine months, the net loss was €7.84 billion due to the recognition of pre-tax impairment losses at non-current assets for €2.75 billion mainly relating to oil and gas assets and refinery plants, due to a revised outlook for oil and natural gas prices and product margins, an inventory loss of €1.4 billion due to the alignment of the book value to current market prices, as well as by the write-off of deferred tax assets (€0.8 billion).
Adjusted net cash before changes in working capital at replacement cost: €5.14 billion in the nine months of 2020, down by 44% versus the nine months of 2019 (€1.77 billion in the third quarter 2020, down by 31%) driven by negative scenario effects for approximately -€4.8 billion, including the impact of dividends from equity accounted entities, operational impacts associated with the COVID-19 for -€0.9 billion, while the underlying performance was a positive €1.7 billion.
Net cash from operations: €3.83 billion in the nine months, down by 56% from the nine months 2019.
Net investments: €3.76 billion, down by 33% due to the curtailment of the capex plan adopted since March 2020, fully funded by the adjusted cash flow.
Net borrowings: €19.85 billion (€14.53 billion when excluding lease liabilities), up by €2.7 billion from December 31, 2019.
Leverage: 0.40, before the effect of IFRS 16, higher than the ratio at December 31, 2019 (0.24) and at June 30, 2020 (0.37). Including IFRS 16, leverage was 0.54.
On October 6, 2020 two hybrid bonds were successfully issued, rising an overall financing of €3 billion. The proforma leverage as of September 30, 2020 including this issuance as equity instruments would be 0.29.
Management expects the fourth quarter to be in line with the business trends recorded in the just-ended quarter, which featured high volatility in energy commodity prices due to an uncertain and uneven economic recovery. Possible downside risks. The fundamentals of the oil market are anticipated to remain weak due to continuing oversupply, high global inventory levels and a sluggish pace in demand growth due to a complex pandemic situation which is weighing on economic activity, trade and travel. The same trends are expected in the other business segments. The Brent price is estimated at approximately 40 $/barrel for the year; PSV gas price at 3 $/mmBTU; SERM margin at 2.4 $/barrel. In 2021, expected a rebound in energy demand.
During the year 2020, in response to an unprecedented crisis for the oil industry due to the fall in energy demand caused by the COVID-19 pandemic and continued pressure on product prices, Eni’s management has repeatedly reviewed business plans and operating schedules to adapt the business to the current challenges, defining a set of actions and initiatives designed to strengthen liquidity and the robustness of the balance sheet, to preserve profitable operations and increase the portfolio resilience to the scenario, without impairing the Company's ability to grow as soon as macro-economic conditions improve, while accelerating the low-carbon evolution of the business.
The initiatives already announced and implemented comprise:
- Assumed a more conservative oil scenario with a LT Brent at 60 $/barrel in real terms 2023 (compared to the previous projection of 70 $/barrel) to reflect the possible structural effects of the pandemic on oil demand and the strong "green" footprint of the economic measures for the recovery launched by various countries and the EU, which could possibly accelerate the pace of the transition to a low-carbon economy. Recognized €2.75 billion of plants impairment losses due to the changed price assumptions;
- Launched a new Company structure to align the shape of the business with the transformation being implemented by Eni aimed at leading the market for the supply of decarbonized products and at achieving a more balanced portfolio, featuring less exposure to the volatility of hydrocarbon prices;
- Defined a new shareholder remuneration policy aligned to the current market conditions, characterized by high volatility and depressed oil and gas prices, which provides an annual dividend consisting of a floor amount currently set at €0.36 per share, when the annual Brent is at least 45 $/barrel, and a growing variable component which will increase when the Brent price grows up to 60 $/barrel, beyond which the buy-back plan will be reactivated. The floor amount will increase depending on the results of the Company’s growth strategy and will be reviewed every year. The floor dividend will be paid in 2020 notwithstanding today’s forecast of an annual average Brent price of 40 $/barrel: one third of that amount has been paid in September as interim dividend.
Management is currently executing on several initiatives which comprise:
- In 2020, investment optimizations of €2.6 billion (for a total reduction of 35% compared to the original plans); cost optimizations of €1.4 billion. Expected annual capex level at €5.2 billion (on a constant exchange rate);
- In 2021 planned cost reductions of €1.4 billion and lower investments of €2.4 billion;
- 2020-2021 capex optimizations almost fully focused in the E&P segment. Higher investments expected for 2022-2023 for an overall amount of €800 million targeting growth at the green businesses (bio-refineries, renewables and retail customers expansion);
- Confirmed 2020 production target within the range of 1.72-1.74 mboe/d including OPEC+ cuts, in line with what previously announced, based on capex curtailments in response to the COVID-19 crisis, the reduction of worldwide gas demand (also partly related to the pandemic) and the extension of force majeure in Libya until the end of September 2020. Reviewed the target production profile of 2023 to approximately 2 million boe/d;
- Advanced agreements this year on gross disposals of around €1 billion;
- At management’s assumption of an average Brent price of 40 $/bbl for the FY 2020, expected adjusted cash flow before working capital changes of €6.5 billion, which will enable the Company to fund the expected capex for 2020. Compared to the initial guidance of €11.5 billion at a Brent price of 60 $/barrel, the shortfall is attributable to lower hydrocarbon prices (for a total effect of approximately €4.5 billion) and COVID-19 impact (approximately -€1.7 billion), offset by opex savings and a better performance for €1.2 billion;
- Sensitivity of the cash flow to movements in crude oil prices: estimated approximately €170 million of cash flow variation 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 initiatives and excluding effects on dividends from equity accounted entities;
- Revision of the 2020 guidance for adjusted EBIT of the mid-downstream: GGP is expected at €0.2 billion, while R&M (including the pro-forma Eni’s share of ADNOC refining and trading results), Versalis, the gas and power retail business and the power production business are expected to earn more than €0.3 billion, down from the previous overall guidance €0.8 billion mainly due to a deteriorated refining scenario, assuming SERM refining margin of 2.7 $/bbl on average in the fourth quarter;
- Liquidity: Eni is well equipped to withstand the downturn leveraging on the resilience of its portfolio of conventional oil and gas properties with low break-even prices and a robust financial framework. At September 30, 2020, the Company can count on a liquidity reserve of approximately €17.4 billion, consisting of €6.88 billion of cash and cash equivalents, €5.61 billion of readily disposable securities, €0.35 billion of short-term financing receivable and €4.56 billion of committed undrawn credit facilities.