Eni S.p.A. (NYSE:E) Q1 2024 Earnings Call Transcript

Eni S.p.A. (NYSE:E) Q1 2024 Earnings Call Transcript April 24, 2024

Eni S.p.A. misses on earnings expectations. Reported EPS is $1.04 EPS, expectations were $1.22. E isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to Eni’s 2024 First 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. However, at the end of the call, you’ll have the opportunity to ask questions. [Operator Instructions] I’m now handing over to your host to begin today’s conference. Thank you.

Francesco Gattei: Thank you. Good afternoon, and welcome to Eni quarter one 2024 results conference call. Our first quarter is an excellent result. We have reported pro forma EBIT of €4.1 billion and cash flow from operation of €3.9 billion. Production growth in our upstream of 5%, an excellent contribution from our transition business of Enilive and Plenitude meant that we substantially resisted the overall deterioration in this scenario. The continued excellent cash conversion and CapEx discipline also meant that balanced gearing remains comfortably within our range, despite completing on Neptune and the 2023 share buyback program in this quarter. I will analyze our results in more detail shortly, but the slides also emphasize how busy we continue to be in actions to invest to high grade and transform our company.

I wanted to highlight a few items in the year-to-date because they provide helpful context for our strategic progress. In January, we completed the purchase of Neptune. The transaction is highly synergistic, and it has already delivered a very material value to any with significant upside in Indonesia and optionality in UK, as we will see later. With the Neptune deal, following on from Chalmette and Novamont last year, we have concluded the phase of inorganic positioning a new platform for growth, and we enter into a different cycle characterized by the valorization of these new business lines and by the dilution of exploration discovery. As a first step in this new phase, in March, we completed a €600 million equity investment by Energy Infrastructure Partners into Plenitude.

This is an important proof point for our satellite strategy, introducing aligned capital from a variable partner, supporting the future growth of the business and confirming the value created. At the same time, we are organically expanding our growth opportunities. In March, we announced the Calao discovery offshore Ivory Coast. This is another major high equity discovery with a potential resources of between 1 billion to 1.5 billion of oil equivalent. It follows our discovery of Baleine in the count in 2022 and the discovery of over 16 billion barrels of oil equivalent over the past 15 years, translating to organic production growth plus over $10 billion of cash via the dual exploration actions over the past 10 years. We strongly believe in value created via the drill bit and we continue to reinforce our technical competencies paired with the most advanced technological solution.

In this regard, in January, we began the construction of HPC6 supercomputer, that we raised Eni backlog five computing system in the world, with a computing power of over 600 Petaflops, 9x bigger than our current one. Finally, we have just announced the agreement to combine our UK E&P activities with also of Ithaca Energy, creating a new satellite inside the Eni universe. We believe that the hydrocarbon potential of the UKCS remain relevant, and we have immediately leveraged on our enhanced UK portfolio after the acquisition of Neptune to further reinforce our long-term positioning in this country. It is a well-understood model based on complementary portfolio and technical capabilities, and one successfully followed at Var and Azule, where the right combination generates significant top line operating financial and fiscal synergies.

Just before going into the first quarter numbers in more detail, here is a recap of the key industrial message from our Capital Markets Update in March. We now have a complementary portfolio of high-quality businesses that align with the transition and the Trilemma. Whilst that integrate across the Company, that leverage any strength in technology focus and early mover status and which crucially together offer the prospect of sustainable growth. We see 13% CAGR in cash flow from operation per share in a flat scenario, among the highest in our peer group and a progressive diversification and improved quality in our sources of cash. Our strategy will make Eni a larger and more profitable company at the end of our current plan and beyond. Our distinctive industrial approach is supported by a robust financial framework that balances the use of cash flow for shareholder returns with the investment for growth and the balance sheet.

Our satellite model helps to appropriately capital allocation and provide investors with visibility on the performance and valuation of activity with very different financial profiles. Ultimately, transition will only be real if it creates material and sustainable returns and profitable business. Moving to the quarter. The next three slides provide analysis of today’s results. We recorded an excellent quarter for production with the impact of the Neptune acquisition, the ramp-up of Ivory Coast in Norway and good performance in Libya. This production performance helped to mitigate the weaker gas price. GGP results are down year-on-year versus an exceptional quarter for trading and optimization in the first quarter 2023, and also down versus the last quarter of 2023, which saw the benefit of the arbitration procedure.

However, the Q1 result is in line with our expectation given seasonal strength but low market volatility. You will have seen, we have re-segmented Enilive and Plenitude together to highlight their importance, together as material growth business for any in the changing energy market. An important theme of this quarter is growth. I mentioned hydrocarbon production up 5% year-on-year. But in this transition businesses, it is really significant bio throughputs have more than doubled, renewable energy generation is up 12%, and quarter-end capacity up 30% year-on-year, while charging points are up 33%. And we are also progressing the regulatory framework for our CCS program. Our more traditional downstream businesses are now grouped together with refining showing improved utilization and capturing the quarter-over-quarter improvement in the refining margins.

Versalis was again loss-making, albeit an improvement over the last quarter of the quarter four of last year. But recall, we set up — set out our plans at the Capital Markets Day in March to restructure and transform our chemical operation, and you should expect more of this as we go through the year. We have demonstrated good cash conversion once again, and this will drive a higher distribution, as we indicated, it would be in March. With a strong first quarter delivery and the prospect of improved macro conditions versus the plan, we are raising our guidance for cash flow from operations. We are now seeing cash flow from operation for the full year in excess of €14 billion. Incidentally, marking to market based on a snapshot of the market this week would generate even a higher figure.

As we set out in March, our distribution commitment is to share up to 60% of additional cash flow above plan with our investors via the buyback. Therefore, we are raising the 2024 buyback by 45% to €1.6 billion from €1.1 billion with a continuing commitment to revisit in each of the remaining quarters to update on a better financial performance and the associated distribution. Our aim is that at a minimum, we deliver the underlying business performance we target and ensure we capture the available upside from the scenario. Our shareholder meeting on 15th of May will consider the proposal to authorize our new buyback program up to a maximum of €3.5 billion. Our normal practice will be to begin repurchases shortly after this authorization.

If authorized, our 2024 dividend of €1 per share paid quarterly will start in September. Our CapEx in the first quarter of €2 billion was in line with a full year figure of around €9 billion. Take into account, this period is historically lighter on spending. Similarly, we confirm that our major strategic inorganic acquisitions have been completed, and we are making good progress in our target of a front-end loaded net €8 billion cash in over the four-year plan period, which will result in net CapEx of €7 billion to €8 billion in 2024. In the annex, you will see also the bridge to net debt with leverage at 23% at the end of March, which remains well within our guided range despite the portfolio cash out and the completion of the 2023 buyback.

Turning back to the proposed combination of our UK E&P operation with Ithaca, let’s take a more detailed view. You are familiar with our use of satellite structure at Var and Azule. In the upstream, we use the satellite structure to build scale, realize synergies, increasing near field exploration, development potential and matching complementary cash flow profile and efficiently access capital market. With Ithaca, we tick all of the boxes. With the addition of Neptune and now Ithaca, we are moving from a mature and quite marginal position in UK to a leading status in terms of production of over 100,000 barrel per day in resources. Quite clearly, the UK has its challenges, but we are confident we are now in a position to access considerable operating and cost synergy critical for business success in a mature basin, give ourselves significant optionality and helping to provide additional supply while addressing emissions.

Together with our existing activity in CCS, which were also boosted with the Neptune purchase and our participation in the giant Dogger Bank Wind Farm development, we are establishing ourselves as a significant participant in the UK energy industry as it grows and decarbonize. Reviewing our guidance versus March, we have increased the confidence in upstream production. Underlying profitability at GGP, Enilive and Plenitude are all confirmed. So, with a more positive scenario, we have raised 2024 guidance for both group pro forma EBIT and cash flow from operation in excess of €14 billion each. With that in mind, we can also confirm our gearing guidance and raise expected buyback for the year by 45% to €1.6 billion, evidencing our committed to share upside with our shareholders by means of a clear attractive distribution policy.

Finally, I can provide some guidance for Q2. We expect production to be lower sequentially, reflecting seasonal maintenance impact and any divestment will conclude. In line with typical seasonal pattern reflecting current trading environment, we expect the Q2 results from GGP to be lower than Q1. For Plenitude, we expect a solid Q2 performance in retail, albeit with lower seasonal volume as well as renewable contribution that continue to reflect the recent capacity growth. We anticipate utilization rate in our conventional refineries to be down sequentially because of planned maintenance. While biorefinery availability is expected to remain steady at around through 90%, with scope to capture higher seasonal demand in marketing. To conclude, we are very pleased with our progress at the outset of 2024, demonstrating evidence of delivering against all our key objectives.

And we can see continued positive momentum across the remainder of this year. We are also pleased to be able to materially raise the shareholder distribution for the year while continuing to grow a larger and more profitable Eni. This concludes my review of the quarter. Along with Eni top management, I’m ready to answer your questions.

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Q&A Session

Operator: [Operator Instructions] The first question is from Josh Stone with UBS. Please go ahead.

Josh Stone: Two questions, please. Firstly, your net debt was up sharply in the quarter, and you’ve given a helpful chart on that. Looking forward, clearly, it’ll come down. You’ve got some disposals to get away, probably working capital releases. But a question more about timing. When do you expect to see the benefits of these things to come down? Will it be this year, later this year? Will it start next year? Just help us understand the progressive net debt, that would be great. Secondly, on Ithaca. Congratulations on agreeing the merger. We got another satellite seem to go up into orbit. I guess the question is, at what point do we think you reach critical mass on the satellites? You acknowledge and we’ve still got Plenitude, Enilive, many other potentially to come. Will you continue to be active in this strategy elsewhere in the portfolio? Are there other things you’re looking at, potential satellites?

Francesco Gattei: Okay. On the timing of the net debt reduction, clearly, this quarter is the year — is the quarter where we are summing up the two major elements of raising the net debt for the year. These two major elements clearly are related to the acquisition of Neptune that is between the amount we cashed out and the debt acquired is around €2.5 billion. On the other side, this quarter, as you have seen, is also seasonally and traditionally impacted by working capital effect. So, these two elements together are in excess of 5 percentage point of impact. And clearly, by having disposal, having a progression in the timing of cash in, we will be able to return to the range that we would like to be after a phase of, let’s say, a number of acquisitions, just to give you a flavor in the last 15 months with the acquisition, as mentioned, of Neptune, the one-off Chalmette, Novamont and also some renewables, the overall amount that we have, let’s say, expanded that was in excess of €5 billion.

So that is around the 10% point of leverage. Now we are entering the following phase, the following phase of valorization, it is a phase of dual exploration model application and therefore, let’s say, benefiting and it’s clearly also will collect additional sources from the tail assets that we are going to sell. So, this is, I would say, is a progress that you will see during the coming quarters already starting from the second quarter and clearly speeding up during the rest of the year. But this is something that is completely in line and also, we have good evidence of the start of the — even at the start of this year of the quality of this portfolio that we are putting for valorization in the market. About the Ithaca and the satellites, clearly, satellites, has already proved — has already proved to be material.

If you look — what was our position in Var before, in Norway, sorry, before the start of Var, and the — even the situation or the position that we have both in Plenitude and Enilive and in Angola, you see that is a materiality. There is a strong growth. So, the satellites help you to focus to cash in, to fuel your growth and that you have — you collect more tools to use as we did, for example, with Var to use this currency, if you’re speaking about listed entities, eventually also for doing M&A opportunity or capturing M&A opportunity. So, the materiality of the satellite is evident, will continue to grow in all these four. Clearly, Ithaca is adding to this list. We are thinking to a few other, but clearly, still early stage to speak around — us to speak about.

But clearly, this is a model that will have still some additional bullet to be shoot.

Operator: The next question is from Giacomo Romeo with Jefferies. Please go ahead.

Giacomo Romeo: Yes. The first question is on GGP. What you reported, based about 40% of the target you have for the year. It’s — at the time of the CMD, you clearly said that the guidance was based on market conditions that you were seeing back then. Just wondering, it seems that these conditions have somewhat improved, not just the flat price, but also in general volatility around spreads. Can you confirm that you’re actually seeing these improvements? And do you expect PSV to be a healthy premium during the summer on the back of the trend of Italian gas storage? Second question is still relatively close to GGP. And just thinking about what the — what we have from the Egyptian government about the outlook of importing LNG this summer, 8 to 10 cargoes. Just wondering what this means in your mind for the overall outlook for LNG exports out of Egypt for the year?

Francesco Gattei: I will leave the answers to Cristian Signoretto, Head of GGP.

Cristian Signoretto: Yes. So, thanks for the question. So, when it comes to the target, so yes, in the first quarter, we have realized 40% of the base case target that we have set during the Capital Market Update. I think this is a bit usual in the sense that usually, for a seasonal reason, I mean, the Q1 is always the strongest quarter of GGP also in the past. So, I’d say in terms of volatility, well, the first quarter actually was pretty much in line with what we expected during the Capital Market Update. So that means that we are still looking forward for the next nine months to see more volatility and more opportunities to be spread and capture in the market. And also, the guidance, the upper part of the guidance is also linked to some renegotiations that we have ongoing.

And so, in the next nine months, we will be trying to close them down and get the upside that we were looking for. When it comes to Egypt, yes, clearly, the first quarter of this year, we have seen a steep reduction of export capacity from Egypt due to the supply and demand imbalance and the Middle East situation. December, the country expects to bring LNG from outside. We think that the next winter season could be another window of opportunity for export some LNG cargoes, clearly, not many, vis-a-vis the past, but given the strong seasonal demand and supply balance of Egypt, we still think that there is a window of opportunity for the next winter to be exporting some cargoes.

Operator: The next question is from Matt Smith with Bank of America. Please go ahead.

Matt Smith: A couple from me. I think the first one, going back to sort of net debt and also timing, I guess there’s — thank you for the gross CapEx guidance for the year. And I suppose, like you’ve alluded to, there’s a bit of a gap that still remains between the net CapEx guidance and the gross CapEx guidance for 2024. So, I suppose my question is, how confident are you on delivering these disposal proceeds in the year? And I suppose, the question is really how important is that completing that timing to you in terms of hitting the net CapEx guidance in 2024 versus this wider four-year plan and against a backdrop of, I’m sure, looking to maximize value. So, a question on confidence over timing on the disposals. And then the second question, back to GGP, but less on volatility, more so your opinions on the fundamentals of the European gas market.