Earnings Call Transcript - E Q2 2024

Operator, Operator

Good afternoon ladies and gentlemen and welcome to Eni’s 2024 First Half Results Conference Call hosted by Mr. Claudio Descalzi, Chief Executive Officer. For the duration of the call you will be in listen-only mode. Now I'm handing you over to your host to begin today's conference. Thank you.

Claudio Descalzi, CEO

Good afternoon and welcome to our Second Quarter and First Half Result Conference Call. This quarter confirms we are making significant strides forward in delivering on our strategy and the four-year plan set out in March. I will discuss our financial results in more detail, but in summary, our performance in the first half exceeded our plan in terms of financial outcomes and cash flow generation, with capital expenditure and leverage showing a positive trend. Touching on some important milestones in the years so far, we are materially enhancing our upstream portfolio. We completed a high-value acquisition of Neptune in January, already delivering significant value for our shareholders, thanks to synergies in Indonesia, Norway, and Algeria. Following the step up of our exposure on the UK Continental Shelf with Neptune, we have moved quickly and are creating one of the largest independent players in the country through the combination of it with Ithaca Energy. At the same time, we are also making real progress in high grading our upstream portfolio, completing the sale of non-core assets in Congo and Nigeria, and announcing the sale of Alaska, which we expect to close this year. Furthermore, we are working on some additional transactions related to our dual exploration model that will mature in the coming quarters. Meanwhile, our upstream business continues to focus on its core activities. We have reported production growth of 6% year-on-year and have other significant oil and gas resources with notable exploration success in Cyprus and Mexico. On the businesses related to the energy transition, we are unveiling the value that the market places on our unique integrated chains in retail consumption and sustainable mobility. In March, we completed a EUR600 million equity investment into Plenitude by energy infrastructure partners. And this week, we have announced the potential investment by KKR into Enilive, in a range between EUR2.5 billion and EUR3 billion. Together, these deals highlight an enterprise value of around EUR22 billion, a remarkable improvement versus the marginal value these activities were accorded only a few years ago. We are also pleased with the operational progress we are making for Enilive with the Final Investment Decisions of the two new biorefineries in Malaysia and South Korea, and for Plenitude the startups of its largest solar project to date, the Renopool Solar Park in Spain. Let's put all of these in context. The energy transition is irreversible, but it will only be sustainable if it allows returns that attract private capital. And this is what we are proving through our portfolio of activities that are highly valuable for the market and achieving precisely those objectives of profitability and economic sustainability. We are also growing upstream, with higher margins and lower emissions to be net zero by 2030. We will grow underlying production by 4% per year over the planned period, reported production by 2% per year after disposals, and crucially we will grow Cash Flow from Operations (CFFO) per barrel by 30%. Plenitude and Enilive will likely double EBITDA over the four-year plan and double again by 2030. This is an outstanding plan of growth that is attracting the interest of many investors and will ultimately take both businesses towards full-market valorization through Initial Public Offerings (IPOs). Our transformation plan has more emerging options; we are restructuring and reorienting our Chemicals presence towards a sustainable platform based on biochemistry and the circular economy as we did and continue to do in biorefining. Furthermore, Carbon Capture, Utilization and Storage (CCUS) has a key role in reducing emissions in hard-to-abate sectors, and is also well suited to be an additional satellite in our system in due course. Taken together, supported by a clear and focused financial framework, Eni is able to offer sector leading CFFO per share growth rate of over 13% per year, and highly competitive shareholder returns. Turning to our results, pro forma EBIT, incorporating our associate operations, was EUR4.1 billion, in line with last year even without the benefit of GGP one-offs reported in 2023. Over the first six months pro forma EBIT was EUR8.2 billion, more than 60% of the original annual plan. In the Upstream, we reported another excellent quarter with production up 6% year-on-year, and pro forma EBIT of EUR3.5 billion capturing the oil price scenario and recovering gas market. Indeed, GGP with EUR334 million also reported a strong result, in line year-on-year on an underlying basis and in what is traditionally a seasonally lower quarter. In the Transition businesses, Enilive's pro forma EBIT was EUR120 million, reflecting the currently softer biorefining market conditions, offset by seasonally stronger marketing income, confirming the advantage of the integration along the value chain with the sales of products and services to retail and wholesale. Plenitude reported pro forma EBIT of EUR149 million, 12% higher than the second quarter last year and giving a strong first half progression. A weaker scenario for refined products impacted our traditional refining, offset by resilient wholesale and trading activities and supported by high plant availability, leading to a stronger result year-on-year. Chemicals in Versalis continues to face very challenging markets, reflected in our Q2 losses. Taxes rose in the quarter with the accounting rate at 55%, primarily due to mix effects within the Upstream and across the income statement more generally. Our CFFO in the quarter is EUR3.9 billion and EUR7.8 billion for the first half, delivering a pleasing trend of efficient cash conversion, reflecting good dividend income and a cash tax rate of around 30%, consistent with the level we anticipate for the full year. Our first half CFFO means we have already generated 55% of the planned annual amount. Organic CapEx is currently tracking below our gross guidance of a EUR9 billion full-year figure, but our expectation remains unchanged. Net portfolio activity was still cash out in the half year, but in the quarter we generated proceeds of EUR480 million being primarily the sale of shares of Saipem. After payment of the final dividend and the restart of the buyback, net debt fell from a Q1 peak. Let's focus for a moment on our Upstream and Transition businesses, the key current components of our value chain. This slide emphasizes the resilience of the result in absence of the GGP one-offs. In Exploration and Production, we have delivered excellent volume growth backed by continuing exploration success to feed the business, and progressed portfolio high-grading. GGP continues to capture margin in our equity gas sales, leveraging its excellent asset and logistics positioning. Financial performance in our Transition businesses remains on track despite volatile and often challenging market conditions. This reflects the underlying resilience in these balanced and integrated businesses. As a result, we’re maintaining growth in a consistently competitive fashion and investing for value and for the long term. This means we are able to launch new advantaged bio-refinery projects and have a significant portfolio of new renewables capacity under construction to sustain our growth. Confirmation of the value we are creating is evident in the financial investment we have attracted in both Plenitude and Enilive. A strong balance sheet remains a key target in our plan, providing resilience, flexibility and strategic optionality. In March, we said gearing over the four-year plan would range between 15% and 25%. The impact of the strategic acquisitions we made to support our growth platforms pushed gearing up towards the higher end of that range by the first quarter; but as we have seen in Q2, even with limited impact of disposal actions, leverage is already inflecting down falling by almost 1.5 percentage points versus Q1. We are executing our disposal plan much faster than planned; as a reminder in March we announced we would deliver EUR8 billion of net portfolio inflows in the four-year plan and indicated we expected that divestment activity to be front-end loaded. In the first six months, we have, in fact, advanced this programme faster and for better value than anticipated. The announced deals in Alaska and Nigeria will reduce our leverage by around 3 percentage points, while the sale of a 20% to 25% stake in Enilive will impact our leverage by a further 5% to 6%. This means by the end of the year, we now expect leverage to be well below 20% and, conceivably towards 15% on a pro forma basis, awaiting the full cash-in of these deals and other planned actions. And we are working on several additional transactions that will further contribute to our portfolio enhancement and debt reduction. In other words, by the end of the year, we expect to be able to provide visibility, either via actions completed, announced or with defined plans, over the large majority of the transactions that will be roughly split 50-50 between upstream and new transition businesses. That brings me to our Satellite model, a crucial source of cash to fuel our growth plan, distribution and to maintain a strong balance sheet. 2024 has been an important proof of the distinctive model we have built. The Plenitude and Enilive transactions, that will generate over EUR3 billion in total represent material deals of aligned capital and at attractive multiples with valuable partners. This is only a portion of the EUR11 billion cash we generated from dividends, disposals and IPOs through our key satellites; Enilive, Plenitude, Azule and Var Energy since their creation. This new capital supports our funding needs and confirms the value we are creating in different businesses, and anticipates cash flow generation from these long-term opportunities. Cash generated from our satellites has a double impact on our distribution, accelerating growth in our cash flow from operations as a result of the material increase of these businesses. During the plan, Var and Azule production will grow together by 45%, while Plenitude and Enilive are almost doubling their EBITDA; diversifying our businesses and improving our balance sheet, allowing us to progressively enhance our distribution policy. Finally, let me elaborate on the outlook for the remainder of the year. We now expect reported full-year production to be at the top end of our guidance implying a growth rate of close to 4%. Similarly, GGP has now significantly de-risked our original EUR800 million pro forma EBIT guidance for the year and we now expect a full year figure of around EUR1 billion. Our main Transition businesses, Plenitude and Enilive remain on course to deliver their combined guidance of EUR2 billion of pro forma EBITDA this year. Eni full-year pro forma adjusted EBIT and CFFO before working capital are expected to be around EUR15 billion and over EUR14 billion respectively at our current scenario, and in that context we confirm the buyback will be a minimum of EUR1.6 billion. Thanks to the improved visibility on our divestment programme, we will speed up repurchases through Q3 and Q4 versus our previous plan. Moreover, given the lower expected debt in light of the progress of the M&A, we will be able in the third quarter to evaluate a further increase in the distribution share up to the maximum limit of 35% of the budgeted CFFO, which corresponds to a potential buyback value of an additional EUR500 million. To help with CFFO profiling for modelling purposes we can confirm that dividend cash-in from associates should closely approximate the net income, while the cash tax rate for the full year is expected to be around 31%. Net CapEx is now expected to be under EUR6 billion, significantly below the previous guidance in-line with our updated expectation that year-end gearing will be well below 20%, and pro forma, on deals awaiting formal closing, will be even lower than that. Finally, with the work now underway, we have already identified savings in excess of EUR250 million for 2024 and we are raising to around EUR2 billion the full value of savings and simplification benefits over the plan period that we announced in March. To conclude, we are really pleased with the progress we are making. Our strategy is to invest in our high-quality businesses to make Eni more profitable, fund the next phase of growth, work to highlight the full value of our assets, and to deliver a growing and competitive shareholder distribution. The first half of 2024 has seen us making clear strides forward in terms of the operational delivery and the new projects that underpin that growth. This has translated into an excellent financial outcome. And in addition, we’re also ahead of our expectations in our divestment programme, in terms of proceeds, value realization and timing, de-risking the business and accruing further value to shareholders. The Eni investment proposition is clear: highly competitive growth in the key segments of business related to traditional and transition energy, value realization through portfolio management, fast deleveraging and a strict investment discipline in prioritizing our significant pipeline of new projects, a competitive and progressive distribution policy supported by the material growth in cash flow generation and balance sheet enhancement. With these remarks I conclude our review of the quarter. And now along with Eni's top management, we are ready to answer your questions.

Operator, Operator

Thank you for joining us. We will now start the question-and-answer session. The first question comes from Irene Himona with Bernstein. Please proceed.

Irene Himona, Analyst

Thank you and congratulations on these numbers. My first question is on biofuels. If you could perhaps share your views on what is currently a rather oversupplied biofuels market. When and how would you expect the rebalancing and for margins to start recovering? And my second question, it is quite unusual to flag a future potential buyback increase. I wonder if you can talk about the reason. I think it is the first time you're doing it. And also, would you agree that it is linked to the faster pace of asset disposals via a stronger balance sheet? Thank you.

Claudio Descalzi, CEO

Okay, thank you for the question. Stefano Ballista, CEO of Enilive can give the answer.

Stefano Ballista, CEO, Enilive

Yes, there is no doubt that actually this quarter has been very challenging for the biofuel business. We recorded the lowest margin ever and this is a situation that is actually a continuation of the first quarter and let me say very well expected. It's driven by fundamentals with a short-term view. So it's a transition phase, primarily defined by oversupply both in Europe and in the US, and the reasons are pretty much the same we discussed in previous calls, like Sweden on one side and a specific step up in terms of capacity in the US, plus some extra flows from China. But what is really important is that this is a transition period. Obligation and mandate are strongly in place and defined. I just quote some of them like refueling aviation is set to go into effect starting from next year. It is going to lead to more than a million tonnes of extra demand in Europe and is going to increase along the timeline. And this is a regulation, so there is no debate about when it's going to be fulfilled. The second core element is the renewable energy directive number three. It has been approved, as we know, each country has about 18 months to deploy at the country level. Targets are going to be doubled compared to the current ones, from 14% to 29% in terms of energy content. This is going to be in place starting from the second half of next year, given it has been approved at the end of the previous year. And it's going to push for strong extra demand. On top, I want to mention there are also states that are even now changing some key rules. I want to quote Germany that actually starting from next year will consider the UER no longer eligible for bio demand. And so this is going to create additional demand. So in short, this is a transitional phase with a market rebalancing expected in the near future, around 2025, with a potential step up. And this is the last comment coming from the first evidence on the anti-dumping procedure. We received preliminary and provisional duties that are going to create a level playing field with the current Chinese flow and this is going to give an improvement. It's difficult to quantify now but it is there for the year.

Claudio Descalzi, CEO

Thank you, Stefano. I just want to add something because Stefano was very clear about regulation and what is going to happen in the next month. Looking at the market, what is happening, what we are experiencing in the market, is that we have many, many requests from maritime operations, maritime aviation, and a lot of different kinds of entities that they want to reduce their CO2 emissions. So we are signing a huge number of contracts with these different companies. So that is the first-hand evidence that we have in our business. Clearly, we talk about this moment, this anomaly that we forecast, but we must also say that Enilive reacted very positively. Why this reaction compared also to other operators? Because we are on the value chain. We are in the Upstream. So we are in the feedstock with Agri-Hub, with all the Western residues. So we try and study that to stabilize our feedstock. We have our technology, we have our refineries, then we have a huge retail. So we are not just in the biofuel and bio-refinery. And that helped us a lot in the quarter, in this semester. So I think that is very important because that is a first-hand observation from a company that is engaging daily with the market and interacting with customers. So the second question is for Francesco.

Francesco Gattei, CFO

Yes, on the buyback, clearly what we design since a few years is a progressive distribution that is linked mainly to cash flow from operations. But this cash flow from operations, let’s say, sharing is clearly continually monitored in terms of performance, in terms of scenarios, and in terms of balance sheet. So as you have seen, the buyback is defined in two ways. We have, at the beginning of the year, the overall distribution dividend plus buyback that was a percentage of the budget and the cash flow from operation between 30% to 35%. We fixed our reference around the middle of that range and we announced the buyback of EUR1.1 billion. In the policy, we also stated clearly that 60% of the upside related to cash flow from operations would have been shared with our investors, and we announced that in the first quarter results. And now we are in a situation where we can look differently at the bottom-line of this distribution policy; the buyback that we originated. The idea is that substantially there is room if in the third quarter, all the deals and progress in the various disposals are confirmed and even enhanced to review that percentage. So there is still a potential of 2% to 3% of additional share of that amount that at the beginning of the year, if you remember, was EUR13.5 billion, the cash flow for operations. It means that there is a potential of EUR500 million of additional buyback. I would also say that we have an immediate effect today, of the improvement of our balance sheet and the visibility we have seen in the disposal plan, which is the acceleration. So we are speeding up the pace of our buyback shares. And also in the third quarter, we will conduct a review overall of the cash flow from operations, and if there is an additional increase in the potential cash flow from operations, there is again the application of the rule of the 60% upside. So we mentioned that there is a floor at the beginning of the year. We improved this floor in the first quarter. Now we are evaluating in the third quarter a potential step up with different mechanisms. So I think that is evolving positively regarding our distribution policy.

Irene Himona, Analyst

Thank you very much.

Operator, Operator

The next question is from Josh Stone with UBS. Please go ahead.

Josh Stone, Analyst

Thanks and good afternoon. Thanks for the presentation. And congratulations on the strong results. Two questions please. Firstly, coming back on disposals. You highlighted an acceleration or you've got good visibility on a very big chunk of your four-year program. Do you think there is a chance you could actually exceed your EUR10 billion gross divestment target? Or in other words, as you've been reviewing your assets and portfolio, are you finding there's more things to sell or at a higher value than you first expected? Or is it just simply in line? Second question on back on Enilive. One thing that struck me with your – the KKR announcement was that you're willing to sell up to 25% of the business and then possibly another 10% to another investor. So your leading stake was 65%. So my question is why is there so much interest in Enilive now? I understand you get a good valuation, but once it is sold, it's sold. So are there particular attributes that these new partners are bringing to Enilive beyond a particular source of financing? Anything you add there would be great. Thanks.

Claudio Descalzi, CEO

So thank you for the question about disposal. I will say something then maybe Francesco want to elaborate further. We have accelerated first of all, because we have good assets. So the natural assets, when we talk about upstream, we said that it's at 50-50, so 50% upstream, 50% transition businesses. But we have good assets. So we have a lot of discussions with different entities and companies that are interested in our assets. It has been very fast because we initially thought to deploy this divestment program in the first two years. But in the first six months, we have practically reached our target. We can go beyond EUR8 billion, maybe yes, more on dual exploration because we found a lot of resources, it is not a lot of investment, we de-risk the asset and that could be a potential additional market that we can explore in 2025. Clearly now we are focused on the projects that we announced and others that we are working on. They are mature but we will be ready in the third quarter to say more. But we have the potentiality to overcome and do better than our initial expectation, so better than EUR8 billion. I think, yes, we can do that.

Francesco Gattei, CFO

For Enilive, clearly we try to balance, there is a lot of interest, the valuation is very good. We want to invest in because we have a big component of the two companies that is growth, biorefinery growth and renewables, and charging point growth. So I think that we need money and that we understood we have the proof that these companies are able to finance themselves without using our capital and our debt. So I think that that is the reason we want to progress, we want to grow, and when we are able to find very strong investors, that can help the company that they share our view and our project, I think that is a good opportunity. I don't know if we are going to do that immediately because we have to finalize the deal yet. But there is a clear reason to do that. We want to grow. We want to create more value in these companies that are doing very, very well. We reached as a valuation through our strategic investors EUR22 billion for the two companies, which is really a huge number considering that this business until a few years ago had a very low value. So I don't know if Francesco wants to add something. Let’s say, we clarify since the beginning that the EUR8 billion net was a risked amount that was clearly based on a larger assumption. In that assumption of disposal, we didn't include the outcome of this positive feedback from the market specifically on Enilive in terms of evaluation and appetite. So there is clearly room to decide, prioritize and improve the overall guidance as we said.

Claudio Descalzi, CEO

Good news.

Francesco Gattei, CFO

Good news, absolutely. I think that was clear. It was good. And the other element, clearly you mentioned about the potential disposal of a second stake. First of all, this is not included in our forecast. So it is again an upside eventually to be considered. We need the first to conclude the discussions and negotiations that are ongoing with KKR. It is a deal that needed to be finalized. And after that, we evaluate, due to the fact there is quite a very strong appetite from the market, if there is an opportunity to make an additional joint deal related to that specific asset. So again, it's another positive sign that the assets are extremely interesting for the market, and there is a lot of potential valuation coming on.

Josh Stone, Analyst

Thank you.

Operator, Operator

The next question is from Biraj Borkhataria with RBC. Please go ahead.

Biraj Borkhataria, Analyst

All right. Thank you for taking my questions. The first one is just on your LNG growth plan. So you continue to build up your options, but mostly through the integrated approach. We haven't seen you do too many offtake deals, for example, Gulf Coast US. Is that something that you think would be a good addition to your portfolio? Or would you rather build up in an integrated fashion? And then secondly, just going back to the last question on the financial framework. If I was to plug in the disposals in the market, which I understand you've risked in your plan, but the ones that are already there. It is possible that I could see Eni at single-digit gearing by the end of 2025. So I just wanted to get some thoughts on at what point does your balance sheet not need that additional cash? And secondly, one of the things that has happened over the last couple of years is that you very clearly created more value through building these businesses than you would have by buying back shares. So I just want to think – I wanted to get some color on how you think about the balance between paying out that capital, the excess capital and then maybe increasing CapEx to build these businesses to more scale? Thank you.

Claudio Descalzi, CEO

Thank you. So the first question is for Guido Brusco and the second from Francesco.

Guido Brusco, CFO

Thank you, Biraj. You spotted rightly. So we are building a portfolio mainly of integrated projects which spans from the Congo project, which just started up and will increase up to 3 million tonnes per annum by the end of next year. We have Mozambique, we have Qatar. We have Indonesia, which is currently delivering gas for liquefaction only from the south-hub of the Kutei Basin, but soon we'll have a second hub in the north part, which is pretty exciting. So as you have seen, this is mostly organic, stemming from our successful exploration campaign in the past year. And we see much more value in the integration rather than buy and sell gas from third parties. I might not rule out some small deals we can have in the future to complement our portfolio, but the growth is essentially linked to the organic component.

Francesco Gattei, CFO

In terms of leverage, clearly you know what is our guidance, our reference is a range between 10% to 20%. We’re moving fast towards 15%, the middle of that range. There could be, as we said, the upside. We have a lot of additional opportunity that has the materiality to push even lower that leverage. It's important for us to understand that reducing leverage is valuable if there is no alternative, but if you have opportunities to invest in your pipeline of projects, then clearly there is no financial sense. We are paying 1% net financial cost in that leverage. So I can push down the leverage to keep enough buffer for hard times, but it was also important to have opportunities where I can invest at much higher return. This is the balance we want to keep. We think that 10% to 20% range, you could drop below in the lower part of that range, but this should be the area of comfort that we want to stay.

Biraj Borkhataria, Analyst

Understood. Thank you.

Operator, Operator

The next question is from Alejandro Vigil with Santander. Please go ahead.

Alejandro Vigil, Analyst

Yes. Thank you for taking my questions. And congratulations on the Enilive transaction. My first question is about Plenitude. If in connection with the interest you're seeing Enilive, we could see some additional interest in selling stakes in Plenitude in the second half of the year? And the second question is also regarding the low carbon strategy, particularly in terms of Carbon Capture and Storage (CCS). The CCS is an area which you are considering investing hundreds of millions to billions in the coming years. What kind of returns are you expecting from these investments? Thank you.

Claudio Descalzi, CEO

Thank you, Alejandro. For Plenitude, I don't think we will see activity in the second half because we have other projects that are more mature, but we have had a lot of interest for Plenitude from big funds and other companies. So Plenitude is there; there is room; we have room, and clearly also planning this in a similar situation as Enilive. They require money to invest in their growth. They have a very important plan for growth. So it is not something that we can exclude. We have to understand that if these investors are serious and want to genuinely share our projects, but we do have room in Plenitude and we have also received a lot of interest. CCS is not a question of how much we are going to invest. CCS is becoming more and more real in terms of projects, in terms of acceptance. In the UK, we are proceeding. In a few days or weeks, we are going to inject cash in Ravenna, so it's there. We have a lot of interest from hard-to-abate industries, not just from Italy but also from France and Greece. So there is a strong interest and strong movement. Our investment model that we now have in Italy and the UK, where we take care of both transportation and storage, does not require significant investments. In any case, our model is based on existing facilities, depleted reservoirs, where we have everything practically because we have all the wells and platforms and compressors. So we just have to reverse the process, maybe train some injectors, but it is not a big investment. So it's a big deal, a big business, and a lot of interest. It doesn't require a lot of investments. The only part that is relatively expensive is the carbon capture itself, and it's not about capital investment, but rather operating costs that we have to manage every time we capture the CO2, depending on the percentage of CO2. So, it is not a very capital-intensive project. But it is something that can be very useful during the transition in reducing CO2 emissions from hard-to-abate sectors. We have a quite interesting advantage and priority in the system because we are among the few companies performing real projects that will start production now in a few months or within a year. Do you want to add something, Guido?

Guido Brusco, CFO

Just to complement what you said, not that much capital will be needed, and the capital needed will be mainly provided through project financing, which we've seen appetite from banks and institutions to fund those kinds of projects.

Alejandro Vigil, Analyst

Thank you.

Operator, Operator

The next question is from Alessandro Pozzi with Mediobanca. Please go ahead.

Alessandro Pozzi, Analyst

Good afternoon. Thank you for taking my questions. I have three. The first one is on GGP, the new guidance, sort of EUR1 billion. Can you perhaps elaborate on what allowed you to raise the guidance to EUR1 billion, and how you see opportunities in the market for the second half? I'm just trying to understand whether potentially there could be further upside to the EUR1 billion in the second half. Then the second question is on chemicals. Of course, you said the results are great. The only probably downside was chemicals that lost still 200 million. Can you give us an update on the restructuring plans for the division? And finally, I believe only a few weeks ago, the constitutional court in Italy declared part of the windfall tax unconstitutional. I was wondering whether there is any chance of recouping at least part of the taxes paid in the last couple of years? Thank you.

Claudio Descalzi, CEO

Thank you, Alessandro. So I think Cristian is going to answer the first question and then Adriano for Versalis, and then Francesco.

Cristian Signoretto, CFO

Yes, so on the rate guidance, there are three major elements which actually allowed us to raise this guidance. One is the sustained trading environment. So we were able to capture value out of the volatility, especially regarding geographical spreads, especially in Italy, and the oil and gas spreads. The second element is the anticipation of some renegotiations that we expect to close later in the year. Actually, we anticipated that in the second quarter, which helped our results there. The third element is linked to an accounting readjustment that actually increased the EBIT but without any impact on cash flow. And when it comes to the second semester of the year, we still see those elements at play, which is why we were able to raise that guidance to EUR1 billion.

Adriano Alfani, CFO

On Versalis, thanks, Alessandro, for the question. As you described, we are really grappling with continuous negative momentum in terms of market. Raw materials and variable costs remain pretty high for the chemical sector. There is weak demand. On the other hand, there is also strong availability of product from imports, also due to very weak demand in China that is rerouting a lot of product from the US into Europe. So really a negative momentum. Regarding the transformation plan that we presented during the Capital Market update, we are developing the plan while taking into consideration all the elements presented in March during the Capital Market Day. That will enable, as we said in March, breakeven EBITDA in 2025, breakeven EBIT in 2026, and breakeven cash flow in 2027. Engagement with all the stakeholders are ongoing. We will continue this engagement in the second half, and we are confident that in the call for the result of the third quarter, we will be able to share more ongoing implementation by Q4.

Francesco Gattei, CFO

Okay. Instead, regarding the ruling of the constitutional court, clearly the court has recognized that under special circumstances, there is the possibility to raise this levy or base it also on a particular structure, the VAT, the delta VAT basis. So it is a one-time tax measure originated by the special circumstances. This does not exclude the possibility for us to move forth with legal action, in particular related to our gas trading arm that was heavily impacted by the tax. The worst case was not dealt with by the constitutional court ruling. On the other side, we are going to pay in the next, let's say, six months, the last installment of the tax, EUR450 million. And also in this case, we will move our appeal regarding these taxes. So we will continue to seek compensation or reduction in certain instances.

Alessandro Pozzi, Analyst

Thank you.

Operator, Operator

The next question is from Alastair Syme with Citi. Please go ahead.

Alastair Syme, Analyst

Hello. Can I just clarify the position on whether there might be a future IPO of Enilive? I think to the point that was made earlier, you might come down to a 65% stake. So it was a question of whether you could go lower than that? Or is now a future IPO really being held as a future exit for one of the partners like KKR? And then secondly, it is widely known out there, there's a large industry opportunity in Namibia. I wonder if you could talk in concept. Could you see a role for Azule to be used as an acquisition vehicle? I guess more to the point, are you prepared to put capital into Azule if a good opportunity came up?

Claudio Descalzi, CEO

Thank you. For Enilive, the first question, Francesco can give some insights.

Francesco Gattei, CFO

Yes. Clearly, the IPO is the goal, both for Enilive and Plenitude. The structure of the IPO will require a certain mechanism; it is important to understand which is the amount that funds are involved, first to understand which is the overall percentage of the funds, if it's one or two. Secondly, which is the kind of funds that need to exit during the liquidity event of an IPO. In that case, there would be a larger room for them at the beginning than for Eni, but is something that has to be structured. First of all, we need to finalize the deal with KKR, and eventually, the second deal. So I think that it is quite premature now to discuss the structure of an IPO that will occur in a number of years. So in any case, there are different options.

Claudio Descalzi, CEO

Before giving the floor to Guido, just to clarify something. Normally, we go through a dual exploration model. That means that we go through exploration, and then we sell the window. It is not our habit to do the vice versa. We are not really interested to buy something that has been de-risked by somebody else because we have a huge amount of exploration blocks, huge amounts of discoveries. Azule recently entered into an exploration block, the PL 85. Our strategy is very distinct. We are not really seeking risk in exploration; we aim to produce this exploration. So Guido, I think I have said everything clear. I doubt about it.

Alastair Syme, Analyst

Can I just ask back to the IPO concept? Would you be prepared to fall below 50% stakeholding in either Plenitude or Enilive at some point in the future?

Francesco Gattei, CFO

In Plenitude and Enilive, we want to do an IPO at the proper time with the percentage that the market will absorb. There will be different steps in order to decide what percentage we are going to hold. Speaking about what our ultimate percentage is in these two entities is something that is extremely premature now.

Operator, Operator

The next question is from Lydia Rainforth with Barclays. Please go ahead.

Lydia Rainforth, Analyst

Thank you and good afternoon. Actually, quite a lot of my questions have been asked, but two if I could. Just coming back to the distribution policy. The additional potential for I think about EUR500 million buyback. What would actually stop you from doing that? So when you get to October, if you look at the balance sheet, a good place. You've got Enilive coming through. What would actually stop that from happening? And then secondly, this is just more of a big picture question Claudio. But in terms of the satellite model, how many satellites do you think is actually manageable? And by that, I'm thinking you've got different — now you’ve got Ithaca up in the North Sea, you’ve got Azule in Angola, we have Enilive, we have Plenitude. How do you see that kind of E&I, existence going across everything? Thanks.

Claudio Descalzi, CEO

The first question regarding distribution policy—who is preventing us from doing that now, is because we are prudent and we want to have a clear vision, everything clear. We could do now because everything is mature, but we want to be sure that all capital allocation is done in the right way. It’s our responsibility; we don’t want to run. We don’t need now to rush. It’s a question of a couple of months. So I think that first of all, we have to understand that everything is progressing as we think and as we hope. It’s more likely that everything will be good, but that is the main reason. On the satellite model, Francesco, if you want to share something in relation to the satellite?

Francesco Gattei, CFO

But I think that it proves with the experience that we have — let’s say matured so far, both with VAR and the experience of Azule. And now with Ithaca that is yet to be completed as you know. I think that we proved there is an opportunity to create this model. This is a bit hybrid versus the traditional model of an oil and gas company that wanted to have all control of everything in-house. You need to have good management, good capability to deal with the Boards, establishing strong technical relationships, and having an understanding of your counterpart and the market rules. So far, I think that we have seen only benefits from what we have designed as a satellite and the capability to manage the complexities that this implies.

Claudio Descalzi, CEO

So I'd like to add that clearly we’re going through a different kind of model. I think it is a very good model, but that also poses challenges which is the challenge that we have to be useful. We have to attract our satellites. These new companies must understand we add value to them. So that is a challenge where we give added value through our technologies. All the technologies that the satellite are using, our proprietary technology is something we update, we refresh the software and hardware. So there is a strong relationship that is going to be reinforced because we are experiencing a very strong relationship from a technical point of view, from an overall general point of view because this new technology we had to rescale, upscale our people, and our people is going to these companies. There is a strong, umbilical link because the skill and the technical capability is something we produce in the corporate. So I think that is completely different. But clearly, we are facing a different period. We are facing the transition and a different kind of world. We cannot think that we cannot continue to use models that we used 30, 40 years ago. And that is the reason why we moved a few years ago because we understood that the future would be different. We must have different tools. Clearly then we have the technology — we have gas, we have oil, but we also have a very strong resource which is technology, know-how, R&D, and skilled people.

Operator, Operator

The next question is from Peter Low with Redburn Atlantic. Please go ahead.

Peter Low, Analyst

Thanks. The first was on upstream production. You said that's now expected to be towards the upper end of your guided range. What have you assumed in terms of the timing of disposals within that? And then can you perhaps update on some of the 2024 start-ups in the plan, specifically Cassiopea and Baleine Phase 2? How are they progressing? And then the second question was on your biorefining target. I think you previously targeted 3 million tonnes of capacity by 2026. I thought that included a contribution from Pengerang. I think in the press release today, you said that — that might not start up until 2028. Does that 3 million tonne target still hold? Or could that slip a bit? Thanks.

Claudio Descalzi, CEO

Well, the first question is for Guido and the second one for Stefano.

Guido Brusco, CFO

Yes. As we said, we are expecting to be at the upper bound of the guidance, and this is being reinforced by several factors. First the good performance in the first half, driven by Ivory Coast, Indonesia, Congo, and Libya. The confidence we are growing on the startup. Cassiopea, as we speak, we are at the very last stage of commissioning, and first gas is coming soon, expected in early August. On Baleine Phase 2, we just completed the naming ceremony the day before yesterday. So the ship will soon sail, will be in the country in September. And building on the experience of Phase 1, we expect a couple of months of final integrated commissioning. So this startup will also happen at the end of the year. The uptime has also been pretty low. All the major maintenance are factored into our budget. So I would say we are pretty confident to be in the upper side of the guidance.

Stefano Ballista, CEO, Enilive

Yes. On biorefining, actually, our choices are driven by two key drivers. The first one is to ensure state-of-the-art biorefining capabilities. This means capability to process 100% waste and residues, high flexibility in order to shift from sustainable aviation fuel to HVO, depending on value pools driven by market volatility and market demand evolution, very efficient and effective processes. This required a detailed deep dive to ensure maximum value creation in whatever context. And second, having a view on market evolution, the second driver has been getting the right phasing in terms of cash out, CapEx, and value creation, to maximize the IRR of each investment. Given these two main drivers, we rephased in a minor way capacity development; we are going to reach the 3 million tonnes by 2027.

Operator, Operator

The next question is from Michele Della Vigna with Goldman Sachs. Please go ahead.

Michele Della Vigna, Analyst

Thank you and congratulations again for the strong results. Two questions, if I may. The first one is on your tax rate. It has been quite volatile in the last few quarters. I was wondering what you think would be the best assumption for us to use in the coming quarters? And then secondly, I wanted to come back to Egypt. It looks like they are committing to import LNG, which effectively implies there will be short gas, even potentially in winter for the next couple of years. In the last five years, you've effectively turned that country from a net importer to a net exporter of gas. I was wondering if there was anything through exploration or development you could do there, especially connected to your Cronos discovery in Cyprus, which seems to have very good well deliverability and whether there was effectively a political agreement to potentially get it into Egypt. Thank you.

Guido Brusco, CFO

Yes, Michele, you are right. I mean, it's open source information that Egypt has awarded 20 cargoes for the summer from now to September. We don't have more visibility than what the open sources can provide. Clearly, things may change; import from neighboring countries, or demand in the country may not raise as expected. So we cannot rule out that a few cargo may be exported next winter. But for sure, it is not very likely as it was this year. In terms of attractiveness of Egypt as a potential hub, clearly there is this potential. Egypt has capacity in LNG, capacity for liquefaction, processing capacity but this requires alignment between many stakeholders, both private and government. I know that the Egyptian government is working on that, but it is quite a long journey.

Francesco Gattei, CFO

About the tax rate, yes, it is correct that there is volatility, but volatility is driven by seasonality, by the contribution of the different segments in line with their seasonal cycles. You know very well that if the contribution of the results is driven by E&P or by downstream, this will help to reduce the tax rate, while in the quarter where the upstream dominates, the tax rate is a bit higher. Expectation for the year is to have a 50% tax rate in line with what we presented at the beginning of the year, just a bit above. But it is not material—very normal fluctuation. We expect that this 50% will be at the top end in the coming years. So we are probably looking at something in the range of 45% as a percentage in the next four-year plan.

Michele Della Vigna, Analyst

Thank you.

Operator, Operator

The next question is from Matt Smith with Bank of America. Please go ahead.

Matt Smith, Analyst

Hi, good afternoon. Thank you for addressing my questions. I have two, if I may. There has been a significant focus on your net CapEx today, which is understandable, but I would like to return to the gross CapEx. It seems that based on the first half results, the run rate is closer to EUR8 billion, rather than the EUR9 billion projected for the full year. Could you provide any insights on that? What kind of activity should we expect in the second half of the year that might drive that number higher? My second question is also about the buyback. Would you be open to proceeding with the potential for an additional EUR500 million in buybacks if the disposals occur in the current macro environment? I am curious if you are aiming for 35% of CFFO in that case, regardless of what that CFFO might be, or if you are planning to execute on an additional EUR500 million in buybacks. I bring this up because I noticed that your CFFO guidance still reflects a Brent price of $86 for the full year, which is slightly above the current market price. Thank you.

Claudio Descalzi, CEO

So for the first question on gross CapEx, what I said during the presentation and our expectation is to stay close, lower but close to the EUR9 billion that was our original target. It's true that now if we consider what we have spent in the first half, we are tracking a little more than EUR8 billion. So we have space. What we have, we have activities that are linked to exploration and development. So we can save something. We can maybe reduce, but our expectation linked to the activity we have, not only in the upstream, is to stay close to our initial forecast. It is likely that we can spend a little bit less, but at the moment that is our target. For the buyback, Francesco.

Francesco Gattei, CFO

The buyback, clearly the scenario—if we apply the scenario today, this will not make a major change to the overall cash flow from operations in the year. So we are speaking about a potential impact in the range of EUR300 million to EUR400 million. So this is something that is almost equivalent to a 1% leverage impact. This will not be the major driver of our decision; a major driver will be our capability to complete and have visibility to the disposal plan. So the 1% is not a big effect that will change the view.

Operator, Operator

The next question is from Martijn Rats with Morgan Stanley. Please go ahead.

Martijn Rats, Analyst

Hello. I don't think I've ever said this, but on this occasion, congratulations for the great quarter. It was really very impressive. A lot of questions have been already asked, but I have one left. And that is that I noticed that on Slide three of the pack that you sent around, it reiterates the EUR17 billion Cash Flow From Operations (CFFO) guidance targets for 2027. So it is a few years out, but it's another step up. And I was wondering if you would feel it appropriate if we were to assume the same structure of the payout on that number as you are now talking about for this year, i.e. 35% payout on the first EUR13.5 billion and then 60% on the increment above that. Is that sort of structure of payout also applicable to the CFFO guidance for 2027?

Francesco Gattei, CFO

You know that we have this guidance for 30% to 35%, and we revise this every year. We announced at the Capital Market Day, taking into account various elements, including clearly the scenario, including deleverage, including the structure of the company, moving eventually on growing the role of the transition business also changes the volatility of the results. So it is quite premature to recognize or to announce today what will be potentially the percentage. But the logic behind the distribution policy is clearly to improve even the purchase on the basis of the enhancement of the strength of the company. So that will be a natural consequence of this evolution.

Martijn Rats, Analyst

Okay. Thank you.

Operator, Operator

The next question is from Matt Lofting with JPMorgan. Please go ahead.

Matt Lofting, Analyst

Thank you for taking the questions. You've addressed many topics already, including most of the ones I had. So I'll keep it to just one. I wanted to revisit GGP. Its performance in the first half of the year appears strong, especially considering that market conditions for trading and optimization in gas markets have been less stable than in the past couple of years. Could you share your thoughts on what set GGP's performance apart in the first half? I ask partly because the financial results indicate that looking ahead to 2025 and beyond with the EUR800 million baseline per year you provided in March may seem increasingly conservative. Thank you.

Cristian Signoretto, CFO

So thanks for the question. Let's say, as we anticipated during the strategy meeting—the market has been reducing in terms of volatility. I mean just to give you a number, I mean, last year, in the first six months, the daily GTF movements were around EUR2.2, EUR2.3 per megawatt hour. This year, we are clearly down to EUR0.9 per megawatt hour. So this is a trend which is actually happening. Having said that, this is still a volatility which actually gives opportunities into the market in comparison to the period before the energy crisis. As I told you, especially on the geographical spreads, you know that we have a substantial activity in Italy, and that actually helped during the first six months. Second, the combined volatility between oil, Brent and hub has also provided us with opportunities. Those were the two elements, I'd say, in the first six months that were behind, let's say, the results.

Operator, Operator

It’s Jon Rigby here. I’m going to have to call it to a close. We run about 10 minutes over. But hopefully, that’s a reflection of the interest in these results. So thank you very much for your questions. Anybody who has follow-up questions, please contact me or one of the team and we can arrange to help you with any questions that you have. So thank you very much. I know you’ve had a long week. Get some rest. Have a good weekend, and we’ll speak soon.

Operator, Operator

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