Eni S.p.A. (ENI) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Eni's 2026 Third Quarter Results Conference Call hosted by Mr. Francesco Gattei, Chief Transition and Financial Officer. I'm now handing you over to your host to begin today's conference. Thank you.

Thank you. Good afternoon, and welcome to Eni 43 conference call. In this quarter, Eni has shown once again that the strategy is working and delivering outstanding results. We are driving distinctive real asset-driven organic growth in both the upstream expanding into new geographies with major projects and in our new businesses linked to the energy transition. At the same time, we are generating strong cash flow and bringing our debt down to its lowest level ever. As we grow, we want all our shareholders to share in the upside. That is why we combine our industrial strategy with a progressive distribution policy that has also reached a record level. Before describing our additional distribution, let me highlight the key milestone of this quarter and of 2026. Starting with Upstream, where production growth is already sector-leading propelled by our differentiated industrial organic technology-led capabilities. We have already had a standout year for exploration even when set against a decade-long track record of success with discovered resources of more than 1.2 billion barrels. Our technical rate of success is 80%, and our commercial rate is 70%, really remarkable, but remarkable still is that this has been achieved with a discovery cost of below $1 per barrel. Strong execution of our strategy has enabled us to raise our full year underlying production guidance to 67%. The growth primarily comes from Congo, Libya, Coder, Mexico, Ghana and from the business combination in Indonesia, Malaysia, called Seara and comes despite the complex operating environment in the Middle East, and constraint on Kazakh's export. And we are looking in future production growth with key FID this year ofBaleine Phase III in [indiscernible], [indiscernible] North and [indiscernible] Indonesia, Cronos in Cyprus and Greater [indiscernible] in Angola. [indiscernible] is volume growth, our single target. We are guided by value. Hence, through our well exploration in Côte d'Ivoire in Indonesia, we have raised around $2 billion of accelerated value. On top of that, we are working up an unprecedented level of access to discovered resources, employing our technology and fast track development skills to match -- to mature opportunities in Venezuela and Argentina. Our 2 listed [indiscernible] are also adding new resources with Var Energi and [ Itaka ] recently announcing acquisition, expanding their geographical footprint and deepening the resource base in Denmark and Canada, respectively. A proof point in their delivery of value is that both companies recently reached record market capitalization with an equity stake value for Eni now at around EUR 10.5 billion almost doubling the original level. Our gas and LNG strategy is delivering tangible value already. New LNG supply contracts signed in Indonesian and Cypress for a total of up to 3.4 million tonnes per year strengthen the path towards our target of more than 20 million tonnes per year of LNG equity production by 2030 and support the increase of our 2026 full year pro forma EBIT guidance to around EUR 1.5 billion. As to the CCS business, this year, we completed the installation of the new Douglas CCS platform in Liverpool Bay. The world's first purpose-built offshore platform dedicated to industrial [indiscernible] transportation and storage. We have also progressed the development of the [ Ravena ] Phase 2 project securing further support through the world of European Commission's Innovation Fund. It is worth looking at this in the context of our expanding and increasingly balanced global footprint. Exploration success has come in West Africa, Egypt and Indonesia. It is a mix of infrastructure led in [indiscernible] and higher impacted discoveries, but all representing considerable value. We have built and strengthened four major growth hubs across the Far East, the Americas, Africa and the [indiscernible] and giving us a deep and diversified resource base. Projects sanctioned in full year will deliver around 600,000 barrels per day of new production at 2030, underscoring the scale and quality of our development pipeline. And this is a continuous evolving portfolio. new agreements and additional opportunities have been identified or implemented in 2026, contributing around 4.6 billion barrels of oil equivalent of additional equity results. Let me also take a moment to update in a bit more detail on our progress in Venezuela, where we appreciate things have been moving very quickly. In early September, we signed a new contractual regime that will cover the [indiscernible] 5 field for the next 25 years. We have already submitted the development plan to the [indiscernible] authorities. Upon approval, we intend to quickly move forward to FID on Phase 1, which will add a 200,000 barrel gross in 24 months. This could be before the end of this year. Further phases could then take full field production to a gross level of 1 million-barrel per day. Also, earlier this year, we signed a sustainability agreement on Perla giving Eni control of export and revenues from which we will pay our royalty and taxes, while resuming payment for our gas. In addition, the agreement allows for some debottlenecking of production for the domestic market while also defining a new expansion phase for future LNG export roughly doubling production. It's important to emphasize our objective is to manage our free cash flow position over both [indiscernible] and Perla carefully managing the net capital phase development and timely far downs to manage the risk reward are a fundamental feature of Eni's Upstream strategy, as you know. Before going into more detail on our performance for the quarter, let's also cover transition, providing further important balance to our company, we continue to capture value from our transition [indiscernible] where as reported a record result this quarter coming ahead of a year when we expected to add significant new bio-refining capacity and bring in by year-end benefits of our recent purchase of the marketing asset in Germany. At the end of the quarter, we have also completed the additional investment in Plenitude with [ ARS ] taking a larger share. This new structure will efficiently support the next phase of growth for Plenitude. In fact, emphasizing our value creation, we now have market valuation implying a value of these 2 largest company in the transition business at a combined EUR 25 billion. Our satellite strategy is a key tool to our success in building new transition businesses without sacrificing investment into E&P. Turning now to Q3 results. This fully reflects our object to grow. Eni, while simultaneously reducing risk and adding the optionality that comes with a low-gear balance sheet and delivering an attractive return to our shareholders. E&P reported production growth of 4.2%, combined with a supportive market environment and a focus on efficient operations we generated pro forma EBIT of EUR 4.6 billion. [ GGP ] pro forma EBIT of EUR 0.4 billion came without onetime benefit seen in Q2 2026, and was driven by strong gas and LNG optimization results. There were no one-off contract adjustment in the quarter. In transition, any [indiscernible] together reported pro forma EBIT of EUR 0.7 billion, corresponding to EUR 0.6 billion of pro forma EBIT with any live benefiting from supporting biorefining margins, while planning to the results were impacted by the current competitive environment in the retail space. Transformation [indiscernible] refining report a further recovery in utilization as the major turnaround activity was completed, meaning we were provided important supply to customers, and we're able to capture the strong market conditions. Versalis suffered from a reversal in the scenario from Q2, but the underlying performance remain on track towards its target of breakeven in 2028. Contribution from associates reflects a full quarter of [indiscernible] the business combination in the Far East, while our share of the ADNOC refinery returned to profitability. The group tax rate of 32% reflects a tax rate of 35% in E&P, helped by high grading of production, a higher proportion of results in lower tax regimes and the effect of the satellites plus also the improved contribution from [indiscernible] and refining, we now expect a full year charge of between 36% and 37%. Net income of EUR 2.8 billion was up 20% quarter-on-quarter despite lower oil price and up 2.2x year-on-year. CFFO before working capital effect was EUR 4.3 billion, broadly in line with Q2 despite lower crude oil prices and 30% up year-on-year. Capital expenditure of EUR 1.35 billion is consistent with the EUR 7 billion we have guided to and consistent with our comments to expect a lower figure in the second half with the consolidation of [indiscernible] and Upstream activity in Indonesia. The impact of this long cash flow from operation generation, our disciplined net investment and the consolidation of [indiscernible] debt equivalent to EUR 2.75 billion, improved our balance sheet with a reported gearing now at 10%. The bottom end of the guidance, the 10%, 15% rate, while pro forma gearing is at 9%, both levels representing a record minimum. The continued improvement in our balance sheet metrics is also confirmed by a recent upgrade by Standard & Poor on our credit rating and its initiation of an investment-grade rating on Plenitude. For the full year 2026, we now see cash flow from operation at EUR 16.5 billion, 43% above our initial guidance. This underpins our shareholder returns, and cover the dividend, our first priority by more than 5x. Our historically strong balance sheet position and excellent cash flow operation allow us to confirm the raise in our share buyback and the announcement of a special dividend. Today, we are raising our 2026 share buyback to EUR 3.2 billion from EUR 3.4 billion, 2.5x above the original guidance. And additionally, we can confirm, we are declaring an exceptional dividend of EUR 1.3 billion with ex dividend date on the 7th of December, bringing our total cash dividend this year to EUR 4.4 billion, the highest level in our history. This represents a total payout of EUR 8.2 billion or 50% of cash flow from operation, equivalent to yield on our share price of more than 11%. With this, I conclude my remarks on what I think you will agree was another excellent quarter consistent with our view share of [indiscernible], that Eni is one of the strongest position in its history. Together now with my colleagues from Eni management team, I'm happy to take your questions.

[Operator Instructions] I now leave the floor to Mr. Jon Rigby for the Q&A session.

We're going to move to the first question in the queue, and that's Alejandro Vigil at Santander. So Alex, if you'd like to ask your question.

Congratulations for these results. Probably two questions that are related also potentially with the Capital Markets Day in '27. But basically, looking at the strong underlying growth in the Upstream business, my question is what's the level of CapEx you need to maintain this profile in the coming years? If the EUR 7 billion is enough or you have to look at this number? And the second question is about Venezuela. I'm very interested on the Union 5 and the Perla project. You can give us an indication on the total CapEx needed to reach those levels of production although you also highlighted the possibility of [indiscernible], but just so you can give us some numbers?

Okay. I will answer to the CapEx. Clearly, it's a bit early now to discuss about Capital Market Day because we are working -- we are starting to work in the coming weeks on the plan that we are going to present next year. But sure, what you could expect is that the model that we have built and has proved -- has the potential to make you grow in different directions, different businesses and geographies without compromising the amount of investment to actually maximize opportunity and therefore, the speed of this transformation and growth while keeping a steady level of CapEx. So we could continue to expect something that is in the range of what we are seeing this year and also last year. About the Venezuela I leave now to Brusco.

On Venezuela, as you know, we will -- it's a phased project. First of all, then we will leverage on facilities with capacity. Of course, over time, we will have to build new facilities as the production volumes will increase. So I would say -- it's still -- we are still in an assessing phase to understand the level of capital. But for sure, at the very beginning, will be low intensity, utilizing spare capacity, which is in the country available.

We're going to now move to Michele Della Vigna at Goldman Sachs.

And congratulations on the very strong results. I wanted to ask two questions. First, on tanker rates for crude. We've seen a craze increase over 20x the normalized level. Could you give us an idea of how much of your crude transport need covered by long-term agreements versus spot rates. It's never really matter that much before, but it is very important, especially as we start to model the fourth quarter realizations? And then secondly, you've achieved a very low tax rate in the last 2 quarters. You're guiding 36%, 37% for this year. Is that also what we should use for modeling next year or perhaps with a more normalized finding environment, let's say, maybe something closer to 40%, 45% would be more appropriate?

Okay. I leave to Stefano [indiscernible] Head of Trading, the answer about the tankers rates, and then we'll come back to the tax rate.

Yes. So in terms of shipping strategy, I would say, 60% roughly of the shipping that we do is under long-term agreements. So this is providing us a mitigation on the current very high prices that we are seeing on the market from one side, and from the other is giving us a certainty of being able to deliver the volumes -- the remaining 40% is more, let's say, on the spot market. But let's say, more than half of those we are able, through the selling through the sales through selling contracts actually to pass through those costs to the buyer.

About the tax rate, clearly, the tax rate evolution is related to two factors. One is the level of pricing clearly, the contribution of the different segment or deeper in the upstream geographies or on one case, but also from the point of view of the different business, R&M on one side, Gas & Power on another side and [indiscernible] are supporting [indiscernible] to reduce the tax rate. The other factor that is more structural and not related to the prices, the fact that the business combination reduced the tax rate. So you received just the -- practically the net result from this company, and therefore, you don't have any rate applied to that result. For this reason, you should expect clearly a range that is much lower than the historical level that we had in the past in a normalized price environment. Clearly, the price remain where it is now. This is also helping to keep it even lower.

We're going to move to Alessandra Pozzi Mediobanca.

Yes. Thank you, Jon. The first one is going back to Venezuela. You talked about a phased approach. You talked about an initial phase of 200,000 barrels they increasing to potentially 1 million barrels which is quite significant. And I believe is that just for Union 5, that's well understood. I was wondering, can you give us a bit of maybe the timing within which you aim to get there? And also, I think [indiscernible] is in the [indiscernible] belt and historically, has been heavy oil, you need a lot of dilutive to extract the oil. I was wondering about any technical challenges that you may face there, basically. And on the second question is on Argentina. I believe there is an FID targeted around year-end. Can you give us an update about the regulatory you need the [indiscernible] framework and financing as well. And then can you clarify what will be the accounting for Argentina, upstream and LNG?

I leave the both answer to Guido.

Okay. I'm just finishing to Okay. So starting from Venezuela, a bit of a timing. On the Phase 1, which would reach the 200,000 barrel of oil per day. We expect between 18 and 24 months. Then we have another intermediate level, which is 400 million barrels, which we will achieve by end of 202. And then the 1 million barrels is the potential, which we will achieve in the mid-20 -- let's say, 2032, 2033. You have to consider that this is a super giant with 35 billion-barrel of oil in place. So the potential is there. Clearly, we have to build as we you have appreciated the right logistics, the right supply chain. And this will take some time, of course. But from a subsurface standpoint, the rocks, we know the rocks, we know the reservoir. You spot at the right point. We need a lot of diluents, but we also have synergies with our assets in Venezuela. We have condensate from Perla. And we are -- we expect to double the production of condensate in parallel with the future export -- and so this could be used as a diluent for the AB oil of Union 5. Equally, we have another asset, Corocoro, on which we have also planned to increase production. It's light oil or lighter than the oil of Union 5. And this also could be used as a deal on. So the amount is -- the amount required is large, but we have also some synergies we can leverage in country to overcome that. Going to Argentina, there are a few things required for the FID, from a technical point of view, commercial point of view and also supply chain contractors have been identified. So that part of the work is done. [indiscernible], we have just submitted the application, and we expect to get it approved before, of course, the the government and the stakeholders are very supportive. And rig have been designed for this kind of project. So rig is all about mega project like this one. The financing, of course, we made market sounding. We've tested the market. There is a very strong appetite. Our target is to achieve a 65% to 70% financing for this project. On the accounting, I would leave...

I will complement that on the accounting, both the upstream and the midstream activities will be deconsolidated because we'll be structured around special purpose vehicle that has also Guido said, will attract the specific financing tools.

Okay. That includes the LNG the midstream part?

Correct. Yes.

We're now going to move to Lydia Rainforth at Barclays. Lydia?

A quick one, just on Venezuela. I just want to come back to, I think it was Slide 5 where you talked about 600,000 barrels a day of new production in 2030 [indiscernible] has been sanctioned in 2026. Does that include Venezuela or not just [indiscernible] be that one hasn't been sanctioned yet? So just want to check on that one. And then just -- when you look at the idea of 2026, materially changing the portfolio and adding as much resources you have. Can you just give us a sense of the scale of that change in terms of -- do you feel that this has been a year where Eni has been a step change in the [indiscernible]?

I think Guido is the right person.

Yes. On -- I mean, those in the 600 million barrels, Venezuela is not included to give you a straight answer. 2026 was clearly a very strategic and a turning point for us. We've continued our phenomenal exploration success, but we also, with the strategic agreement in Venezuela and Argentina, we've accessed very large resources in Vaca Muerta and of course, in [ Konin 5. And ] the EUR 4.6 billion of BOE reflects that access. Of course, the the lion's share is done by Argentina and Venezuela, but if you could appreciate it also in the slide, we have created 4 major hubs engine of growth. It's not only Americas, it's also Indonesia with and the third upcoming with [indiscernible], but it's also Africa and Mediterranean with Cronos in the Mediterranean with the discovery of [indiscernible] in Egypt with Baleine Phase III with greater page in Angola with the ramp-up of Congo LNG, Coral North in Mozambique. So it is Venezuela and Argentina, but not only that.

We're going to move to -- now to Josh Stone to UBS, Josh?

Yes. Thanks, John, and thanks for [indiscernible]. Thanks for [indiscernible]. One question on the balance sheet. It's quite striking you're gearing now being below 10% on a pro forma basis. So wondering how you're thinking about Francesco looking into 2027. If the current [indiscernible] continues, would you consider going net cash potentially? Or is the idea just getting excess cash back to shareholders? I'm just curious of your thoughts there. And then second question on chemicals. Everything seems going better than expected, but except for [indiscernible] where it seems to be losing more money than it was. At least on the 9 months versus last year, if I include the transformation cost. So I understand the macro has been very difficult for petrochemicals. But is there anything else you think that can be done to help stop the losses here?

Thank you, Josh, for the question about gearing. Clearly, we have a model that allows us to grow and distribute, as we said, at a record level, but also to manage different cycles in the oil prices and the commodity prices. So what is the real advantage of what we built is a sort of ship that is able to navigate differences. And clearly, in a period that's the one that we have seen this in this 2026, there is, say, an amount of cash that -- it was originally not included, but that we consider it in any case, and I would say we were quite able to anticipate a potential scenario to share this upside to the shareholder on the other side to use this upside for our balance sheet. 2027, clearly, we have to see how the crisis is evolving in the coming months. it will take time to recover a normalized price environment. But what is more important is that for us, the opportunity is to use at the best the financial potential that we have inside the company is not only gearing of any is the reference, but also are the different financial potential that is inside the different combination, the different entity that we built. So do we expect to reach net debt positive cash is not in our assumption, but it's something that could happen in the case of scenario. The distribution policy, I think, is something that we are going to discuss with the Board for -- with the plan under our eyes with the board next year. But clearly, it's something that will follow the same logic if there is an upside related to our capability to capture and to execute better than expected, we like to share the upside. And now I leave to Adriano for the Versalis answer.

Thanks, Josh, for the question. I think we need to make a distinction between what is the trajectory and what was the second quarter of 2026, that was a special quarter, let me say, special from funding part of [indiscernible]. When we look, as you asked, compared to the same quarter of 2025, the EBIT pro forma is slightly better, I will say, in line is slightly better than the third quarter of 2025. As a result of a scenario that remains extremely weak from a demand point of view, but that is significantly worse from utilities point of view, and you know that the chemical sector is very energy-intensive, and also from negative impact of imported duties that starting from the first of July of 2026 have been eliminated completely versus the U.S. And of course, this is putting Europe even in a weaker position from a competitiveness point of view. So what we have done and what we are doing is moving on with our transformation plan that on a quarterly basis, represent almost EUR 90 million, but unfortunately, this is offset completely by utilities and by the negative scenario. What else we can do? I mean, you need to consider that as we always discussed that, Europe does not have the strong demand of Asia. Europe does not have the competitiveness in terms of feedstock and energy that the Middle East and the U.S. have. So Europe has to play with competencies and innovation to transform. And this is what we are doing, and this is what we are going to share more also in the next capital market date on how we are going to accelerate our transformation.

Next up is Paul Redman, BNP Paribas, Paul?