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Investors unconvinced by Eni's 'solid budget' plan

Claudio Descalzi's strategy to reduce debt and focus on upstream has yet to convince investors

Almost a year after taking the helm at Eni, in April Claudio Descalzi was defending his strategy to reduce the Italian major’s debt by divesting assets, slashing dividends and refocusing on upstream operations. Investors, however, are yet to be entirely convinced the new management team can pull it off.

“The aim of our plan is a solid budget, to be achieved by covering investments and dividends with budget cash, reducing the quota of distributed profits to below 100% and down to 60% in 2017-2018, keeping the debt/equity ratio below 30% with a decreasing trend from 2016 onwards, and launching 16 new projects for oil and gas production,” Descalzi said in an interview with the Italian daily Corriere della Sera.

“The process began last May as soon as I was appointed, with a new organisational structure and cuts to general and administrative costs amounting to €2bn [$2.1bn].”

Eni’s shares are still down over 10% at around €17 from when Descalzi was appointed by the board on 9 May, though have recovered from the low of €13 hit in January as the oil price was bottoming. There have been further jitters, such as on 12 March when the stock fell almost 5% after Eni became the first of the majors to lower its dividend since crude prices began tumbling in 2014.

“Ultimately we are building a much more robust Eni that can face a period of lower oil prices,” Descalzi said while presenting the company’s new four-year plan for 2015-18 on 13 March, which predicts that Brent crude will average $55 a barrel this year, rising to $70 in 2016, $80 in 2017 and $90 in 2018.

That plan includes a dividend cut by 30%, which “has understandably left the investors unhappy. Even the Italian treasury will be poorer by $372.3m, but the company had to go for the dividend cut because of considerable cash shortfall,” says Michael Kaufman of the financial research firm Bidness Etc.

The company also anticipates a fall of 17% in capital expenditure to about €48bn compared with a previous plan, while offloading €8 billion worth of assets over the period. Of the asset sales, some 70% of the total should be undertaken in the first two years of the plan, and 50% of the total will come from selling down stakes in recently developed projects.

The share of capex it has already committed to sanctioned projects is expected to fall from 75% in 2015 and 2016 to 38% in 2017 and 2018.

Prime among such sales is an up to 20% stake of its half share of the Mamba discovery offshore Mozambique.

The gas reserves in the Rovuma basin are currently estimated around 120 trillion cubic feet (cf), making Mozambique a potential challenger to Qatar, the world’s leading liquefied natural gas (LNG) exporter.

Yet the project’s costs will be huge, in excess of $100bn over the next decade.

The project is made up of two liquefaction facilities – the 2.5m tonne-per-year (t/y) Coral floating LNG plant and the 10m t/y Mamba onshore plant.

The costs will likely become clear by the end of this year; a final investment decision (FID) on Coral is expected in the third quarter and an FID for Mamba is seen in early 2016.

While Mozambique LNG remains at the core of Eni’s capex plans for 2015-2018, at about 18% of the total, Descalzi said the major’s focus for future growth will be on the Gulf of Mexico, Indonesia, Myanmar and Vietnam.

“We are increasing our exploration for the future in different areas. Last year we acquired 140,000 square km of new acreage worldwide. I think we have to make an additional effort to be in other countries,” he said, adding that Africa remains “our strong point”.

In the meantime, Eni is planning to grow its production despite the asset sales and mothballing of other projects like shale gas exploration in China and western Ukraine.

Eni sees its output rising by 3.5% per year between 2015 and 2018 to more than 650,000 barrels of oil equivalent per day (boe/d), which is half a percentage point higher than a previous plan.

Among the 16 or so projects it will bring into production over the four-year period are the Perla oilfield in Venezuela, due by June; the Goliat oilfield in Norway, due in the second half of this year; and the huge but perennially troubled Kashagan oilfield in Kazakhastan in the second half of 2016.

But as well as breathing new life into the upstream segment, Descalzi’s mandate also includes sorting out the non-oil part of the business, including the gas and power, chemicals and refining divisions, as a way to cut debt of around €4.4bn off its balance sheet to help fund growth. Analysts say that these businesses have been a drag on earnings since 2012 – something that was plain in the 2014 financial results, which showed adjusted net income falling 16.3% to $3.7bn.

In February, reports emerged that Eni has hired Goldman Sachs to look into on the possible spinoff of its power and gas unit, while Descalzi said in March that the disposal of its 43% stake in Saipem, an oil and gas engineering company, is still part of the strategy despite in December suspending the sale process due to adverse market conditions.

One thing Eni probably won’t be doing over the next few years is following in the footsteps of Shell, which in April announced plans to buy BG Group.

“Companies usually buy assets to acquire reserves without the associated exploration risks, but for us it’s different because we’ve discovered lots of resources,” Descalzi said, noting that Eni has discovered 10bn barrels over the last seven years at an average price of $2.

But while Descalzi is not planning on making any acquisitions, “anything can happen”.

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