Eni 1Q profit falls

Italy’s oil company Eni today reporter its 1Q 2014 net profit was €1.30 billion, down 15.6% from the first quarter 2013.

Adjusted operating profit
In the first quarter of 2014, adjusted operating profit was €3.49 billion, down 6.8% compared to the first quarter of 2013. This decline was driven by lower results achieved by the Exploration & Production Division (adjusted operating profit down by 13.7%), negatively influenced by a weak oil price environment (Brent benchmark down 3.9%) and the appreciation of the euro against the dollar (up 3.7%), and the Refining & Marketing Division, where operating losses were 66.4% more than in the previous-year quarter due to a continuing deterioration in the refining scenario and lower fuels demand. The Engineering & Construction segment reported a 37.3% reduction in operating profit due to the lower profitability of current contract works.

The Gas & Power Division reported a better operating performance (from a €211 million operating loss in the first quarter of 2013 to an operating profit of €241 million) against the backdrop of declining demand and ongoing competitive pressure. The division benefited in particular from the renegotiation of the Norwegian long-term gas supply contract with economic effects retroactive to the previous thermal year.

Adjusted net profit

Adjusted net profit of the first quarter of 2014 amounted to €1.19 billion, down by 14.3% from the first quarter of 2013. This was driven by a lower operating performance and an increased adjusted consolidated tax rate (up 3 percentage points) due mainly to the Exploration & Production Division as a growing share of taxable profit was earned by subsidiaries subject to a higher tax rate.

Capital expenditure

Capital expenditure for the first quarter of 2014 amounted to €2.54 billion, mainly related to the development of oil and gas reserves and exploration projects.

Balance sheet and cash flow

As of March 31, 2014, net borrowings amounted to €13.8 billion, down €1.16 billion from the close of the previous reporting period. This decline reflected net cash provided by operating activities (€2.15 billion), which nonetheless was impacted by lower trade receivables due beyond the end of the quarter transferred to factoring institutions as compared with the end of 2013 (down €750 million), and the proceeds from disposals mainly relating to the divestment of Eni’s interest in Artic Russia (€2.18 billion). These inflows were partially offset by cash outflows relating to capital expenditure of the period.

Outlook
The 2014 outlook is linked in part to a moderate strengthening of the global economic recovery. A number of uncertainties surrounding this outlook remain due to weak growth prospects in the Euro-zone and risks from the emerging economies, Eni said. Crude oil prices are forecast on a solid trend driven by geopolitical factors and the resulting technical issues in a number of important producing Countries against the backdrop of well supplied global markets. Management expects that the trading environment will remain challenging for the Company’s businesses.

“We expect continuing weak conditions in the European industries of gas distribution, refining and marketing of fuels and chemical products, where we do not anticipate any meaningful improvement in demand, while competition, excess supplies and overcapacity will continue to weigh on selling margins of energy commodities. In light of this, management reaffirms its commitment to restoring profitability and preserving cash generation at the Company’s mid and downstream businesses leveraging on cost cuts and continuing renegotiation of long-term gas supply contracts, capacity restructuring and reconversion and product and marketing innovation,” Eni said in its report.

Production of liquids and natural gas is expected to remain substantially in line to 2013, excluding the impact of the divestment of Eni’s interest in the Artic Russia gas assets;
Natural gas sales are expected to be slightly lower than 2013.

Management plans to strengthen marketing efforts and innovation to fend off competitive pressures both in the large customers segment and in the retail segment considering an ongoing demand downturn and oversupplies, particularly in Italy
As for the Engineering & Construction business, Eni says that 2014 will be a transitional year with profitability expected to recover, the extent of which will be determined by the effective execution of operational and commercial activities on low-margin contracts still present in the current portfolio and by how quickly bids currently under consideration are awarded.

In 2014, management expects a capital budget in line with 2013 (€12.80 billion in capital expenditure and €0.32 billion in financial investments in 2013). Assuming a Brent price of $106 a barrel and an euro/dollar exchange rate of 1.33 on average for the full year 2014, the ratio of net borrowings to total equity – leverage – is projected to be almost in line with the level achieved at the end of 2013, due to cash flows from operations and portfolio transactions.

Paolo Scaroni, Chief Executive Officer, commented: “Eni delivered solid results in the first quarter 2014, despite a difficult market environment, thanks to a good performance in E&P and progress in the mid and downstream businesses, in particular with the renegotiation of the Statoil gas supply contract.The outlook for 2014 is in line with our expectations, benefiting from the ramp-up of new projects and restructuring activitiesin G&P, R&M and Chemicals, in the context of continued volatility in Libya and weakness in European demand.”