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Eni cuts 2018 output growth target after gas production disappoints

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Eni cuts 2018 output growth target after gas production disappoints

Highlights

Full-year output growth cut to 3%, down from 4%

Gas and power unit profit guidance raised

Confirms breakeven, capex targets as cash flow jumps

London — Italian oil major Eni cut its full-year production growth target Friday after failing to grow its upstream volumes during the third quarter due to lower-than-expected flows of natural gas.

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The Rome-based company said it now expects its oil and gas production to grow about 3% year on year in 2018, after gas sales were hit in Venezuela, Libya and Ghana. The company had previously forecast an average 4% production growth to about 1.9 million b/d of oil equivalent this year, assuming a Brent price scenario of $60/b.

In the third quarter of 2018, oil and natural gas production averaged 1.803 million boe/d, unchanged from the third quarter of 2017, Eni said in an earnings statement.

The production volumes were partially hit by the termination of a production contract at Libya's Intisar gas field in June, Eni said, the effect of which reduced its output by 43,000 boe/d over the first nine months of the year.

Lower gas output in Venezuela and Libya due to weaker domestic demand and in Ghana, due to lower gas nominations from the buyer, also crimped upstream flows in the quarter, Eni CFO Massimo Mondazzi told analysts on a conference call.

He said, however, the lower production guidance will have only a "negligible effect" on Eni's cash flow due to the low margins on the gas flows affected.

Eni expects its production growth will continue to be fueled by the ramp-up of the giant Zohr gas field off Egypt and helped by new fields in Indonesia, Congo and Ghana. Higher production at the giant Kashagan project in Kazakhstan and the Val d'Agri fields in southern Italy will also lift its volumes.

During the quarter, the Zohr gas field reached a production target of 2 Bcf/d, or 365,000 boe/d, Eni said, confirming a target of ramping up 3.2 Bcf/d by the end of next year.

EARNINGS BEAT

In March, Eni raised its upstream growth targets as it prepared to extend a run of industry-leading exploration success with new drilling plans across a bigger upstream portfolio. The major saw output grow 5% year on year in the second quarter and expects to grow its production by an average of 3.5%/year over the next four years as it further develops its increasingly gas-focused resource base.

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Despite the flat Q3 production, Eni's adjusted earnings jumped to Eur1.39 billion ($1.58 billion) during the quarter after higher prices saw its cash flows double to Eur4.1 billion.

Eni's adjusted operating earnings of Eur3.3 billion were 21% above market consensus estimates and its cash generation was stronger than expected. Eni's underlying free cash flow of Eur3.4 billion beat expectations of Eur3 billion.

The earnings growth was underpinned by operating cost reductions that will allow Eni to fund capital spending plans and pay dividends -- referred to as cash neutrality -- at a Brent price of $55/b this year.

"We are reaffirming our guidance of group cash neutrality, including the funding of the dividend, at $55/b, roughly $20 lower than the current Brent price. This is in line with the financial discipline we aim to maintain over time," CEO Claudio Descalzi said in a statement.

The company also confirmed its 2018 capital expenditure guidance of Eur7.7 billion.

WEAK REFINING, STRONGER LNG

Downstream, Eni's business sector earnings were sharply weaker year on year due to weaker refining margins. Its adjusted refining and marketing earnings fell 38% to Eur14 million in the quarter, due to an "unfavorable trading environment." Eni's indicator refining margin of $4.50/b was up 10% quarter on quarter, but 30% lower than year-ago levels.

Looking ahead, Eni expects a refining breakeven margin of approximately $3.20/b on average in 2018. Refining throughputs are expected to be flat compared to 2017, Eni said, due to better performance at the Sannazzaro and Livorno refineries following unplanned shutdowns in 2017.

In the gas and power business, Eni said it has set a new target of Eur550 million adjusted operating profit this year after already hitting achieved the former guidance of Eur400 million.

For the full year, it said total sales are expected to decline in line with an expected reduction in long-term contractual commitments both to procure and to supply gas.

But Eni said it sees an increase in LNG sales to nearly 9 million mt of contracted volumes by 2018 year-end. In the first nine months of the year, Eni said its gas sales from LNG were 34% higher on the year at 7.9 Bcm.

-- Robert Perkins, robert.perkins@spglobal.com

-- Edited by Annie Siebert, ann.siebert@spglobal.com