O'Reilly Automotive Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2024

There are 19 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the ENI's 2023 4th Quarter and Full Year Results Conference Call, hosted by Mr. Claudia Descalci, Chief Executive Officer. For the duration of the call, you will be in listen only mode. However, at the end of the call, you will have an opportunity to ask questions. I am now handing you over to your host to begin today's conference.

Operator

Thank you.

Speaker 1

Thank you. Good afternoon, and welcome to our 2023 full year and Q4 results presentation. 2023 was an excellent year for Remy. Our continuous focus has been on mitigating the impact of a market characterized by price and margin volatility as well as a critical geopolitical contest. We maintain a direction aligned with our strategy and successfully achieved or beat our targets for the year, while also improving the efficiency of our asset.

Speaker 1

This resulted in the 2nd best financial performance by any in its current structure. Our aim was to capture strong results, but also to foster our growth ambitions, meaning we also advanced our transition strategy very significantly. It has been a very It has been a very active year, so now let's go through the highlights. In the Upstream, we brought on stream 2 important operated projects in line with our fast track model of phased development. Malen Phase 1 started production at the end of August, less than 18 months after from the FID.

Speaker 1

At the end of December, we announced the first production of gas into the Tango facility at our Congo LNG project only 12 months after sanction. Key to our E and P strategy is feeding in new advantage resources from our industry leading aspiration. The highlight was Gengen North, the largest commercial discovery in the industry last year. Indonesia will become an area of major focus for our upstream in the coming years, benefiting from a network of facilities with spare capacity that will help to fast track future production at competitive cost. But Indonesia was not a stand alone success.

Speaker 1

In fact, our Nargis exploration well in Egypt offshore was also a top 5 discovery. A distinctive feature of any strategy is our organic model, but also focused portfolio management plays a critical role as we shape our business. Undoubtedly, our highest profile deal was the purchase of Neptun announced in June and completed at the end of January, a few months earlier than expected. I will update you a little more on that shortly. We are constantly looking at high grade our portfolio also via divestment.

Speaker 1

And in the year, we announced the sale of non coal producing asset in Congo and Nigeria onshore, both of which were approaching completion. In December, we were delighted to announce the investment by Energy Infrastructure Partners into Plenitude, providing new and aligned capital to support its growth path, while also confirming and valorizing part of the value we have already created. The satellite model of which Plenitude is an example with its circa €10,000,000,000 of enterprise value, is a key enabler for any to sustain growth and deliver shareholder value across the multiple energy vectors we are focused on. In Eni Life, our purchase of a 50% stake in the Chamblet biorefinery in the U. S.

Speaker 1

Marked a new stage of in establishing a leading international and integrated biorefining business. In addition, we acquired full control of Novamont, a market leader in the biochemical sector which will become another pillar in our strategy of transformation. In CCS, we reached an agreement with the U. K. Government on key terms of the economic, regulatory and governance model for the transportation and storage of CO2 on INET.

Speaker 1

This is a major step forward for a line of business that will be increasingly important over the coming years and where NNE has a leading European position. The progress we have made from a strategic perspective was also echoed in Eni's operating performance. Full year production of 1,655,000 barrels per day in the upper end of the guidance range and 3% higher year on year. We discovered around 900,000,000 barrels of new resources, which more than covers 2023 production. Amid lower European demand of gas, our GGP was effective in meeting customer needs in the absence of Russian volumes and also recorded the highest result in the East history.

Speaker 1

Palenitude ended the year with 3 gigawatt of historic renewable capacity, up by more than 1 third year on year and in line with guidance. 2023 biorefineries throughputs were up almost 60% year on year while biofuel capacity at 1,650,000 tonne per year was 50% higher after our U. S. Acquisition. Our upstream net carbon scope 12 footprint fell by 10% in 2023 and is now down by 40% versus the 2018 baseline, in line with our aim to net 0 in the Upstream by 2,030.

Speaker 1

Turning to our financial results. The news is also positive. EBIT pro form a of 17.8 €1,000,000,000 including €4,000,000,000 from associates is 2nd highest result in the history of the company in its current form. Net profit of €8,300,000,000 converts to €16,500,000,000 of CFFO and both confirm the historical top end of our yearly performance. In fact, this excellent result reflect a very significant improvement versus our expectations, around €3,500,000,000 on EBIT €2,000,000,000 on cash flow that offset the impact of the weaker scenario.

Speaker 1

CapEx of €9,200,000,000 was below our budget of €9,500,000,000 confirming that we are efficiently investing in the context of a rigorous capital discipline. We stepped up share buybacks in the Q4 to €790,000,000 totaling €1,800,000,000 for the year with around €400,000,000 to finish our program in Q1. Our full payout is equivalent to around 32% of our 2023 adjusted CFFO, above our original guidance. Shares in issue are down 9% over the past 2 years, enhancing their participation in a business that is also increasingly bigger and better. Indeed, in the past 2 years, NES distributed almost €11,000,000,000 to its shareholders, the highest amount since our listing.

Speaker 1

Leverage at 20% remains low by historical standards and the balance sheet provide us with flexibility to pursue our strategy while retaining considerable resilience. That is an overview of the strategic, operational and financial delivery for the year. I'll now move on the business division in a little more detail. Starting with E and P production for the full year was 1,660,000 barrels per day, up 3% year on year and up 6% in the quarter to 1,701,000 barrels per day. In the quarter, we saw higher activity in Algeria, seasonal effect in the North Sea and the benefit of strong regularity in Kazakhstan, Bahrain ramp up and better performance and entitlement in Libya.

Speaker 1

Full year pro form a EBIT in E and P of €13,300,000,000 mainly reflect the impact of lower prices when compared with 2022, partly compensated by higher volumes, while Q4 earnings include higher aspiration write offs, which is typical of the quarter. GGP reported EBIT of €680,000,000 in Q4, benefiting from a favorable outcome to an arbitration in the quarter, but with the underlying result muted by lower gas prices and reduced trading flexibility as we had expected it to be. Record full year EBIT of almost €3,300,000,000 took the benefit of strong optimization activity in the first half of the year, in particular highlighting the leverage to favorable condition that the GGP retains by virtue of its diverse supply and infrastructure position. Our Neptun acquisition was one of the key events of 2023. After announcing the deal in late June, we achieved completion on the 31st January for an investment of $2,400,000,000 in cash out and debt acquired, adjusted down from the headline of $2,600,000,000 as a result of the cash flows accruing since the deal's reference date.

Speaker 1

Net production consolidated directly by any and through our share of VAR is currently over 100,000 barrels per day. The high proportion of gas production currently around 75% and the low scope 1 and 2 emission profile precisely aligned with our strategic direction. The value proposition is clear with synergies estimated at $500,000,000 and with material upside, which includes the new discovery of Geng and the higher share of IDD field in Indonesia, additional gas supply optimization and potential CCUS project. Our portfolio activity will also progress as we continue to high grade with the announced divestment in West Africa to complete in 2024. Turning to Energy Evolution, NE Live reported around a 10% improvement in EBIT year on year despite weaker product markets, mainly reflecting improved biorefinery performance, both in terms of asset optimization and feedstock flexibility, confirming our vertically integrated model is delivering.

Speaker 1

With activities now in 8 countries, agri feedstock production has increased to more than 40,000 tonnes per year and it is on track to provide meaningful earnings over time. Our refining earnings were impacted by the fall in the Serm, but also by the narrowing in light, heavy and sweet, sour differentials. Our chemicals result reflect the very challenging market conditions, especially for European manufacturers and confirm our strategic intent to transform this business and also to increase focus on specialties and bioplastics. Planitut delivered on its target for store renewables capacity of 3 gigawatts at year end, up by more than 1 third. Renewable energy production actually grew more, up by over 50%.

Speaker 1

But more importantly, trying to deliver financial result with a full year EBIT up 50% year on year to over €500,000,000 and EBITDA up 40% year on year to over €900,000,000 After the remarkably strong 1st month, Q4 EBIT, as expected, made a more moderate contribution, reflecting higher depreciation charges as new renewable capacity and EV charging points enter service. The 2023 results of Plenitude came in the context of another highly volatile and challenging year energy suppliers and again, emphasize the quality of the model. This fact is recognized in the enterprise value of €10,000,000,000 placed on the business by the recent agreement with Energy Infrastructure Partner to invest in Plenitude. Before concluding, I would like to highlight the key results of the year that exceeded all the regional metrics, both operating and financial, right across the business. This strong financial outcome driven by the operating performance of the underlying businesses and the delivery of significant strategic progress all helped in outcome where we delivered the best shareholder returns among our peers group in 2023.

Speaker 1

We will update on our strategic progress and future targets when we meet again on the 14 March for our Capital Markets Day. We will elaborate on how Eni is embracing the changes in energy markets to build a stronger company, leveraging the growth potential of new business while preserving the full value of traditional sources. Tim, that are evident in our 2023 result. And now with our top manager, we are ready to answer your

Operator

The first question is from Biraj Borkhataria of Royal Bank of Canada.

Speaker 2

Hi, thanks for taking my question. The first one is on the Chemicals business. You suffered weak results for several quarters in a row now, and it's obviously been quite a tough environment for European Chemicals. What more can you do to stop the bleeding there? Can you talk about some of the plans in place that you can control?

Speaker 2

And secondly, the question is on Egypt. This is a big country for Eni, and obviously, the country is having a number of issues on the financing front. What do you expect for the summer in terms of LNG exports? And also, have you adjusted the activity levels at all given the issues with payments? And maybe you can talk about the receivables balance as it stands today.

Speaker 2

Thank you.

Speaker 1

Just a few words by chemical, and then I give the floor to Alfani, the CEO of Versalis. No, we are conscious about chemicals. We tried in the past and we are continue trying to change some line, but now it's time to consider more radical initiatives that are going through a transformation in the same way we did for our biorefineries. So we have to transform the plan. Clearly, the direction to go to a biochemicals also in light of the acquisition we made of EniMOND and also the other project that we developed implemented from our R and D that is one, but it's not enough.

Speaker 1

Go through our specialty is not enough. So we have to do some more strong action because it's really an area where we can create a huge value. So now I can give the floor to Adriano to maybe elaborate a little bit more on this topic.

Speaker 3

Sure. Thanks, Claudio. Thanks for the question. I mean, first of all, as Claudio was saying, we need to go extremely bullish in term of on efficiency of the entire business. Clearly, we have some case of inefficiency that has been increased due to the recent situation that we are facing in Europe.

Speaker 3

And of course, in some cases, we are getting a little more inefficient. So we are developing a stronger process in order to improve our efficiency across the entire value chain, entire process. But in term of the other three pillars that we are focusing on is, 1, is the specialization portfolio with the recent acquisition of the FIM project and some other development in relation of integration of the business with our portfolio, we decided to further speed up the growth in terms of specialization diversification of the portfolio. So this is 1. The second one is circularity, and we are moving very fast on circularity.

Speaker 3

This year, we are going to start the Phase 1 of the mechanical recycling in Puerto Marghera. And by the end of 2024, we expect to complete the construction of the 1st chemical recycling plant in Mantova. It's a pilot plant or semi industrial plant with intention then to speed up in term of industrial processes. And of course, as also Claudio was saying about the acquisition of Novamont, the acquisition of Novamont is another big cluster to differentiate and to grow this platform, not only in the really double digit to grow in term of biochemistry.

Speaker 1

Thank you, Adriano. So a few more about Egypt, then I give the floor to Guido, Head of Natural Resources. So first of all, clearly Egypt is passing through us or North Africa and Middle East through a quite difficult situation in light of the event we have now with Gaza. So clearly, it's not in a very simple situation. In spite of that, I have to say that Egypt is reacting.

Speaker 1

And we have to say also that Egypt is quite crucial, important, critical in the area for everybody, for the Mediterranean, for North Africa, for Middle Eastern. So what I think and what is my perception that everybody is trying out to help them. So saying that if you talk about receivable, there is a small marginal buildup they are paying, maybe less little installment that they are paying. So there is a willingness to preserve and protect investors. So there is a very positive attitude.

Speaker 1

So now I give the floor to the question is also about LNG because the cargo we receive in January and the rest. So now Guido is talking a bit more elaborate on LNG.

Speaker 4

Yes. On LNG, the question was in the summer, I think. And the summer, historically, there is very little, if no, export in Egypt given the high increase in the domestic demand. Currently, in the past couple of months, the end of Q4 2023. Because of the Israeli Palestinian conflict, there was a reduction, sharp reduction of the import to Israel.

Speaker 4

So the export of LNG in Egypt was impacted. In December, they restarted with some volumes. And we have seen, I mean, from E and I side, 3 cargoes in December, and we are foreseeing between 8 to 10 cargo in the forthcoming months before the end of the winter season.

Operator

The next question is from Clint Oswald of Bernstein.

Speaker 5

Good afternoon. Thank you. Yes, first question, I mean, a bit of a step up in gearing towards the end of the year. So I wanted just to get your thoughts around divestments and really the potential for more sizable or more aggressive upstream focused divestments. I mean, still a lot of continued exploration success.

Speaker 5

You're folding in Neptune. It feels like you've been buying a lot, so maybe a good time to start selling some of what is a high quality inventory. It could free up capacity to potentially signal some peer leading shareholder returns all the way through the plan and keep the balance sheet flexibility that Claudio just mentioned around executing the strategy. So that's the first question. Secondly, I wanted to ask about SAF, Sustainable Aviation Fuel.

Speaker 5

I remember the great trip we had last year in Venice, and we talked about SAF upside of up to 2,000,000 tonnes per annum based on demand. It seems like demand is ticking off. You've had this more sizable Ryanair deal recently, much more material than the DHL deal a couple of years ago. So the question is, are you starting to see SAF customer demand track at the high end of your expectations? And really, I'd love to get an idea of the price you're selling this for.

Speaker 5

Is this 3x jet fuel? Is this 5x jet fuel? It's hard to get an idea of what this might mean financially for the company. Thank you.

Speaker 1

Thank you for the question. So the first question is for for Francesco and the second one for Stefano, yes.

Speaker 6

Okay. Thank you. The question is about the gearing. Clearly, you have seen a step up in the quarter. The quarter increase was expected.

Speaker 6

Actually, we had a result that was in line with our target. Take into account that there were some, let's say, variation in the exchange rate that was a bit more higher for the euro and also because of the lack of the income that we are expecting to come before the end of the year related to Plenitude. Anyway, that increase was generated mainly by the inclusion of Novamonta debt inside after the acquisition, some as we said, the exchange rate effect and some cash related to leasing. In the plan, what you are going to expect is clearly exactly what you are mentioning. If you remember, the plus plan was a plan where we had a relatively balance in our, let's say, management of portfolio.

Speaker 6

We saw only EUR 1,000,000,000 of positive effect and that was originated by the fact that we are still in a position where we are buyer, while you will see that in the coming plan, you will have more, let's say, a stronger valorization of our assets, the Upstream with all the discovery that we have made and continuing to make and on the satellites that as you well know is a way also to accumulate cash in advance for fueling our future growth. So you will see a material impact of M and A and this will have a clear strong effect on the net amount of CapEx we are going to pay.

Speaker 1

For SAF trends and

Speaker 7

Yes. Yes, on SAF, I definitely confirmed the trend we discussed even in Venice. So we are seeing exactly what you see, let's say, voluntary demand coming in place in an increasing with increasing target. Just to make some examples, we see airline companies targeting 10% at 2,030 and logistic players targeting up to 30% still at 2,030. In Europe, we got Refuel Aviation already approved.

Speaker 7

It means starting from 2025, 2% of global fuel will be biojet. This means more than 1,000,000 tons, let's say, from one day to the other. On top, recently, the IEA set an increased target for biojet demand already in 2027 by up to 30% and definitely confirm the 50,000,000 ton at 2,030. Just give an high level number. In 2,050, we see 500,000,000 ton of jet fuel.

Speaker 7

Even assuming only 20% of biojet, we jump at 100,000,000 ton of biojet demand. This means that the market is going to be in strong demand for biojet. And given the time to get facility in place, we are in a very good position to take advantage from this tight market we are going to see in the medium term.

Speaker 5

Anything you could say about pricing? Sorry.

Speaker 7

Yes. No, pricing and profitability is given to the very, very short market. So today, it doesn't make too much sense to look at current number. Reason for that is exactly what I said. The market is going to be short in term of supply, given the current state of the art and the expected demand evolution on the other side.

Speaker 7

So that's the profitability we're going to expect. So good boost on our results in the next future.

Speaker 1

Thank you.

Operator

The next question is from Alessandro Pozzi of Mediobanca.

Speaker 8

Hi, there. I have two questions. The first one is related to the production in Q4, which was really strong. And I was wondering, is that Kazakhstan was very strong and also North Africa had a big jump quarter on quarter. Part, I believe, was Algeria, but maybe also Libya.

Speaker 8

So if you can give us some color on whether maybe that could be sustainable going into 2024? And also, I think, though, is Egypt production from Egypt is coming down a little bit and what should we expect from Zoh in terms of production going forward? The second question is on Kaunas 2, the recent positive results on the appraisal well. Is that a catalyst for developing Equinox on a standalone basis? Or if not, can you give us the thoughts on where we are on Cyprus in terms of moving those resources forward?

Speaker 8

Thank you.

Speaker 1

That's all question for Guido. So please, Guido.

Speaker 4

Indeed, I mean, you spotted rightly the production in Q4 was strong and this was thanks to the ramp up of Ballin. The recovery maintenance in Kazakhstan, higher contribution from Libya. This production as we move in 2024, in Q1 will be quite in line. The net portfolio effect will be partially compensated by lower entitlement in certain geographies. And while for what concern the Cronos, we can of course confirm that the recent appraisal well gave us comfort on the extension of the field confirming the upper side of the estimation, well deliverability is excellent.

Speaker 4

And of course, we are still assessing with our partner and the authority the best and most appropriate development scheme to bring these resources into production.

Speaker 1

Thank you.

Operator

The next question is from Matt Smith of Bank of America.

Speaker 9

Hi there, good afternoon. Thanks for taking my questions. I've got a couple, please. The first one would be on GGP, another extraordinary year for the division. But I suppose arbitration award aside in 4Q, it's very much been a year of 2 halves in regard to profitability.

Speaker 9

So just wondered whether you could sort of speak to the current market conditions in terms of arbitrage opportunities and also touch upon the sort of visibility you have into 2024. And then the second one on exploration, was just whether there was any news on the Orion 1X well in Egypt or whether that should be due soon? Any time line there would be useful, please.

Speaker 1

Okay. Christian Signoretto for GGP, please.

Speaker 10

So thanks for the questions. Surely, 2023 has been a very unusual, let's say, year, an exceptional year because of important optimization and trading opportunities and also positive arbitration and settlements results. When we look at 2024, clearly, I mean, the market has been reducing its flat price and this is, let's say, you can see that. But we feel that the volatility is still there because the market is very tight in the sense that demand and supply are very finely balanced because new LNG coming on stream is very little and demand is still very latent. If you look at European demand, Asian demand and also weather driven demand is still very latent.

Speaker 10

So we expect 2024 still to be a very volatile year with opportunities to be captured via trading optimization activities.

Speaker 1

Okay. So I think that Onigio is very fast because we are drilling, so we cannot say anything, correct?

Speaker 4

Yes, correct. I mean, we have yet to reach the target.

Operator

The next question is from Irene Himona of Societe Generale.

Speaker 11

Thank you. Good afternoon. On the Upstream, I see that you now recognize the UK energy profit levy as a recurring item. I wonder if you can provide some guidance on the E and P tax rate going forward, inclusive of these in the current environment? And secondly, on the numbers, the 4th quarter net interest expense you had, €54,000,000 was down very substantially, over 50% sequentially.

Speaker 11

And you referred to the drivers in your press release. I wonder if we can anticipate this level to be sustainable in 2024. Thank you.

Speaker 6

Thank you, Irene. On the U. K. Levy, we kept this since the start as a recurring item. We consider this due to the fact there is no expiration date, but there is a generic sentence related to the potential oil price for the removal to consider that in a recurring way.

Speaker 6

We are not able yet to provide you what will be the tax rate in the plan. What we can tell you is that the impact of these taxes versus last year, take into account of the start at the end of the last year, year on year basis is in the range of 1%, 0.7%, 0.8%. On the net interest, we will be very happy if we continue, but unfortunately it's not possible because you know that this is related to the financial asset that we have. We have almost €18,000,000,000 of liquidity that are gaining from the benefit of the interest rate growth. While on the other side, we have 70%, 75% of our debt, the gross debt that is at fixed rate.

Speaker 6

So if the interest rate will start to go down and you have to refresh your new debt, this net interest will be higher. Anyway, we will manage and we will continue to use different tools to keep as low as possible the capture, let's say, as much as saving as possible through our liquidity positions.

Speaker 11

Thank you.

Operator

The next question is from Giacomo Romeo of Jefferies.

Speaker 12

Yes. Thank you for taking my question. First is a very quick follow-up on your comments on GGP. And just I understand you are expecting to see more volatility in 2024. And just trying to understand how to read into the Q4 numbers if we take out the impact from the arbitration.

Speaker 12

Should that be a good indication of a normalized level of profitability in the absence of significant volatility? Second question is on Planitur. We have seen some comments during the quarter during last month from your future partners that they're sort of stocking down the prospects of an IPO of the business. Just wanted to check whether this is still the ultimate goal for Prelude for you and whether there is a full alignment at this point with your future partners?

Speaker 1

Thank you. So the first one is for Christian, the second one for Francesco.

Speaker 10

So well, I mean, in general, our results, it's, let's say, geared towards usually the Q1. Q1 usually is the strongest period and quarter of our, let's say, portfolio optimization opportunities for a number of reasons that clearly are very much linked to the type of assets that we have in our portfolio. So I'd say that the Q4 underlying result is not a predictor of the Q1 because of this, let's say, seasonality effect that you have in our business.

Speaker 6

Yes. On the planning to the road to the IPO, I confirm that we continue to plan our valorization through the different sources, different way. We mentioned at the beginning of the dual track. If you remember, we have already started to deliver the first of this track by the fact that substantially we fixed a bar, a value that is one of the first element for valorizing our satellites model specifically. And clearly, we will continue to monitor the market condition, market condition 2024 2025.

Speaker 6

Our partner that is yet, let's say, to enter in the entity in the partnership, clearly, as mentioned, it's something that is probably was, let's say, more generic and a bit misunderstood. He was thinking that was not necessary to do the IPO. It doesn't mean that this is the plan. The plan will be to do the IPO at the right condition from the market and clearly to capture the best value from this opportunity.

Speaker 1

Thank you.

Operator

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

Speaker 13

Thank you very much and congratulations on the strong delivery and exploration success, if I may. The first one

Speaker 12

is on the Mr.

Operator

D'Alevigne, we can't hear you very well. Can you please speak closer to the microphone?

Speaker 12

Sorry, can you give me that? A

Speaker 1

bit better, but the line I think the line is not very good, but try again, Mikhail. Can you hear me? Yes, better now. Yes.

Speaker 13

Okay. Sorry for that. I wanted to ask you 2 questions. The first one,

Speaker 12

And my second question relates

Speaker 13

to carbon capture. We're seeing a lot of progress in Europe, but much more policy support. You have bought the biggest

Speaker 12

development portfolios in UK and Italy. I was wondering if you could give us an update on the progress of that.

Speaker 1

So Michele, so we just understood the second, but not really very well. We understood the one an update on the carbon capture. The first one, absolutely, the line is so bad and there are a lot of background noise. So we didn't understand the first one. Okay.

Speaker 1

Update Guido, you need an update please on CCS? I can

Speaker 4

give you, Michele, an update on our major CCS project. So for the Ravenna Phase 1, the project is in execution at the moment and we are planning in early Q2 the start up. While for the Phase 2, the project I mean, we are now doing the engineering work and we are also completing the legislative framework with the Italian government. The plan is to make a final investment decision by Q2 2025 and a start up in 2027. In U.

Speaker 4

K, you may have read that we have agreed with the U. K. Authorities the main economic model, and we are now negotiating the definitive economic license, which we expect to finalize sometime in Q2, Q3 this year. Engineering works have been already done. And from a technical side, we are now in the procurement phase of the project and the target is to make a cluster FID by Q3 2024 with a start up in 2027.

Speaker 4

Another important element is that in April, 5 meters out of a total of 8, which have been selected by the U. K. Authorities, belongs to the INET Northwest cluster. And those have been selected as a priority emitters to access the fund made available by the U. K.

Speaker 4

Government.

Speaker 1

Okay. Thank you.

Operator

The next question is from Josh Stone of UBS.

Speaker 9

Thanks. Hi. Good afternoon. Two questions, please. Firstly, on your biofuel business, I just noticed your throughput was down quarter on quarter despite the ramp up of the PBF biorefinery.

Speaker 9

So was there maintenance impacting that? Or any comment you can make there? And potentially also if you could talk about where you see profitability in HVO today given the impact of lower credit prices both in Europe and the U. S, how much of your feedstock program is able to offset that? And then second question on working capital.

Speaker 9

There was some release during the quarter, but if I go back over the last 2 years, there's sort of been a trend or a bit about a $4,000,000,000 €4,000,000,000 build over the last 2 years. So how much of that do you think can release over the next period? Is there anything you can make any comments on that? Thank you. Yes.

Speaker 7

On HBO and on Bioproducts, 2024, it's a, let's say, transitionary year. This is well known and well expected. In Europe, we got Sweden change of obligation getting in place exactly this year. This is going to be partially compensated by a widespread of increased obligation in other countries, including, as an example, Italy, France, Holland, among others. In the medium term, we see still strong performance from biofuel demand for a set of reasons.

Speaker 7

I just touched the red 3 directive, the renewable energy directive that has been approved by you end of last year, countries are going to have 18 months to deploy it at country level, a number. In terms of energy content, it's going to jump from 14% RED 2 to 29% RED 3. Same in U. S, we got this year a significant capacity getting in, well known in advance. Demand is increasing linearly.

Speaker 7

In 2025, we're going to get impact from among others 2 main topic. 1 is the new clean production credit that is going to substitute the current blending tax credit. The new credit is going to apply on local facilities. So this is going to, in a way, create a barrier to current import flow to U. S.

Speaker 7

We have an estimated number of more than 1,000,000 ton coming to U. S. From foreign countries in 2023. The second point is the second element is CARB is expected to increase California target in terms of GHG reduction from 20% to 30%, 2,030. And then last, just it's a small signal, but we got a couple of days ago, New Mexico is the 1st non West Coast state in U.

Speaker 7

S. Approving an LCF as obligation mechanism, again, 20% year to year reduction in 2,030. So in the medium term, demand is definitely increasing and strong. From an asset perspective, we are working on all key levers to optimize profitability at whatever market scenario, namely vertical integration, feedstock flexibility and product diversification. We are also looking to move flows from U.

Speaker 7

S. To Europe wherever arbitrage are going to be open.

Speaker 6

In terms of the working capital trend, it's very difficult to anticipate how it could be in the next quarter. Substantially, what we can do is or we can say that this is a matter of related to the trend of prices. So once you have growing prices, there is generally an increase in your working capital position and clearly on your capability to lift, so to reduce your stock positioning both in the Upstream and clearly also in the other sector, in particularly in the Downstream. So I would say that clearly, we were very active from this point of view. On the other side, we were helped by the price trend.

Speaker 9

Got it. Thank you.

Operator

The next question is from Alejandra Vigil of Santander.

Speaker 12

Hello. Thank you for taking my questions. I have 2. One about the implications for Plenitude in the current scenario of lower power prices in Europe. This is going to have some implications in your strategy at this beginning of the year?

Speaker 12

And the second question is about the outlook for refining in Europe. In the beginning of the year, we also see some increase in refining margins in January. If you can elaborate on your thoughts on that. Thank you.

Speaker 1

Okay. Stefano Gobert, CEO of Plenitude, answered the first question.

Speaker 14

Thank you, Alejandro. On the energy price level, of course, on the renewal production where we have spot prices, we will take the impact on the lower prices. But on the other side, on the retail activity, lower prices reduce a lot our risk in the portfolio because the volume risk is reduced and the working capital is released. So our combined business model help us to pass through this period like we did this year with the result of 2023.

Speaker 1

Pino? Yes, sir.

Speaker 15

Yes, sir.

Speaker 1

Okay.

Speaker 15

Can you hear me? Yes, yes, very well. About the refining in Europe in this 1st period of the year, we are seeing again very high volatility. And in the last period, with the closure of the Suez, of course, we have increased the spread related to the difference from diesel and Brent that are arising more or less as during the first phase of the war in Russia Ukraine. And it means a very high impact on the margin on the traditional refining.

Speaker 15

Of course, what we expect in this year is that this volatility will continue, and probably we could gain to this for some months waiting for the driving season when we will see the increase also the market of gasoline. The results are quite good. Notwithstanding this, we will continue our strategy for the mid- to long term because the traditional refining in Europe could not be very profitable in the mid- to long term. For this reason, we are continuing to in the program of evolution and transformation of the traditional refining and biorefinery. Maintaining the Middle East refining system that is less volatile, more stable in the profit.

Operator

The next question is from Lydia Rainforth of Barclays.

Speaker 16

Hello and thank you for taking the question. 2 please. Firstly, just in terms of the upstream and the fact the fast track starts that's coming on stream, the Neptune acquisition coming into the portfolio. How do you think about the margin per barrel evolving as we go forward? I'm assuming that actually we should see that as incremental to it.

Speaker 16

And then secondly, and I appreciate if you don't want to answer this question, but just around the buyback for 2024, whether any would want to be involved in at least offsetting some of that impact in terms of the market? Thank you.

Speaker 1

Okay. So the first question, maybe I gave some first answer, then I don't know if we don't want to add something. Clearly, when we talk about the margin of Upstream, we have to go back to the fundamentals that are at the cost because we cannot do anything on the price of the cost. So we have to you must have a very low exploration cost, you must have a very low operating cost and a very low and really very low development cost. So our cost in terms of exploration this year was approximately $1 per barrel discovered.

Speaker 1

We had a very exceptional year. We discovered a lot of resources and that is the base. If you have to buy something like that, if you have to buy in a derisked exploration, you have to spend much more. You have to spend in around between $5, dollars 6 or up to $10 per barrel. Then we had the operating cost.

Speaker 1

Our operating cost remain in the lower side of the industry, about $6 per barrel and the development cost is ranging between 9 10. Why? Because it's organic, it's also following our strategy. We are we develop a near field close to existing facilities. So that means that we're below.

Speaker 1

And that is also for the acquisition we made. They are well below in terms of thermostat and cost well below $18 $17 per barrel. So that helped the margin and that's also the reason why the cash neutrality or the breakeven of our stream is very good. Clearly, when we make an acquisition, normally we are organic, but we work also through acquisition. When we have big synergies, we try to replicate and check and due diligence that the asset we acquire are in line with our cost and we are not diluting our cost.

Speaker 1

The second one on the buyback, Francesco, yes, Guido, you want to add something or it's okay?

Speaker 4

What would that just the time to market? The time to market.

Speaker 1

The return on the project. Sure, you're right.

Speaker 4

The quality, as Claudio said, of our portfolio, but also our distinctive phased and fast track approach improves a lot the return on the project because of the very short time to market.

Speaker 6

On the buyback, generally speaking about the distribution, you have seen that in the we announced it last year the distribution policy between 25% to 30%. Actually, we designed a distribution that was at 30% on the basis of the assumption of the cash flow we planned at the beginning of the year. And actually, we are working now in the range of 32%, 33% of overall distribution yield. The buyback plan is substantially almost completed. We have accelerated in the last part of last year.

Speaker 6

So we proved to the market that we are flexible and positively flexible towards this metric. Clearly, any other distribution guidance will be disclosed in the next Capital Market Day in the middle of March with all the plan related both on the dividend and the buyback.

Speaker 16

Perfect. Thank you all.

Operator

The next question is from Bertrand Hodee of Kepler Cheuvreux.

Speaker 13

Yes. Hello. Before taking my question, I have 2, if I may. I understand you will give us full update on 14 March with a new strategic plan on your medium term target. And sorry to be a bit impatient, but is there any element of 2024 guidance you would like to share with us at this stage?

Speaker 13

The second question is on UAE LNG opportunity. The UAE is likely to launch close to 10,000,000,000 ton of LNG this year sanctioning the Ruwais LNG project. Would you be keen on participating? Meaning, I remember that when Qatar launched the extension, you were quite vocal, you would like to participate. Do you have the same appetite to potentially take a stake or be an offtaker on Abu Dhabi LNG project?

Speaker 13

Thank you.

Speaker 1

So on the first question, what we can say just for the sake of clarity is about CapEx. What we want really to do is to be very focused on CapEx on our expenditure. One means is M and A, but the other is to be efficient in CapEx. So reduce CapEx, but keeping in any case the same level of profitability and returns on our operations. So that is an exercise that on which we are working a lot.

Speaker 1

And so CapEx is so the gross CapEx will remain below €9,000,000,000 I can say, also if my people are not very happy, but that will be and then net CapEx much lower. That's what I can say. For Abu Dhabi, we are working Abu Dhabi work very well with ADNOC and we are interested. We are also developing gas and producing associated gas, but we are going to develop gas with arguasi. So it's something that we can have a look, but I cannot tell you anything now.

Speaker 1

If I have to say something, I will say to Abu Dhabi and ADNOC and then to you. Thank you.

Operator

The next question is from Matt Lofting of JPMorgan.

Speaker 17

Hi, thanks for taking the questions and congratulations on strong execution through 2023. Two quick ones if I could please. First, explorations clearly been a significant value lever for the company through recent history. I think you talked about Egypt earlier. Could you just talk about sort of 2024 more broadly over the next sort of 6 to 12 months, any sort of key exploration opportunities that you have lined up within the portfolio and perhaps sort of next steps around Indonesia as well?

Speaker 17

And then secondly, just on GGP, the arbitration proceeds were a key component of the Q4. Obviously, that's a lumpy component within the business. And can you just talk about how we should view that on a 3 cycle basis and any further arbitration upside that you see over the medium term? Thank you.

Speaker 1

The first question about arbitration and future development is Guido or Aldo that is not in charge of aspirations. One is Christian.

Speaker 4

On exploration, I think, I mean, you said it's one of the more I mean, of the levers of the value creation in our company. The result this year were outstanding as also in the past year and particularly in Indonesia. We have some impact wells high impact wells ongoing at the moment. And of course, the result of those are will happen soon. In 2024, we will continue our near field ILX exploration in proven basin that proved to be very effective and successful.

Speaker 4

Indonesia is one of the key area. Gangne North and the acquisition of the acreage around the discovery proved that play as well as other play that we drilled in the past year can deliver significant resources. When we made the discovery in gangue, we outlined also the potential of the area, which is in the region of the 10ths of the TCF. And as you may have appreciated, we have already anticipated that we will build a second hub in the north area and that together with the hub, Jan Creek, we have in the south with almost 750,000,000 scarp per day. This 2 hub will bring a production which is approximately close to the €2,000,000,000 of the standard cubic feet per day in the forthcoming year, which will be which will have extended plateau because of the number of prospects that are around that.

Speaker 4

Other important area, of course, are legacy areas like Egypt and others where we had our discovery. Norway also is an area where we have a significant acreage in exploration. And but of course, the near field nature of our discovery will also make enable us to bring them quickly on stream. I wouldn't

Speaker 1

So quickly onstream and gave us a possibility to go through, as Francesco said, through dual exploration. So it's a part of the plan because we discover a lot. We own between 80% 100% of all these discoveries also with what we acquired. So that is another important upside that we can have in our next 4 year plan. So now we have Christian and then one more and then we have finished.

Speaker 1

Thank you very much.

Speaker 10

So in terms of renegotiation, as you can imagine, I mean, these are normal feature of the midstream business. So we have ongoing renegotiation in our portfolio with our contracts. We tend to clearly settle those amicably. But from time to time, it happens that we had to resort to arbitration tribunal in order to seek a conclusion of that discussion. So what I can tell you is that in 2024, we don't expect any outcome from any arbitration.

Speaker 1

Thank you, Christian.

Operator

The next question is from Massimo Bonazzoli of Equita.

Speaker 18

Thank you. Two quick set of questions. The first on the chemical business, I'd like to know how much of the negative performance of Versalis in Q4 is coming from the consolidation of Novamonte and given the still weak trading condition in Q1 2024 for chemical margin, is it reasonable to expect again a triple digit loss for Q1 24. And then a question on the refining business in Italy, following the change in ownership of Aizab and now on Saras together with the stop of traditional activity in Livorno. Could you share your thoughts on the supply of fuel on domestic market?

Speaker 18

And if this may represent an opportunity for ENI? Thank you.

Speaker 3

Okay. Thanks for the question. On the chemical side, NovoMont has been consolidated just for a quarter. So the impact of the 4th quarter is very minor and is not really representative because every time that you're in acquisition that you have some transaction point of view. So it's really not representative of the performance in 1 quarter.

Speaker 3

About outlook for Q1, we don't give yet the outlook for Q1. But of course, it's not the 3 digit, yes.

Speaker 1

Thank you.

Speaker 15

No, about the refining in Italy,

Speaker 1

of course Refining in Italy, I asked Pino if he's still there.

Speaker 13

Yes.

Speaker 15

Okay. No, the refining in Italy, in the refinery in Italy, we are seeing a lot of change in the last period and 2 big refineries are moving to the trader ownership. What does it mean? That there is an interest still an interest in the refining system in Italy. But at the same time, we have to consider that in any case, the profitability of the refining the traditional refining system in Italy as of the Europe is affected by the very high cost of energy, very high cost of CO2, very low size of the plant.

Speaker 15

So it's very, very difficult to maintain in the long term the profitability. The effect of the transformation of Livorno refinery and Biofinery help to balance also the demand and offer in a market that is not already declining in the mid- to long term. So what we expect to see in Italy is that in our system, more balance between production in the refining and consumption in the marketing in the retail system and wholesale system, we could gain to advantage to reduce the volatility because the volatility is when you have to offer the product on the cargo market. And the transformation of the traditional refinery and biorefinery helped 2 times. 1st, because you enter in a new business very, very profitable as we have seen before.

Speaker 15

2nd, you rebalance demand and offer in the traditional refining system.

Speaker 18

Very clear. Thank you.

Operator

Ladies and gentlemen, this is the last question. Thank you.

Speaker 1

Thank you. Thank you very much. Goodbye.

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Earnings Conference Call
O'Reilly Automotive Q4 2023
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