On Friday 19/03, Eni S.p.A., the Italian Oil &Gas largest company by market value, announced in London its new 2016-2019 strategic plan whose main declared aim is to adjust the company business model in order to offset the impact of the dramatic plunge in oil prices.
Indeed, the whole Oil & Gas industry has been suffering significantly from decreasing oil prices levels, which began falling in the middle of 2014 and, despite a recent rebound, remain almost 75% below the peak of two years ago. On the one hand, 2014 was a year characterised by a shock in prices that rapidly moved from $90-$100 to around $50 per barrel by the end of the year. On the other hand, in 2015, oil prices continued to trend even lower, getting down to the $40-50 per barrel range since mid-summer and dipping below $40 per barrel in December.
During the new strategy presentation held in London, Mr. Claudio Descalzi, Eni’s CEO since mid-2014, said “the Oil&Gas industry is facing a very complex challenge: reducing costs to fulfil short-term constraints while enhancing long-term value”.
He also added that Eni, thanks to its successful strategy of restructuring and transformation into an integrated oil and gas company, is “well positioned to meet this challenge through a competitive cost structure, an efficient operating model and a flexible asset portfolio. We have started a new cycle of profitable growth and have the potential to extract more value in the future”.
Eni’s CEO: Mr. Claudio Descalzi
The pillars of the plan
In more detail, the new plan is centred on Eni’s refocusing on its core business: upstream (finding and producing oil and/or natural gas). Indeed, despite an 18% decrease in overall upstream capital expenditure, the company targets at increasing the hydrocarbon production by more than 3% per year (compared to the 3.5% growth outlined in the previous plan), so as to show a cumulative production growth of 13% over the 2016-2019 period.
Exploration will remain a key factor for the growth of the company. Indeed, over the last 8 years, Eni has discovered 11.9 billion barrels of resources at a unit cost of $1.2 per barrel, representing 2.4 times the overall production in the period, which is far above the peer average of 0.3. Moreover, Eni expects new discoveries of 1.6 billion BOE (barrel of oil equivalent), at a unit exploration cost of $2.3 per barrel during the plan period, with a very short time to market and an average expenditure consistent with 2015 levels.
An Eni’s Offshore platform for oil production
Another essential point is the reduction in the breakeven levels in order to deal with the low prices. In more detail, as said by Mr. Descalzi, “thanks to Eni’s portfolio flexibility, ongoing successful exploration strategy, synergies with existing assets and contract renegotiations, the average breakeven price of new projects has been radically reduced from $45 to $27 per barrel.”
Instead, with reference to its non-core Midstream (the transportation, storage, wholesale marketing of crude oil and/or gas) and Downstream businesses (the refining of crude oil and the processing and purifying of raw natural gas), Eni will continue to restructure them in order to create additional value in the future. In particular, “Gas & Power will benefit from the renegotiation of long-term contracts and reductions in logistics costs, while in Refining & Marketing, we are focused on lowering our breakeven while enhancing the efficiency of our operations and defending our retail market share”. Overall the group aims at further cost reductions of roughly €6 bn (€3.5 bn from renegotiations and €2.5 from cumulative G&A savings).
Oil & Gas value chain representation
As far as the whole group financial strategy is concerned, Eni will put focus on its high-value projects that have accelerated returns, in addition to the development of conventional projects during the considered period. The group CAPEX (capital expenditures) would amount to approximately €37 billion and, consequently, represent a 21% reduction at constant foreign exchange rates versus the previous plan. In addition, consistently with the refocusing on the Upstream business, “Eni will dispose another 7 billion euros ($7.9 billion) of assets, considered strategically irrelevant, by 2019. Then, regarding OPEX (operating expenditures), Eni’s objective is to keep them below $7 BOE, despite the fact that oil prices could eventually rebound to more “normal levels”.
In conclusion, as expected by Eni, the new plan would lead to a much more robust business model in order to deal with “a period of lower oil prices while continuing to create value in a sustainable way”. Thus, the Italian Oil & Gas giant is preparing itself to deal with a negative scenario which is everything but easy to decipher and, of course, given the high volatility and unpredictability of the oil prices, only time will tell us whether it has been the right move or it will need further modifications.