Eni Spa Q3 FY2021 Earnings Call

Thank you. Good afternoon. Welcome to Eni 9 months 2021 Conference Call. The recovery of the global economy and the rebound in the demand for energy is continuing and accelerating. However, the pent-up demand that is emerging after the unprecedented disruption of 2020 is putting strain on the balance of the market. In 2021, structural features of supply weakness, which are substantially expanding along the full range of commodities, have emerged. The slowness of the supply response is not totally related to the rapid recovery of the economy but more substantially to nearly 7 years of underinvestment that has affected these markets. As a consequence, Brent has returned to levels around $85 per barrel. While in gas, we are witnessing historical record at $30 per million BTU on the European and Belgian spot markets. Eni will remain focused on capital discipline to reduce its cash neutrality. The rapid deployment of new technology to speed up the execution of our decarbonization plans and on the acceleration in establishing dedicated business vehicles as a key strategic element to focus our growth and to highlight the full value of our portfolio. Let's now move on the summary of our results. In the third quarter of 2021, we accelerated our economic and financial results and provided evidence of consistent operating performance. This trend is expected to continue in the coming months. Looking at our natural resource business. In Upstream, we produced 1.66 million barrels per day in the first 9 months and continued delivering exploration results with the recent major discovery in Agri Cost. In GGP, we were able to capture the extraordinary uplift for gas prices and successfully renegotiated long-term contracts to align their terms to current market conditions. In terms of portfolio, we are progressing with the business combination in Angola. And as announced a few days ago, we have launched the process of ownership structure review for Vår Energi that could include a potential IPO in 2022. Furthermore, our HyNet CCS project in the U.K. was accepted as a Track-1 project giving it access to the GBP 1 billion U.K. government fund and allowing Eni to proceed in developing one of the first U.K. industrial clusters to apply CCS and materially reduce CO2 emissions in the country. With regards to energy evolution, in early October, we launched the process for an initial public offering for our newly integrated retail renewable business. We will detail more on this in the next slide. In Downstream, R&M is now almost at breakeven year-to-date. While on chemical, Versalis reported an excellent performance in the first 9 months. Turning to group financials. Our net profit adjusted for the 9 months settled at EUR 2.6 billion, exceeding 2019 pre-COVID level driven by the EUR 1.4 billion of the third quarter, among the strongest results since 2013. Retail renewable initial public offering is a strategic milestone for Eni's strategy of decarbonizing our domestic clients, accelerated growth in new green power capacity and additional customers and creates an independent, self-financed entity to ensure the most efficient capital allocation. Our unit business, the merged retail, renewables and BV charging points will result in a synergic model that will derisk our growth and will expand the green offer we can provide to our clients. Leasing of the new shares, subject to market conditions at the Milan Stock Exchange, is expected in 2022. Further update on this business, including the new company name, will be made on the Capital Market Day on 22nd November. We are not limiting the portfolio restructuring only to our renewable business. In the Upstream business, we continue to seek opportunities to enhance the value of the portfolio through business combinations that have proved successful in creating growth-oriented fully autonomous vehicles. Vår Energi Norway was the first example of how such organization could allocate. Created in 2018, it is now the largest independent E&P company in Norway with 239,000 barrels per day, and it is a reliable source of cash through dividends to the parent company. Operational excellence and development of a diversified portfolio allow it to increase average production by more than 30% in 3 years while our focused near-field exploration enhances the future potential with resource discovery in the last 3 years of more than 180 million barrels of oil equivalent. Now we are ready to move to a new step for the Vår Energi story. This week, we have launched a review of corporate structure to further crystallize value either through an IPO or a partial stake sale. We expect to conclude this process subject to market conditions in 2022. At the same time, in Angola, we are well progressing with the business combination with BP with establishing a top-ranked player in the country by early next year. Let's now move to 2021 results. In natural resources, Upstream recorded a solid performance with adjusted EBIT in the first 9 months at EUR 5.7 billion. The Q3 results at EUR 2.4 billion are above pre-COVID levels despite production still ramping up after the maintenance season. In the quarter, production was sustained by recovery of plant turnaround, especially in Norway and the ramp-up in Indonesia, in the Middle East and Angola, which more than compensated the PSA effect and disruption of either allocation. We expect production to further recover in the last quarter at 1.76 million barrels per day, thanks to the ramp-up in Norway and Kazakhstan and production recovery in the U.S.A., confirming our early guidance of around 1.7 million barrels. Focusing on exploration, Eni confirms its leading performance with a major discovery in Ivory Coast in September. The first well discovered light oil and associated gas in a new play concept in the deepwater Baleine prospect, with preliminary estimates of more than 2 billion barrels of oil equivalent. Baleine project is designed to target fast-track development to meet the domestic gas needs, and it will be the first of many in Africa to reach net emission Scope 1 and 2. Finally, with this 90% working interest Eni, the field is a potential candidate for our dual exploration model. Our 9-month total discovery resources were more than 600 million barrels worldwide. Thanks to this performance, we can raise today our 2021 target by 40% to 700 million barrels. In GGP, we registered a positive EBIT in the last quarter. Capturing the spiking spot price, we have been capable to optimize our portfolio, more than offsetting the negative PSV-TTF spread. Thanks to continued portfolio optimization in this favorable market scenario and to one-off contributions from the conclusion of contract renegotiations, we now expect to exceed the EUR 500 million of EBIT and EUR 300 million of free cash flow for 2021, and this guidance could be vastly revised upward under sustained volatile and tight market conditions. Moving now to energy evolution. All the business contributed with positive results in this quarter. In Retail & Renewables, pro forma EBITDA, up EUR 440 million, represents a 35% increase year-on-year, sustained by extra commodity service contribution and customer base management actions. We expect the combined entity to continue its steady growth towards the end of this year for an EBITDA of EUR 600 million, with renewables EBITDA at breakeven. R&M turned positive with an EBIT of EUR 150 million in the last quarter. Traditional refining contributed, thanks to higher focus and asset optimization. Also, margins remain slightly negative. On the other hand, marketing captured an upside from the summer driving season and leaves us a less severe mobility restriction. Versalis is progressing with excellent performance with positive results, sequentially lower on this quarter due to petrochemical margins normalization and lower plant utilization due to planned maintenance in Brindisi and Montara. While performing positively from the economic point of view in downstream, we continue to enhance our structure of our portfolio of low-carbon technology. In R&M, we started production of sustainable aviation fuel from waste procedures. Sustainable aviation fuel growth potential is huge as it can significantly contribute to the decarbonation of aviation in the short to medium term. In Versalis, we acquired 100% of FINPROJECT, becoming the Italian leader in the production of special polymers, and with the acquisition of ECOPLASTIC, we are further specializing in the recovery, recycling and transformation chain of styrenic polymers. In terms of our outlook for 2021, downstream will be negatively impacted by feedstock and energy cost increases. We expect a yearly EBIT for downstream of around EUR 200 million. But this guidance may be further revised downward based on current market conditions. Eni has an important plan of growth in biorefinery and biochemical capacity. But the structural growth that is expected in bioproducts demand will require a robust and consistent growth of diversified feedstock. In order to secure the supply of our plan, we are developing several agricultural projects in many countries of upstream presence that will ensure an integrated contribution of biofeedstock to our processes. Leveraging our long-standing relationship with African countries, we have recently signed an alliance together with other key countries such as Kazakhstan, which will contribute to our worldwide agro production target of 0.1, 0.8 million tonnes per year by 2030. Furthermore, this agriculture initiative has a direct positive impact on the development of new circular economy models. In Congo, as an example, we started a pilot project planting custom castor bean sowing on over 200 hectares of land, not in competition with food. Moving on to our cash flow performance. Our cash flow from operations before working capital of the 9 months was strong at EUR 8.1 billion, more than covering CapEx of EUR 4 billion in the period. For 2021, we expect cash flow from operation before working capital to be close to EUR 12 billion with a Brent price of around $70 and slightly negative sales. If the current forward prices are confirmed during the last quarter, we expect to reach a cash flow from operation of around EUR 13 billion. With yearly CapEx assumed to be EUR 6 billion, we are expecting organic free cash flow at around $6 billion at $70 and $7 billion at current forward prices. The performance registered in 2021 will allow the company to keep leverage at around 28%. To conclude, Eni has continued to advance on the strategic path outlined in the strategic presentation in February. In decarbonization, we are making the first sustainable linked bond in the oil and gas sector. We were promoted to the Track-1 phase of negotiation for the CCS project in the U.K. With the breakthrough achievement towards plasma confinement in magnetic fusion, we confirm that technology remains at the foundation of our transition model. And as a material move to target Scope 3 reduction, we launched the IPO of retail and renewable business. With respect to capital discipline, we lowered our upstream CapEx coverage below $35 per barrel. In addition, we increased our shareholder remuneration through dividends, now back at pre-COVID levels and a 6-month buyback of EUR 400 million that we expected to conclude by year-end. Finally, we are deeply reshaping our company structure to enhance value creation with the business combination in Angola and the review of the ownership in Vår Energi that will reinforce our growth in Norway. Now together with Eni top management, we are ready to answer your questions.

The first question comes from Giacomo Romeo of Jefferies.

Congratulations on the great results. I have a couple of questions. First, I'm interested in the renegotiation gain you mentioned that will impact GGP in Q4. Will this gain translate into a cash payment? Additionally, will you experience a reduction in your historical sensitivity to the PSV spread moving forward? My second question is about the R&R business. Are the extreme prices we're observing affecting you in terms of increased credit risk, and is this a concern for you? I would like to hear your thoughts on this.

Okay. I will leave the first answer to Cristian Signoretto, Head of GGP; and then the second one to Alberto Chiarini or Alessandro Della Zoppa for retailer renewables.

Thanks for the question. So on the spread PSV we have, you are right. And in fact, one of the aims of the renegotiation was to clearly change the exposure of our portfolio, reducing substantially the exposure to the spread gas to TTF. This will clearly then change starting from basically the Q4 of this year. In terms of cash, the agreement is set for receiving part of the benefit, cash benefit I'm saying next year, and while most of the EBIT is going to be accrued this year.

Okay. For the second question, in terms of the impact of high prices, so far, we haven’t suffered any drawbacks from high prices. And the reason is that we were fully covered for our deliveries. So it is clear that the volume risk can be higher, but we are managing it quite well. In terms of credit risk, credit risk, so far, we haven’t seen any real impact. And this is also thanks to the measures of the government that have helped families that could have some difficulties in paying gas and power prices.

The next question is from Michele Della Vigna of Goldman Sachs.

Francesco, I really had one main question about your cash distribution to shareholders. The flexible dividend strategy has worked very well in this recovery, and it has provided visibility on where the dividend would go at different levels of oil prices. Now we are pretty much $20 per barrel above the higher end of that range, which was set at 65%. And I'm wondering, as you start to think about this further upside case, does it make sense to think more of a continued dividend increase? Or because the dividend yield is already the highest in the sector, it could make sense to shift more towards buybacks as you start to consider further upside to your cash distribution going into next year? And then if I can throw in a second question, I really want to talk about biofuels. You have been an early mover there, and it has substantially improved the profitability of the refineries. You've shifted into bio-refineries in Italy. But we are now seeing a lot of competitors starting to also follow through, especially for sustainable aviation fuel. Do you feel that there could be a few years when actually sustainable aviation fuels may be oversupplied on the European market?

Thank you, Michele. I will answer to the question about distribution and then I will leave to Pino Ricci to answer to biofuel, in particular the aviation fuel. In terms of distribution, you are right in saying that clearly, we are, let's say, well above our pricing deck for the distribution. But I would say also that it's too early. You know that once we prepare a distribution policy, we decide a distribution policy, we look generally speaking, in a long-term way with a 4-year plan with the strategic plan in our hands. We are working on that. Clearly, we have an idea. I think that, as you said, this flexible mechanism has value and merits, we have also to understand how this could work in an upper scenario case that clearly 1 year ago was completely out of sight. So I think that it's a good comment from your point of view, but we can answer more properly in the coming months, in particular in the next strategy presentation. Then I leave to Pino.

Thanks, Francesco. About the biofuel in particular, the SAF biojet, of course, the competition is growing because there are many announcements of new biorefineries or conversion of existing refineries. One of these is Shell in Holland with a project that is with the same capacity as we have in GLA, which started up 2 years ago. And – but what we gain is the advantage of technology, the refining technology developed together with one. It is very, very strong, very flexible in terms of feedstock and product. In fact, we have a robust plan to grow the production of SAF for aviation. And we expect also an increase of the market because the pressure to the aviation sector to use the SAF as the only way today to decarbonize the aviation transport is a very important point. And waiting for the officialization of the rules by Europe, not only Europe, for the minimum contract of SAF in the jet fuel, we are seeing an increase in the interest in both aviation companies and higher portfolio suiters to start to use the SAF. This is very important if you consider that in the world, there is a market of, apart from COVID, more than 250 million tonnes per year of SAF and a trend of growing in the year. At the same time, it’s under definition, the new European rules for the biofuel in the road transport. We expect an increase also in this way because the target of 50 to 55 is so strong that, in fact, the role of biofuel to meet this target is mandatory, and we expect an increase in the obligation for the next decade. So finally, we will have an increase in the production available, but we will have a strong increase also in the demand.

The next question is from Massimo Bonisoli of Equita.

Francesco, I have two questions. First, regarding Vår Energi, could you clarify the reasoning behind the strategic option for Vår Energi? You mentioned a possible partial divestment to realize value. Also, can you remind us about the dividend distribution for Vår Energi and your expectations for next year's dividend? The second question is about Mozambique. When do you anticipate coal production to begin, and do you have any updates on the onshore LNG in light of the recent news from Exxon?

Thank you. Vår Energi is clearly a success story, and being the second operator in Norway adds value that may not be fully acknowledged internally, especially within Eni. However, this situation presents an opportunity to unlock more funds and cash for future growth and to expand Vår's business. Vår has a successful management team, and there is a strong market interest in this type of company. Both parties are keen to reveal the true value of the company. In recent years, Vår has been an excellent dividend distributor, with nearly $3 billion collected, including this year. This year, we expect around $950 million and a final tranche of about $260 million in the last quarter. Regarding Mozambique, I will hand it over to Alessandro Puliti.

Sure. So regarding Coral, we confirm that Coral floating LNG will start up in the second half of next year, 2022. And I will say there will be 3.4 million tonnes per year of LNG that will enter the market really at the right time. Regarding Area 4, the updated project and a new FID date will be defined based on the results of the ongoing optimization phase and also taking into account the evolution of the security situation in the northeastern part of Cabo Delgado province in Mozambique.

The next question is from Bertrand Hodee of Kepler Cheuvreux.

Yes. Two, if I may. So first on fusion energy. Commonwealth Fusion Systems, CFS, announced a major breakthrough in September. They have doubled the possible magnitude field using revolutionary magnets. This could pave the way for fusion to become commercially viable by early '30s. I've made some extensive research on the subject, and I'm really excited by what CFS achieved. So first, congratulations for Eni's outside-the-box thinking and vision for taking a stake in CFS back in 2018. However, even if yesterday, there was an article in Financial Times about fusion energy, the press coverage has been quite muted while the sell-side coverage has been quite inexistent. How do you explain that? And secondly, did you have some discussion since this major breakthrough, either with the Italian government or the Italian Nuclear Agency or other regulatory bodies on the topic? That's the first question. And the second question is more, I would say, bread and butter. Can you guide us about what could be the tax rate at Eni in $70-plus, knowing that the tax rate this quarter in Q3 was significantly below expectations?

Yes. Thank you for the question, particularly the question about the CFS. So the magnetic fusion is clearly a potential breakthrough technology. I agree with you that from the market's point of view, in particular from the analysts of the sector, there is still relatively interesting. You captured this news and made, let’s say, a deep analysis on the potential of this technology. I think It’s a matter of being quick with this kind of technology, new technology and having, let’s say, the progress towards the evolution of the technology coming and becoming a reality. You know that we have completed the first phase. That is the test of the magnet. Now we are entering the second phase that will bring 2025 the first – the creation of the pilot of the first reactor in order to prove the continuity and the value of the energy reaction. So having the amount of energy in excess of the amount of energy used, and it is called Spark. And this will be successful will open the door for the first commercial reactor that is called the ARC and will be available if everything is fine within early next week. So there is a quite, let’s say, short time to market for a breakthrough technology. What I can say that out of the action inside the analyst group, there is a quite strong interest from investors in taking or participating in finalizing that the group – the team, the management team of CFS is now performing. So I will say that the interest is strong. Clearly, it’s not completely visible around all the tables. About the tax rate, it is true that the tax rate in the current environment is extremely low. What we can say is clearly, it is low due to the fact it is not just a matter of having the $70 world, but it’s a matter of having gas pricing at the level that you know. This – what is generating? What is causing? It’s causing that all the businesses and geographies in E&P, et cetera, encountered which have lower tax rates are becoming more relevant in results contribution. I’m referring to Italy. I’m referring to the U.K. And therefore, I’m referring to all the countries in the U.S. that generated that have, let’s say, less than average in terms of tax rates. And clearly, the gas pricing is one of the factors that is determining this rate. So if we will be in a $70 world with the current market environment of pricing, we will have a similar, so below 50% tax rate. Otherwise, in a more normalized gas price environment, we will be something between 50% to 55%.

The next question is from Jason Kenney of Santander.

So just looking at the guidance for the global gas portfolio, EUR 500 million EBIT for 2021. And I know you mentioned earlier that the renegotiation process, most of the EBIT will come in Q4 and the cash may come through next year. I'm just trying to think through cycles of what you were budgeting for GGP EBIT, say, on average annually through to the period 2025. Kind of get a sense of where it might normalize back to in '22, '23, '24. That's my only question.

Okay. I leave it to Cristian to answer.

So thanks for the question. So look, clearly, as we said, the renegotiations, and I would also add the fact that the stream volatility and level of prices of gas clearly has had an effect on the 2021 results. And this will clearly also change our expectation for the future plan because if you remember, we were targeting EUR 800 million free cash flow over the cumulative over the full year. But clearly, we didn't take into account such evolution of the portfolio of the market. So clearly, we will have an upside in the plan that we will disclose and analyze better in our next 4-year plan.

Maybe just a follow-up because obviously, the 9 months are at about $44 million to over $450 million coming in the last quarter. What kind of run rate should we be expecting quarter-on-quarter in the '22 period?

So you're asking for guidance on quarter-by-quarter in 2022?

Or an annual. That may be good too.

Because I mean, look, as we said, clearly, the fourth quarter result is compounding also some retroactive effects because as I think we probably explained these agreements will have some retroactive effects that we clearly manifest in the results in Q4. So those elements will not really reappear in 2022. What is going to change instead, as I told you before, is that the exposure to the PSV-TTF spread will not be there basically starting from Q4. And I mean, as you can imagine, this year, in the first 9 months, we were adding EUR 15,000 cubic meters, positive spread. And this year in the first, let’s say, 9 months, we had a negative EUR 2 per 100,000 cubic meters. So that has a very negative effect on our accounts, and this will not be there next year just because we changed the exposure of the portfolio, so I think that will drive the profitability of the next quarters.

The next question is from Jon Rigby of UBS.

So two questions. One is just a follow-up to the last question. So it's not the exposure to the TTF-PSV margin that's driving the underlying earnings from the gas business? What is the input into the calculation that drives that number just so that we can understand sort of variability going forward? The second question, you talked about the company-wide development being next year development. Can you just sort of run me through the difference between what you're going to be doing there versus, let's say, conventional offshore projects to move it to being net zero? What are the measures that you are taking so that it can be net zero? Because on the face of it, getting a net-zero offshore development in West Africa is like a remarkable achievement.

Again, Cristian and Sandro Puliti for the 2 questions.

Well, I mean what's driving the profitability of the business going forward? So basically, the global gas and LNG portfolio takes care of the final part of the value chain of the gas and LNG business, so basically bringing to the market and monetizing on the one hand, the equity gas and LNG. And on the other hand, clear also the third-party gas and an engine in our portfolio. So in the future, I mean, also today, I would say that in the future, especially, this will be driven by 2 major elements. On the one hand, we have what we call the intrinsic value of the portfolio. So basically, we buy and we sell. And we capture the margin between, say, supply cost and sales cost. And that's one element of the business. The second element, which is becoming more and more important as we speak because of the volatility of the market, is that we have an array of options in our contracts logistic, time spread options, that we try to optimize every day with the movement of the market, being it in the gas or being it in the LNG. And this will clearly be another relevant part of the profitability, which clearly depends on how far is the range of volatility and how fast this will change. And we can say that in the last, I would say, few months, this has been extreme. I think this is under the eyes of everybody. In the future, it's difficult to say, but there are signs that this volatility is probably here to stay given the strong, let's say, tight balance between demand and supply in gas and LNG, and pleased until the next big wave of LNG production will come on stream with Qatar.

So just to follow up, sorry. So can I think of this as just a change in the contract structure to remove TTF as a proxy for your cost of gas, effectively, is that it's not proving to be a good input into calculating the cost of gas to get you the appropriate margin for the work that you do in distributing gas to your customers? Is that a fair way of thinking about it?

It is.

Okay. Regarding Ivory Coast development, and what we meant is that we will have a Scope 1 and 2 net-zero development in Ivory Coast, and this is based by implementing a number of decarbonization initiatives such as red flags initiatives, so forestry initiatives in the country with the programs for the protection of primary forests and also including the development of renewable energy in the country to supplement the gas production and to offset the emissions of the offshore development.

Is there anything intrinsic to the actual development that you're doing? Sort of, I don't know, the way that you're running the generators or supplying the power or whatever?

Clearly, the development will account for the state-of-the-art and the best available technologies to reduce actual emissions and increase the efficiency of the energy utilization of the offshore facilities.

Next question is from Ellis Skinner of JPMorgan.

This is Ellis from JPMorgan. Two questions, if I may. The first to shift tack and look at Versalis. Obviously, the 9-month results have been a bit, for a year, sequentially lower quarter-on-quarter. And in addition to sort of the lower utilization, you reported tighter margins. To what extent have you seen sort of lower project sales prices versus higher costs? Or put another way, are you seeing an impact from higher gas and energy prices in new operations? And how should we expect the business to perform next year? And then second, sort of focusing on AGL items, I think it's pretty well positioned with the integrated business model at the moment. Can you talk more about the potential for customer numbers to increase sort of operating the business in the tough current environment becomes more competitive with prices growing so high. In another way, do you expect the growth here to come from organic or inorganic growth?

Okay. Adriano for the chemicals and then...

Yes, thank you for your question. The performance of Versalis in the first nine months was very positive, although we faced challenges due to lower asset utilization. The low asset utilization in Q3 was mainly due to two significant factors. First, we had a plant turnaround in our largest cracking plants and made upgrades to the ceramics unit in Mantua to adjust our product mix and enhance specialization. We invested heavily in these upgrades to diversify our offerings, which explains the reduced asset utilization in Q3. The second reason for the low asset utilization was unplanned events that occurred at the end of August, particularly in the city area, causing us to lose a couple of weeks of production. Regarding your question about the impact of gas and energy costs on our business performance, we are already seeing effects in Q4 since the costs for electricity and gas in the chemical sector are nearly double compared to Q3. This won't necessarily affect our sales volume but will impact profitability. The current market isn't compensating for utility costs, which is a concern across the industry. We are currently negotiating for next year, seeking to incorporate some of the volatility in utility costs, especially for gas and energy, into our pricing formulas to alleviate the profitability impact for 2022. As you can imagine, these discussions are challenging and may strain the value chain. However, we are beginning this work now. If the current volatility continues, we might see fluctuations in profitability in the chemicals sector for 2022 that we will need to manage.

Okay. In terms of growth for the retail customers, we have to differentiate Italy and abroad. In Italy, we are almost – we are incumbent in the gas, and we are growing in power more than what we are decreasing the customers in gas, and this is the way we are trying to grow. So we are really targeting our customers. In terms of abroad, we have – we are a backer in a way. So we have very lean organizations. And just to give you an example, in France, we have almost doubled our customer base in the last 4 years, and we are now almost 1.4 million customers. In Greece, we recently entered into the power market. And in Spain with Aldro, it’s a new acquisition, and we are confident that we can grow. The impact of high prices, of course, is a reduction of new customers, prospects. But in reality, this is for all the players, which basically means that today, the churn rate is lower because every customer that has a fixed price offer has no convenience to switch to a new price with the current high price base. So – but this is, as I say, this is for all the competitors. And so the trend for us is pretty much the same. Less churn, less acquisition, but overall, a positive balance.

The next question is from Irene Himona of Societe Generale.

Two questions, please. The first one, back to the topic of cost inflation. Aside from the pressure on downstream and tempered margins, can you talk, Francesco, perhaps about any cost inflation pressures in your upstream, please? So what are you experiencing? Are you perhaps perplexed for the period by your contracts with the suppliers? How should we think about the topic basically? And my second question is on capital allocation. You're looking at 2 potential IPOs now. And with those, Eni will raise quite a bit of capital. How should we think about the potential uses of that capital, please? What are your priorities for that cash?

I will leave the first question to Alessandro then I come back about the capital allocation.

So regarding cost, possible cost increase, certainly, the pressure on raw materials is something that we are starting to see on the market, especially for production facilities, clearly, where iron prices and metal and steel are more important. On the other hand, we have to say that our upstream currently ongoing projects are sanctioned and are under EPC contracts with basically fixed and already awarded prices. So we do not expect in the projects going on this year and next year basically a relevant impact due to raw material price fluctuations. For the future, certainly, we are gearing up with the appropriate procurement strategy, trying to limit to the bare minimum the impact of those possible prices increases.

Regarding the allocation, you're correct that next year, with a different IPO and the variation of Vår, there will be a significant cash contribution. This year provides a good benchmark for how we expect to respond next year. We have effectively reduced our debt, reinstated our distribution policy to pre-COVID levels, including dividends and an ongoing buyback strategy that will continue for almost four months. Additionally, we have accelerated the company's transformation. Moving into next year, we will pursue three main strategies: reorganizing the company, enhancing our portfolio as quickly as possible to align with market changes, and maintaining an attractive distribution policy while further reducing debt to strengthen our balance sheet.

The next question is from Biraj Borkhataria of RBC.

I have two questions. First, could you explain the changes from the previous cash flow guidance for 2021 to the updated guidance? Earlier in the call, you mentioned that the cash renegotiation would take place in 2022, so I'm curious about what has changed for this year, particularly in the fourth quarter. Secondly, I would like clarification regarding the renewables sector. Are you planning to decrease your stake to receive cash, or are you considering raising equity as part of the IPO?

About the – the bridge or the calculation for the CFFO guidance. You know that we presented a guidance that was above EUR 11 billion is actually was close to EUR 12 billion in a $70 world. The difference clearly is the gas. The gas is the main source of the change. Then there are a lot of moving parts. There are the thermal, negative thermal that is prolonged, et cetera. But the major contributor in this jump of almost EUR 1 billion, at the same level of oil price or almost same level of oil price, is substantially the gas pricing. And similarly, the next step, the next change in the guidance until the end of the year is based on the assumption of a higher oil price is at the end of the day, almost $3 on average per year. That is equivalent to $400 million, $500 million. But there is also, again, quite a material step-up in gas pricing that explains this additional contribution. Sorry, the other question about the renewables, the IPO – okay. It is about the – clearly, what we are working on that really, and I would recommend to postpone all these questions in the next Capital Market Day. But as a general comment, we target to grow in the market with a company that is substantially free of debt, able to raise its debt comparable with its balance sheet in the company because an EBITDA that is quite material. And therefore, we’ll have according to our information, for preliminary information that we collect from the banks, the capability to raise from 3 to 4 times the EBITDA. So we are speaking about EUR 3 billion, EUR 4 billion along the period, eventually EUR 5 billion at the end of the full year plan. So that is the scope of the logic of – and therefore, about the issuing of shares, etc., is something we decide, but you understand that there is no need to have a strong capitalization of the new company.

The next question is from Alastair Syme of Citi.

Francesco, S&P has maintained a negative outlook on the debt for quite some time. I understand this may not influence your bond pricing, but you likely wish to avoid a downgrade. Can you discuss what steps you think are necessary to change this outlook? Additionally, do you have any insights on the strength of the upstream M&A market as you consider unlocking value in Vår and possibly Angola? We've noticed some recent deals have occurred at relatively low prices, and I’m curious if you’re observing anything different in that area.

Thank you. Now about the Standard & Poor rating, actually, today, there was a positive rating. The negative outlook was raised to let’s say, neutral outlook. So the company is recognizing that the action taken in these years, the financial flexibility, the profit of the balance sheet were successful. So I think this is a positive sign for us, and this will help also to reduce in the future the cost of debt. On the other side, you said that about the environment in terms of M&A, we are very active in M&A. Particularly, we’re working on, again, in M&A that is trying to extract value from our portfolio. We have different, let’s say, processes ongoing. And I think that the market reaction clearly is subject to the quality of the asset that you are presenting to the market. So there is a positive market. There is probably not the same total players that you are used to have in this kind of market. But in terms of player, independent players, infrastructure funds and private equity players, there is an active market.

The next question is from Lucas Herrmann of Exane.

Can I just go back to Angola? And there's obviously been some comments on the level of debt that you're looking to raise, which I think indicated something of the order of $2 billion. I wonder if you can make any comments on that and what kind of rates of interest debt in that market on oil assets might attract? And beyond that, just thinking about going back to the LNG business, forgive my confusion, the improvement, how much of the improvement you're talking about through the final quarter of this year is a consequence of renegotiation? And how much of it is reflective of what actually should be a much better market for your opportunities as you put it or arbitrage of the LNG volumes that are coming out of your business?

And yes, about the business combination in Angola, you know that there was Sivrais's comment related to potential interest in terms of bank capability in the range between EUR 2 billion to EUR 2.5 billion. And the interest, clearly, it's something that must be defined at the time you do the raising of the debt. I would say it is too early now to know what is the cost of capital for this debt. So I think this is what we can give you is the appetite and the size of the financing system. In terms of the other question, I will pass the ball to Cristian.

Thank you for the question. I would say that most of the improved results are connected to the one-time benefits from the contract renegotiations. Additionally, the extreme conditions in the gas and LNG markets, which began experiencing record price levels globally from September, created opportunities for us to utilize options that were previously deeply out of the money but became profitable at these price levels. To give you an idea, I would estimate that around 30% of the improvement is structural, tied to the new agreements we have secured. We have also mitigated risks that we previously faced. The remaining 60% to 70% is due to one-off opportunities we capitalized on, related to the renegotiations and the high price levels that allowed us to activate those previously out-of-the-money options.

And sorry, Francesco, just going back to Angola. Can you say anything about progress and potential timing over and above what you have?

I would say that, substantially, the teams are working up. I think there is a quite positive view, and we are very close in the discussion. You know that as we mentioned also during the presentation, is something that is expected to be completed when speaking about completed. I'm also referring to the fact that you have to collect for the authority approval, etc. So we are next year. It means that we are targeting for a significant completion of the shareholder agreement within the 2 companies within the end of the year.

And would we expect any dividend payout at around that time or subsequent to that event, much the same way it was the case of Vår?

Yes. I think that we have to – first of all, to have the company established, it will clearly, as I mentioned, happen next year. Once it will be established, there will be also the capability to raise funds. And they will also – the company will decide its financial plans, including this distribution policy.

The next question is from Mehdi Ennebati of Bank of America.

Congratulations on a very impressive fiscal year. I have two questions. First, regarding your strong cash flow from operations, I noticed the difference between the taxes you paid and the taxes you announced has been decreasing. Specifically, the tax segment didn't increase in Q3 compared to Q2, despite much higher profitability. Should I expect a catch-up in the coming quarters, meaning your tax payments will increase more rapidly than anticipated, which could negatively impact cash flow from operations? You also mentioned that a significant amount of trade receivables benefited you this quarter. Did this affect your working capital or cash flow from operations, excluding working capital? My second question is about the current LNG price environment. When Damietta LNG started, you mentioned you would be able to sell LNG at competitive prices. I expected Damietta to benefit from the current strong LNG prices. Can you clarify whether you've benefited from the high LNG prices? Additionally, do you expect Damietta's profitability to increase now that LNG prices are higher than in the first quarter?

Regarding the tax rate, there will be fluctuations between the third quarter, the last quarter, and the next quarter. The tax is influenced by our results and significantly by the contribution from certain countries or businesses with low tax rates. There are no delays in payments that would affect cash flow next quarter; everything will follow traditional tax payment methods. This will largely depend on the ability of this business segment to continue generating value as it did in the third quarter. As for working capital, it is mainly impacted by the value of stocks and receivables. With rising prices, you can expect an increase in working capital at similar quantity levels. This will ultimately affect your operational cash flow after accounting for working capital. I will now hand it over to Cristian for further insights on Damietta.

So thanks for the question. Let me start from maybe a portfolio type of consideration. So in 2021, the vast majority of our LNG cargoes are either sold under term agreements, which are substantially not affected by the current level of spot prices, or are directly hedged with our customer base in Europe. We have some major leverage though on the optimization of the portfolio, especially by rerouting our FOB cargoes to capture the arbitrage between the markets. And Damietta clear part of this portfolio because, I mean, being an FOB contract, we can divert the cargoes where the market is asking them to pay a higher price. From 2022 onwards, we have a growing exposure to the spot market that clearly we will take into account in our marketing strategy, including also from Damietta.

The next question is from Henry Tarr from Berenberg.

Two, please. One, just on CapEx looking into 2022. So with commodity prices where they are, is there a temptation to start looking at a slightly higher CapEx in some of the E&P areas? And do you have sort of short cycle options that you're looking at there? So would you expect to see CapEx start to increase a little bit in 2022? And then just secondly, I think you talked about the feedstock for the sustainable aviation fuel in Africa. I maybe missed it. Were you saying castor oil in the Congo? Is that right? And are you hoping to store all of your sort of raw materials in that way? And perhaps just a little bit more color around how that's not in the land, there isn't being used for food growth, that would be great.

Okay. About CapEx, you know that we have a plan. Actually, we're quite disciplined in all the period that we pass through since 2014. Remember, we kept CapEx flat. So we will not follow the price volatility. We have a plan in our plan, we are assuming to have a CapEx of around EUR 5 billion last year, EUR 6 billion this year. That is a bank really and EUR 7 billion as a, let's say, steady level in all our business to perform the transformation clearly. So that is substantially the level that we are targeting, and we are not clearly, let's say, changing the guidance. We will continue to be disciplined on investment and in terms of aviation as well.

About the feedstock for the sustainable aviation fuel, you have to take into account that we are considering also Western residue as feedstock for this particular fuel. And in fact, our early production is coming from UCO used cooking oil. The development of feedstock that we are foreseeing in Africa and the other countries taking our knowledge and presence in these countries is based on both agriculture but not in competition with food and Western residue collections.

The last question is from Oswald Clint of Bernstein.

Yes. So perhaps just another one on the upstream. Natural gas realizations in the upstream. They seem particularly strong, I think, at least relative to what I was expected. So I was just wondering, anything helping those? I mean do you let any of the global gas business price strength accrue back into the upstream through transfer pricing and anything that explains that if I am correct there? And then secondly, I just wanted to ask, I mean, you all your metrics around ESG are pretty impressive, MSCI, Euronext Sustainalytics. And I wanted to ask if you could tell us, are you seeing an increase in ESG investors into your shareholder base? I mean, down in Spain, Repsol would say that in the shareholder base today, and the industry is around 15%. So I'm just curious if you have good knowledge or seeing increases in that type of investor into your shareholder base.

I think that about the gas realization, the gas increase, I would say that is mainly to the fact that the spot pricing increased, PSV and clearly NPV price are the main reason for this jump. So there is no other explanation. The component of oil-linked reference within the spot formula is existing, but it’s not a major factor that explains the change. About ESG, actually, I think that it’s difficult to say what is ESG. Once you have many large funds, you can consider this fund ESG because all – practically almost all the investors have ESG component. So we haven’t done this kind of split. I think that the company will do the split, will go in different metrics. There is no benchmark including a different degree of flexibility, the ESG component within the investor group. So I would say that what we can see is that Eni is top-ranked in all various ESG metrics as a solid decarbonization plan, and we were the first oil and gas company to issue a sustainable linked bond. So this means that in terms of ESG, analysts from our side and the bondholders are buying Eni tools. So that is, for me, the most important driver of KPI in following. Thank you. Thank you to all. We have completed the conference call. And if you have any additional questions, we are available with our Investor Relations team. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.