The last piece fell into place several days ago with the sale of 25% of Area 4 in Mozambique for $2.8 billion.
“It's not a traditional M&A deal,” said ENI CEO Claudio Descalzi at a presentation to investors on Wednesday. “It's an important piece of our strategy for two reasons. Mainly because it allows us to bring in cash before the start of production, anticipated in 2021-2022, guaranteeing a significant gain in the process. Additionally, it confirms the validity of our model because with in this deal, a big company like Exxon has basically certified Mozambique as a gas asset: it gave a seal of approval to the entire project. Their participation is a great upside for ENI and for the country.”
Advantages of the “dual exploration model”
So it's additional affirmation of the so-called “dual-exploration model” that ENI has already tested at Zohr and that, Descalzi said, could be replicated in future initiatives and exploration.
“This path has guaranteed us, over the past 4 years, $9 billion dollars, with more than $8 billion in gains,” Descalzi said.
And while all the other major players in the sector sell off pieces of their production, ENI has followed a different and thus winning strategy, speeding up the monetization of its exploration assets—Mozambique for one, but also Egypt. There, Descalzi recalled, the company has so far sold 10% to BP and 30% to Rosneft, with an additional option to sell each another 5%.
The axis of transformation
But the duel model is just one characteristic, albeit crucial, of Descalzi's ENI. Following his presentation in London several weeks ago of the company's new 2017-2020 strategic plan, the CEO has just updated the market on the latest developments and explained how, in a particularly complex scenario with a steep decline in the price of oil, ENI was able to respond, focusing even more intently on its growth engine (upstream) and restructuring its other businesses (gas, chemicals and refining), which are back in positive territory.
The litmus test of “capex cash neutrality”
Descalzi noted that 2016 “was a tough year with respect to fundamentals, but exceptional in terms of results.” And a barrage of slides projected behind him during his latest presentation revealed “record” numbers for production (“From the end of 2013 to the end of 2016, we cut costs by 25%, but the production bar rose by 15%, or 250,000 additional barrels”) and for exploration, which was full of surprises, as well as providing, through the model above, a core contribution to cash flow.
Which is somewhat of a litmus test for ENI under Descalzi: not just in terms of the levels he'll manage to lock in over the next four years though operations (€47 billion, including €20 billion in free cash flow) but also for the group's ability to ensure investments will be fully covered without incurring debt but though resources that are currently available, and with oil prices extremely low. That's what's technically known as “capex cash neutrality,” which Descalzi said ENI has brought to $46 a barrel and plans to keep under $45 a barrel for the duration of the strategic plan.
Asked if ENI plans to further dilute its stake in its oil services unit Saipem, he said, “Mostly likely, yes, but now is not the time, either from a market perspective or with respect to our strategy.” He also said the company has no plans to sell its chemicals unit Versalis.
As for possible new deals in the short term, his message to the market was the following: “We are fine as we are: our current size is ideal. We are growing. We will use our cash for dividends and investment.”
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