Eni S.p.A. (E) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to Eni's first half 2021 Results Conference Call, hosted by Mr. Claudio Descalzi, Chief Executive Officer. . I am now handing you over to your host to begin today's conference.
Claudio Descalzi: The energy market Rebound in global GDP, the growth in oil consumption and OPEC past agreements translated into a steady increase in crude prices. The gas market is similarly recovering with summer prices at decade is, while a highly volatile environment persists, oil and gas fundamentals remain positive. Today, we'll focus on 3 elements, which define our investment case. First, the 2021 shareholder distribution with the dividend raised to pre-covid level, confirming our commitment to share part of our excess cash generation with shareholders. Second, the progress achieved on our retail and renewable businesses had a market transaction in 2022. During the quarter, we completed the merger between the 2 entities, and we have been able to accelerate our renewable targets. Finally, our first half results, which are among the strongest in the recent years, with a solid performance and strong cash flow generation. Let's start with the 2021 shareholders' remuneration for which we set a Brent price of $65 per barrel. In order to define our price deck, we took into account the actual price to date, the expected trend, market fundamentals and potential risks such as the mergers or new variants of call it that could impact the market recovery. We will distribute a dividend of €0.86 per share more than doubling the size of our 2020 dividend. In line with our policy, half of the dividend will be paid in September and the remaining in May 2022.
Operator: . The first question is from .
Unidentified Analyst: Congratulations for these very strong results. I will ask two questions, please. First one, on your at tax rate, which came at a relatively low level, even if I compare with the previous year. So has it been temporarily impacted by some one-offs, which led to a particularly low tax rate this quarter or should we consider that with the development of some projects that you started recently and in a $70 Brent environment, new upstream tax rate, sorry, in the future should stay below 50%, let's say, between 40% and 50%?
Claudio Descalzi: Okay. Thank you. So now Francesco, our CFO, will answer the first 2 questions and will answer the tail one about refining margin, but is combined with the E&P and other margins. So I think it's Francesco and Pine together with answer.
Francesco Gattei: Yes. About the tax rate, clearly, what we have seen this year is a more normalized tax rate. Actually, once you compare with previous year, you were comparing a mix contribution of our portfolio that were, let's say - relatively, let's say, not reasonable in terms of performance. What we are today seeing that all the component of our portfolio upstream and downstream are more balanced. And in the upstream the country that have a lower tax rate, for example, certain CV countries, U.K., U.S., Italy could benefit of certain results that will reduce the average tax rate. So the answer is substantially that we are expecting that in a $65 world, will be in the range of this 55%. That is actually what we have so far achieved and is in line with the 50% guidance that we gave at the beginning of the year in a $60 world. Once the price of oil is growing up, there is, let's say, this rebalance between the various components. In terms of additional information, you can see that the upstream tax rate is in the range due to the depreciation that I gave, so the different contribution of country. In terms of gas, it is important that what you mentioned, it is true that there are part of our volumes that are related to oil linked. Generally, our long-form live delay or an average related to 9 months, so three quarters of results. And therefore, the gas price will follow the trend with a certain, let's say, delay. The spot clearly is weighting 20%, and the oil link the stat is weighting 25%. The remaining 55% are volumes sold to fixed price or contract or price that are less relevant.
Unidentified Company Representative: Thank you, Francesco. About the refining margin We are seeing in July a little improvement in the margin, but they still remain in a very, very weak. What we expect is a further improvement in the second half. But depending to the evolution also of the covid because the different increase in the COVID measures and so could affect the increase of the market. What we could see is that our sensitivity that we have done in case of margin that continues to be negative in the second half in the overall energy evolution, we are able to maintain the rest of the budget.
Operator: The next question is from Arena Simona .
Unidentified Analyst: My first question concerns the €934 million special item in the second quarter. It appears to be Refining & Chemicals. I wonder if you can say what it relates to? And then secondly, Claudia, as you mentioned you're expanding the renewables portfolio and upgrading the target, you recently added capacity in Spain and France. Can you give us some indication, please, either of the multiples you paid to enter those projects or indeed some sense of the economics you would anticipate such as equity IRR, for example?
Claudio Descalzi: Francesco will answer the first question and then I talk about the second one.
Francesco Gattei: Yes. Carine, yes, you have seen it's correct that we have this write-off. - actually, the rate of are completely related to the refining segment. we have updated our evaluation on the basis of new scenario and the lower margin and very weak margin this year in the coming years. And therefore, we have substantially written off entirely our downstream, our refining refineries. This €900 million are related to that.
Unidentified Analyst: So for expansion renewables. So we reaccelerate our renewable acquisition and also the organic growth, but that mainly in the last 12 months, we talked about in inorganic growth. So we participate to tender we won or we acquire directly. They - we can say that we in 4, 5 months, we achieved what we promised to achieve in 4 years. We accelerate drastically also review of the consolidation of the new companies, the new business combination between renewables, everything. So that's the reason we wanted to progress faster. And then when the company will be there, will be capable to have debt and so to invest in renewables to grow further without impacting our balance sheet and our leverage. Talking about what we paid. So it's a mix of capacity in production under construction and future pipeline. As you know, we have about 9 gigawatts now that so an additional 4 or 3 gig respect what we said if I'm not wrong, what we said in February. We have 2 gig this year. So instead of 1 gig by the end of 2021, we have a 2 gigawatt in production. - and in construction as well. And then we have additional 3 giga that are secure, that means they are in development. And the rest are, we can say, like in exploration in P3 or reserves. That means that it's in our own, we have exits. So it's very easy to get permits because we - at least 2 of them are organic.
Operator: The next question is from Biraj Borkhataria of RBC.
Biraj Borkhataria: The first one is on the gas business. You mentioned that contract renegotiations were a contributor to your results in the second quarter. So can you quantify that? And also let us know if you're expecting any further renegotiations to be agreed later this year? And then the second question is just on your CapEx program in the Upstream. Are you typically had a higher weighting than some of your peers towards short-cycle tieback led projects? And there's obviously a quite high return, and they're pretty quick to come online. And I think you mentioned one earlier given where commodity prices are, are you looking to mobilize any additional upstream CapEx in the second half of this year or in 2022? I'm just wondering how much incremental CapEx you could put to work on these types of projects.
Claudio Descalzi: So the first answer about CAS will be given by Christian simulate in the second one by Alessandro Puliti.
Francesco Gattei: So as we said during the - 3 months ago, we have started a round of renegotiations linked to the fact that the spread between PS and TTF in Italy has deteriorated substantially. And what we achieved in the second quarter was actually a first, let's say, round of renegotiation of some of the contract. There are still some ongoing which we expect, let's say, to settle in the course of this year in order basically to allow us to rebalance our level of portfolio towards the new reality of the Italian market.
Claudio Descalzi: Okay. Regarding CapEx upstream, we do not foresee any CapEx increase. We will continue with our policy to sustained production through production optimization activity and near field exploration tie back, as you mentioned. And this is - this will not require any extra CapEx for what we have already stated.
Operator: The next question is from Martin Leibowitz of Morgan Stanley.
Unidentified Analyst: I have two, if I may. First of all, I wanted to ask about the reference oil price of $65 a barrel that you said. Because on your website, there is a schedule that goes to. And if you set it at the top end of the range, it would simply be the top end of the range, but it's $1 lower. And this may sound like a bit of a nitpicky question, and I don't want to sort of be it like that. But the dividend is very important for the E&I share price. So we spent a little time trying to forecast the dividend, given the schedule that you said that seem to become a matter of mostly forecasting oil prices and then the dividend would flow out. But now it looks like you're building in margins of safety, relative to, let's say, consensus forecasts are for the oil price or what the forward curve says for the oil price. And at the moment, that discount between, say, the forward curve or consensus forecast for oil prices and the $65 you said is a rather large margin of safety. So I know this is all a new schedule, and we're trying to sort of find our way sort of through this. But of course, the situation would change a little bit, if going forward relative to sort of oil prices - oil price expectations that prevail in the market, you'd start to say rather large margins of safety, large discounts to that when effectively setting your dividend policy. And I was wondering if you could talk a bit about why you said $65 rather than simply the top end of the schedule and also why - what levels of margins of safety you would like in this reference oil prices sort of going forward. That would be one thing. And the second thing I would ask you - I wanted to ask you is about refining and the EU sort of fits for 55 sort of package. Look in the Fit for 55 package, refining still sort of treated relatively benignly. But the way things are going, it could well be that either - there could be decarbonization targets for refining and the Scope 1 or 2 level. And before you know it, you start to sort of think about, well, that will require quite a bit and refining margins are already quite low, incurring more CapEx is not easy for the European refining system to kind of absorb - And when you start to put those things together, you wonder sort of what the sort of true long-term sort of viability of this business is and it's already been sort of challenging for some time. So in the context of Fit for 55 decarbonization, potentially more CapEx. What do you think the long-term prospects are for the refineries that you still own?
Claudio Descalzi: Okay. Okay. Thank you, Martin. I'll try to answer to both questions and my colleague can intervene if there is some additional points. First of all, your point about $65 per barrel clearly has been discussed among us was a very critical point because of that - on that, we base our dividend and also the buyback. So why is this - It's not safe for us. It's no margin for us. It's not really - we made a calculation, as I said during the presentation based on what - which is the price now which is our view, talk about the forward curves, but our view about where we are our countries and our business. And then also the uncertainties that we are still leaving. We are not clearly in a clear situation. We still have some users. We don't know exactly what is going to happen in September or October, what is going to happen for the fourth wave of the variance. So clearly, we have some uncertainty. So the 65 real is in the up side of what was our evaluation, and we find an agreement because we want to recognize to our shareholders after the 2020, a clear focus, a clear priority. We also said that the buyback of €400 million will happen in 6 months, not in 12 or 18 months. So we accelerate and we start immediately the €300 million. So we anticipate in say clearly. So that is a quite interesting point because we don't spread over a long period of time, but we will put all together. So that are the reasons then clearly, we'll see in February, March when we present our strategy and maybe we can say something additional on our policy as we did in the first quarter when we changed our - and we reduced the floor to increase the share of the free cash flow for our shareholders. for refining for refining, clearly, refining in Europe is under pressure is not now. COVID clearly creates additional fragility emerge and the negative margin that we have in the last 3, 4 quarters are clearly the results, not just demand, but also refine that sometimes are not - I'm talking generally, but it clearly - it's true also for us and not cause linked to upstream and not cause linked to chemicals. So we have additional cost to respect to other geographies. And in Europe, we have another stuff that is the cost for the taxation for CO2. So the ETS, we have a carbon pricing that before was a low now is more than double in the last 6 months. We are close to €50 per ton. And forecast is to increase. So it is in a very fragile situation. For that reason, we started already. We closed 2 refunds, we resolve this refinery in refineries. And our plan that we really started is to have the right sizing of at least 3 of our refineries, clearly, to reduce the capacity to reduce the cost, and that is the first step. Thank you, Martin. I don't know if there is other point remark colleagues, I don't think so.
Operator: The next question is from Massimo Bonisoli of Equita.
Massimo Bonisoli: Three questions. One on retail renewables. Your guidance of €350 million EBIT implies only €40 million in second half 2021 versus almost €200 million in second half last year. If you can shed some light on the second half in retail and renewables. The second is on chemical. The average plant utilization rate was only 65% in second quarter, considering the very good margin, why the utilization was so low? And should we expect some operating leverage maybe in second half? And also an indication for margins in petrochemical in July would be helpful. Third question on the shareholder remuneration, given your current share price, would you consider maybe next year a different mix in shareholder remuneration. So I mean more buyback than dividend. Okay. Thank you for the question. So better answered the third question about EBITDA.
Claudio Descalzi: Okay. For the retail, as you currently mentioned, in the first semester, we had a very strong semester with almost €80 million more than last year, and we are now in €262 million EBIT. If we look at the forecast, we still are better than last year, but we are reducing the gap, and we are forecasting €382 million. Part of this is the seasonality. So we have anticipated some of the margins that we were expecting during the year. We have anticipated in the first half - and part of that is also the strong contribution of extra commodity that we experienced in the first half because of the super bonus and the incentivation that we have taken into consideration in the second half with a bit of contingency because of the uncertainty of the legislation. But overall, the forecast in 2021 is still €20 million better than last year. Adrian, if you can answer about , please.
Unidentified Company Representative: Sure. Let me explain. I mean, in the second quarter, we have been chasing some plant turnaround and particularly in Brindisi, where we have the biggest cracking and the polyethylene business that were supposed to grow in a turnaround between end of Q1 and beginning of Q2. And in order to capture the highest margin that we have seen at the end of the Q1 and April that we have postponed, but we have not been able to postpone later than May the asset utilization is a result of the turnaround in previously. And Taranis was in cracking aromatics and polyethylene. In addition to that, we have been. We had also planned turnaround in Mantova for term business is a big site. And so the 65 that you take in consideration is still vector around. If you go to the second question about the margin definitely in the first half of the year, we have seen incredible margin related to the shortage of products. And especially on the polyethylene that we have seen record elastomer that have seen very high margin and ceramics as well. In June, we have seen margins start to declining, mainly as the consequence of increased raw material costs, but also stabilization of supply and particularly increase of import again from a region like North America. In July - I mean going to the specific question in July, we've seen a further reduction in margin. We expect that this margin will stabilize in the third quarter. But overall, the margin will remain in the second half higher than in the same period of last year.
Claudio Descalzi: For the last question, as you know, we have already a policy, a dividend policy that's considered a floor and a variable part that is a portion of the free cash flow and the buyback. So clearly, we are already in the situation where we pay the dividend and the buyback back following price. So it's not the time to talk about a new policy. Clearly, I think that if there is any update, we will communicate an update in February, March when we performed the strategy presentation. At the moment, that is the policy and that is already considered in the policy.
Operator: The next question is from .
Unidentified Analyst: Two questions. Firstly, I was intrigued with your comment about the gas of Luc will have its own independent credit raising One of the problems with your own credit rating is that the rating agencies have insisted on keeping it pretty close to the Italian sovereign. So I wondered how you avoid that problem with a lot given that you only get a less 10% of the business? And secondly, I wonder if you could update on plans. I think you've had or you've previously talked about to replicate the via energy model in other regions of the world, such as Angola and the Far East?
Claudio Descalzi: Okay. So yes, Francis will answer the first question. Clearly, about the new entity in an elution renewables, we will start clearly the valuation from agency. And clearly, it will benefit of the combination of the stable and growing cash flow coming from retail than from the potential from the growth - the high-growth potential of real what you mentioned about the different spread that the maximum not that are required by - required by the credit agency cannot be avoided. Clearly, there are reference, but what will be important, I would expect that the company will be investment grade. So I don't think this will be a problem for raising a quite material amount of capital.
Unidentified Analyst: The second question is for .
Unidentified Company Representative: Okay, about creating other business support like the word energy model that we created in Norway, we can confirm that we are progressing in Angola with teen. So that's, let's say, ongoing activity. And we are also actively looking for other kind of these opportunities around the world since we believe that they could bring both operational and capital allocation synergies. So they are very beneficial to the upstream business, owing the coring general situation. Has your question been answered?
Operator: The next question is from Roberto Ranieri of Intesa Sanpaolo .
Unidentified Analyst: Just going back to the renewable business. I have a specific question - specific question on regulation in Spain. You mentioned the Spain in France at the areas the areas important for your ropocapacity development? I mean my question is - If you can give us an update on the regulatory authorities related to the CO2 ex-margin cap and the discussion from the government, the Spanish government moment. And basically, if you have any news on that. Also on the renewable business, after the acquisition you had in the offshore wind, my question is specific and also, I would say, strategic than if you are still committed to invest in the offshore wind. So basically, if you think that the standard business is economically viable and saying that some of the traditional action with operators exiting from the offshore wind. My third question is on Chemicals. If you - very specific on figures, if you can give us a split of the €0.4 billion EBIT guidance between refining and biochemicals and oil take chemicals. And my last question, question still on the chemical center it's about a long-term view. My question is, do you see any room - still room for oil-based chemicals in the long term. We talked about the margins on automatic and for the auditors arrived before. which are - which were pretty good. I'm wondering if you want invest in downstream on this value chain of the traditional and tenants or the own investment and will be devoted to the biochemical are chemicals?
Claudio Descalzi: So if I give the floor to Alberto and also, I'll ask Andre for the first 2 questions.
Alberto Chiarini: Okay. In terms of the legislation, the regulatory risk in Spain, of course, I will not enter into the details. It's under discussion. But for what I understood, is probably more hitting retail than renewables. And currently, the whole environment in Spain is very incentivating an incentivating mode for renewables. So we see a very dynamic market for renewables in Spain. In terms of the offshore wind, of course, we will continue to invest. Dogger Bank for us was kind of entry point in this technology, and we will build up on the experience of Dogger Bank, and we will participate also to - we are participating now in Scotland to some options. And we believe that we need a mix of photovoltaic, sure, wind and offshore wind in the future.
Claudio Descalzi: Andre, can you take the trial to answer all the chemicals question, please.
Andrea Gemma: Sure. As we call you mentioned at the beginning, the €400 million that we expected for the 2021 are mainly driven by the chemical sector. So I would say, roughly 75% to 25% between chemical and renewables. In terms of guidance or in terms of what we expect for the other stream of business in addition to polyethylene and aromatics. And we clearly have built participation also in the styrenics market and in elastomer although these are smaller than the polyester and business to where we play today. We see margin in elastomer and ceramics is stable for the remaining part of 2021. and we expect that also for the next 12 months, the margin will remain pretty much at this level, mainly driven by a recovery in demand in the construction and durable mainly for styrenics and in automotive special in special application for automotive industry for Elastomer. So we had some special product for new a tire performance, a new compounding performance of elastomer business for automotive sector. Also because the driver, as you know, in the mode sector are completely changing from alarm? Sorry. and especially because the driver for automotive sector are completely changing and the type of product that and the spatialization for automotive products are changing, and we are trying to go in this direction. And what about downstream. This is that is the third part of your question, definitely is something that we are looking at very, very carefully. And as you know, we already made an acquisition to go downstream in compounding and molding more related to the polyatinine business, although it opened opportunity also for elastomer that is the 40% of acquisition of these projects. And today, if you want to capture higher margin in chemistry, in the chemical sector, you need to specialize. And the specialization is coming either from product or going down in the value chain to offering solutions to customers. And these are the 2 directions that we are moving as versus specialization of the portfolio in terms of product and moving downstream in the value chain.
Operator: The next question is from Giacomo Romeo of Jefferies .
Unidentified Analyst: The first one is about your retail and renewable business. And I'm looking at the incremental details you provided and particularly regarding the customer growth expected from €10 million to €15 million. And obviously, at the moment, you are making a very good margin on this business and I would like to understand what's your thinking behind the potential effects on margins driven by a liberalization of the market in Italy and whether this could bring a margin erosion? The second question is really getting some - your thought on the 50 or 55 legislation around biofuels, whether what you thought about the biofuels targets, particularly regarding sustainable aviation. And some of your peers have expressed concern about the cap on animal fat feedstock and so whether it would be good to hear your view on that as well?
Claudio Descalzi: Alberto, please.
Alberto Chiarini: Yes. On the margins, of course, you are right. liberalization is an ongoing process. So far, a bit slow in Italy, I have to say, but Certainly, the result will drive the margins to become smaller than they are now. However, we have this very clear. We have incorporated that in our 4-year plan. And the reason why we still grow in terms of results. It's because we will be growing in all the high-value services. So we are already providing around 20% of our EBIT with extra commodity services. And we believe that in the future, this will be very more and more important. So we are somehow replacing the reduced margin per customer with extra services that we can provide to our cast somewhere else.
Claudio Descalzi: And now Pinorici you will take the floor to answer for 55 versus bifuel iJET and the European registration and regulation?
Unidentified Company Representative: Thank you, Claudio. Thanks for the question. 50 55 increased the ambition of Europe in terms of transition, accelerating the target, and this is a very good opportunity for biofuels because it's impossible to reach this target only with electrification. But it means that all the target will increase in biofuel for transportation, road transportation, but also aviation and marine transport. That it means that who has advantages in technology and the plant for production of good biofuels, both biomethane and biodiesel jet as an advantage, a competitive advantage. About the Biogen, we are seeing a very good acceleration - We know that all the companies, all airport companies are thinking in which way they could anticipate the regulations. And also considering what is expected in European ambition that it means 2% of biofuel in Biojet within 2025 at least 6%, 8% within 2030 that means a lot of million tons of . For this reason, we are planning to convert part of JELA biorefinery to produce 150 kilotons per year of Biojet before 2024, but probably we try to anticipate something. About the animal factor, we have no particular concern about animal fat because our strategy is to diversify the feedstock and increase the number and the typology of feedstocks that we have to supply in the market. along the supply by trading and commercialization, but also to develop internally feedstock for this reason, we are growing in the production of these stocks From loans in a month cooked oil and other - looking at other different feedstocks. And we are pursuing also the vertical integration in order to have - to be empowered.
Claudio Descalzi: Just to add something because it's better to remember that First of all, we can diversify our feedstock because we build, we construct the technology. So it's our own technology coming from our R&D. So we have standard the feedstock. Now we can treat more than 150 different kind of feedstock. And that allow us to have a different . And secondly, that everybody knows, but it's better to remember that by 2023, we study in palm oil. We continue with the primary but different kind as Pino said, kind of feedstock, there is no competition with food and then can give more grid and more also positively impact agriculture. In Italy, and in the country where we are. That is very important because we diversification with respect to the oil and gas. So it's 1 of the new that's part of our pilot and our approach. So we have the Biofinity, we have Europe or, but we have also the country where we work. Thanks.
Operator: .
Unidentified Analyst: So two questions. Firstly, we have spoken about tax, I thought I'd come back to that. Can you just explain or maybe to shuttle light on whether there's any value or opportunity now that you're beginning to identify earning streams around biorefining the renewables and circular bits of the chemicals obviously coming...
Claudio Descalzi: Hello?
Operator: Question is from .
Unidentified Analyst: I have two. The first one is on renewables and especially in Italy. Do you see progress on the permitting process, which is - which was very, very slow due to administrative constraint? Is the Italian government has come up with, I would say, with a simplified procedure to accelerate renewable permitting? That is the first question. And then I have a bit of a housekeeping question on Q2 upstream performance. In the press release, it is noted that clean EBIT benefited from retroactive contractual revision. Can you quantify the positive impact on Q2 upstream EBIT from those network rental revision and you give some color on that?
Claudio Descalzi: I think Alberto, the answer on the renewable and Francesco on the...
Alberto Chiarini: Yes. Yes. There is clearly a strong commitment of the government to simplify the procedures for authorization of renewable projects. This is the so-called simplification decree, the resimplification. At the moment, it's a bit too early to evaluate the impact. It will be positive, but it's difficult to say how positive will be because it requires to put in place some committees at government level to manage this authorization. The idea is to bring this authorization from the regions, the comes and to try to centralize a bit - But of course, you don't know how quick will be the process, even though centralized. That we'll see.
Francesco Gattei: Okay. About the one-off effect on E&P in the quarter is just above €100 million, and it is mainly related to certain renegotiation in countries in Africa that were covering previous quarters, so that this cumulative effect. And additional variation or improvement related to infrastructure cost and funds. So that is the reason of the one-off.
Operator: . Mr. Claudio, there are no more questions registered at this time.
Claudio Descalzi: Okay. So thank you very much. Thank you for listening to us. And in any case, as you know, for any other question in the future, we are available every time to answer your question. Thank you. Have a good day.
Unidentified Company Representative: Thank you. Bye-bye.
Operator: Ladies and gentlemen, for joining the conference. You may disconnect your telephone.
