Business Context and Reporting Period
Company: Eni S.p.A.
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter and Nine Months ended September 30, 2012.
Key Event: On October 15, 2012, Eni completed the sale of a 30% minus one share stake in its regulated gas transmission subsidiary, Snam S.p.A., to Cassa Depositi e Prestiti (CDP) for approximately €3.517 billion. Consequently, Snam results are reported as discontinued operations.
Key Financial Metrics
| Metric (€ Million) | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net Sales (Continuing Ops) | 31,494 | 25,516 | 94,697 | 78,042 |
| Adjusted Operating Profit (Continuing Ops) | 4,361 | 4,267 | 14,796 | 12,994 |
| Adjusted Net Profit (Continuing Ops) | 1,777 | 1,723 | 5,610 | 5,363 |
| Net Profit (Continuing Ops) | 2,462 | 1,775 | 6,162 | 5,586 |
| Net Profit (Total) | 2,483 | 1,770 | 6,327 | 5,571 |
| Operating Cash Flow (Continuing Ops) | 1,909 | 2,562 | 10,249 | 10,952 |
| Capital Expenditure (Continuing Ops) | 3,224 | 2,568 | 8,871 | 8,526 |
| Net Borrowings | 19,617 | 28,032 (Dec 2011) | 19,617 | 28,032 (Dec 2011) |
| Leverage Ratio (Net Debt/Equity) | 0.31 | 0.46 (Dec 2011) | 0.31 | 0.46 (Dec 2011) |
Material Changes vs. Prior Period
- Profitability: Adjusted operating profit from continuing operations increased 2.2% in Q3 and 13.9% in the nine months compared to the prior year. Reported net profit for continuing operations surged 38.7% in Q3 and 10.3% in the nine months, driven largely by extraordinary gains on the divestment of a 5% stake in Galp Energia (€1.15 billion gain in Q3).
- Production: Oil and natural gas production reached 1.718 million boe/d in Q3, a 16% increase on a comparable basis (excluding gas conversion rate updates), primarily due to the recovery of Libyan output and new field ramp-ups in Australia and Russia.
- Balance Sheet: Net borrowings decreased by €8.4 billion to €19.6 billion, and leverage improved to 0.31. This improvement is attributed to the Snam divestment proceeds and the reclassification of Snam's third-party debt as discontinued operations.
- Segment Performance:
- Exploration & Production: Adjusted operating profit up 10.8% (Q3) and 15.1% (9M) due to volume growth and favorable currency effects.
- Gas & Power: Adjusted operating loss widened in Q3 due to price revisions on long-term gas contracts and arbitration settlements, though 9M results improved due to retroactive contract renegotiations.
- Refining & Marketing: Adjusted operating results improved in Q3 due to record refining margins in the Mediterranean, offset by weak fuel demand.
Guidance, Outlook, and Risks
- Outlook: Management expects global economic slowdown and volatile energy markets. Full-year oil price assumption is $112/bbl (Brent). Gas demand is projected to fall sharply in Europe due to recession.
- Volume Targets:
- Production: Expected to grow compared to 2011, driven by Libyan recovery.
- Gas Sales: Expected to be roughly in line with 2011 levels.
- Refining Throughputs: Expected to decrease in response to falling demand.
- Retail Sales: Expected to decline in Italy and Rest of Europe due to consumption contraction.
- Capital Expenditure: Full-year 2012 capital budget for continuing operations is expected to be broadly in line with 2011 (€11.91 billion).
- Risks: Key risks include geopolitical instability (Libya, Nigeria), price volatility, regulatory changes, and the economic downturn in the Euro-zone impacting gas and refining demand.
Investor Verification Checklist
- Snam Divestment Impact: Verify the treatment of Snam as discontinued operations and the specific impact of the €3.517 billion consideration on net debt and equity.
- Galp Gains: Confirm the €1.15 billion extraordinary gain recognized in Q3 from the divestment of the 5% Galp stake and the revaluation of the residual interest.
- Gas Contract Revisions: Review the €909 million (Q3) and €986 million (9M) charges related to price revisions on long-term gas contracts and arbitration settlements (e.g., GasTerra).
- Production Metrics: Note the update to the natural gas conversion rate (1 boe = 5,492 cubic feet) effective July 1, 2012, which impacts year-over-year production comparisons.
- Libyan Operations: Assess the sustainability of the production recovery in Libya, which is a primary driver of the E&P segment's performance.