2017 results

Net profit attributable to Eni’s shareholders for the full year of 2017 was €3,374 million, a noticeable improvement over 2016, when a loss of €1,464 million was incurred from both continuing and discontinued operations, with the latter including a one-off charge of €413 million on the Saipem shareholding following the loss of control over the investee. The reported operating profit for the full year of 2017 was €8,012 million, sharply higher than in 2016 (up by €5,855 million). The Eni Group recorded a substantial recovery in profitability across all business segments. This trend benefitted from the progress in the implementation of the Group’s strategy and was driven by a faster time-to-market of discoveries, profitable production growth, efficiency gains, restructuring of the long-term gas contracts portfolio, as well as the restructuring of refining and petrochemical hubs.

Leveraging on the turnaround achievements, Eni was able to fully capture an ongoing recovery in the oil price scenario, with Brent crude oil prices up by 24% y-o-y driven by better market fundamentals. The downstream businesses were helped by higher global demand for commodities.

The 2017 result was also helped by the net gains of €2,739 million recorded on the divestment of a 40% interest in the Zohr gas field offshore Egypt and of a 25% interest in natural gas-rich Area 4 offshore Mozambique, which effect was offset for two thirds by the recognition of a number of special charges and write-downs. Finally, the Group profit & loss benefitted of a lower tax rate of 51% in line with the Group historical average, while in 2016 the tax rate was much higher at 217%. This trend was explained by the recovery in profit before taxes of the E&P segment which helped the Company offset against the taxable income a higher share of deductible expenses, including those incurred under PSA contracts, and to dilute the incidence of non-deductible expenses.

In 2017, the trading environment was characterized by a recovery in crude oil prices, particularly in the last part of the year. This was driven by a better balance between global demand and supplies on the back of the agreement reached by OPEC countries at the end of November 2016 to reduce the output of the cartel, joined also by certain non OPEC countries (among which Russia). The average price for the Brent crude oil benchmark increased by 24% y-o-y. This recovery was not fully reflected in Eni’s average hydrocarbon realizations because of the slow recovery of gas realizations on equity production, also reflecting time lags in oil-linked price formulas.

Eni’s refining margins (Standard Eni Refining Margin - SERM) which represents the benchmark for the level of profitability of Eni’s refineries before fixed cash expenses, increased from a year ago (up by 19%) to $5 per barrel benefitting from higher relative prices of products compared to the cost of the petroleum feedstock. This trend has weakened in the fourth quarter 2017 due to a swift upward movements in the Brent price. The Company managed to reduce its break-even margin and to align it with the current trading environment.

The exchange rate of euro against the dollar was 1.13, with an appreciation of 2.1% compared to the average exchange rate recorded in 2016.

Adjusted operating profit and adjusted net profit are determined by excluding inventory holding gains or losses and extraordinary and non-recurring gains and losses (special items).

In 2017, gains on disposals, asset revaluations, impairment losses and other special charges were a net positive of €995 million in net profit and of €2,209 million in operating profit.

Excluding these gains/charges and an inventory holding profit of €156 million (€219 million pre-tax), the adjusted net profit for the year was €2,379 million compared to a loss of €340 million in 2016, while the Group adjusted operating profit was €5,803 million, more than doubling y-o-y.

The €3.5 billion increase of adjusted operating profit was explained for €3.1 billion by scenario effects and for €0.6 billion by volumes growth and efficiency and optimization gains, partly offset by OPEC cuts and one-off effects amounting to €0.2 billion.

Summarized group balance sheet

The summarized Group balance sheet aggregates the amount of assets and liabilities derived from the statutory balance sheet in accordance with functional criteria which consider the enterprise conventionally divided into the three fundamental areas focusing on resource investments, operations and financing. Management believes that this summarized group balance sheet is useful information in assisting investors to assess Eni’s capital structure and to analyse its sources of funds and investments in fixed assets and working capital. Management uses the summarized group balance sheet to calculate key ratios such as the return on invested capital (ROACE), gearing and leverage.

The Summarized Group Balance Sheet was affected by the movement in the EUR/USD exchange rate, which determined a decrease in net capital employed, total equity and net borrowings by €6,774 million, €5,573 million, and €1,201 million respectively. This was due to translation into euros of the financial statements of US-denominated subsidiaries reflecting a 13,9% appreciation of the euro against the US dollar (1 EUR= 1.200 USD at September 30, 2017 compared to 1.054 at December 31, 2016).

Fixed assets (€71,415 million) decreased by €8,314 million from December 31, 2016. The item “Property, plant and equipment” was down by €7,635 million mainly due to DD&A (€7,483 million) and negative currency movements (€7,025 million), partially offset by capital expenditure of €8,681 million.

The “Intangible assets” decreased by €344 million due to the derecognition of the goodwill of Eni G&P NV following the disposal defined in 2017, as well as the negative effect of exchange rate differences.

The decrease in the item “Equity-accounted investments and other investments” of €586 million was due to the impairment of Eni’s interest in the E&P segment and Chemical business, the negative results of the subsidiaries company and the disposals.

Net working capital was in negative territory at minus €11,634 million and decreased by €621 million y-o-y driven by reduced trade receivables (-€1,004 million), due to better management of working capital and higher volume of trade receivables due beyond end of the reporting period which were transferred to factoring institution, as well as decreased of other current assets and liabilities (-€884 million) due mainly to the impairment of certain receivables in the E&P segment.

These negatives were partly offset by the decrease in tax payables and provisions for deferred taxes (+€686 million) and the reduction in the risk provisions (+€449 million) for the exchange rate effect.

Assets held for sale including related liabilities (€236 million) are related to: (i) an agreement signed by Eni and MET Holding AG to divest 98.99% (entire stake owned) of Tigáz Zrt and Tigáz DSO (100% Tigáz Zrt) to MET, including Eni’s gas distribution operations in Hungary. The transaction is subject to regulatory approval by the relevant authorities; (ii) disposal of tangible assets and investments in the E&P segment.

Sources and uses of cash

In 2017, net cash provided by operating activities from continuing operations amounted to €10,117 million. The closing of the divestment of Eni’s assets in Mozambique and Egypt and other disposals generated €5.455 million of proceeds. These inflows funded financial requirements for capital expenditure (€9,191 million including investments), the payment of Eni’s dividend (the final dividend for fiscal year 2016 and the 2017 interim dividend totaling €2,881 million).

Exploration & Production

In 2017, the Exploration & Production segment reported an adjusted operating profit of €5,173 million, increasing by €2,679 million compared to 2016 thanks to the recovery in crude oil prices (with the Brent price up by 24%), as well as the production growth. These positives were partly offset by higher exploratory well write-offs and higher expenses, as well as lower appreciation of Eni’s average realizations than the Brent benchmark, which has not been yet fully reflected in gas prices due to the time lags in oil-linked price formulas.

Adjusted operating profit excluded a negative adjustment of €2,478 million.

Gas & Power

In 2017, the Gas & Power reported an adjusted operating profit of €214 million (up by €604 million from 2016), the best result over the latest seven years. This reflected better margins from the renegotiation of long-term supply contracts, including some contract terminations, lower logistic costs, as well as the improved performance in trading, LNG and Power businesses, targeting structural positive profit one year ahead of plans. From 2017, the profit/loss on stock has been included in the business underlying performance due to a changed regulatory framework on gas storage in Italy, on which basis management has elected to leverage gas stocks as a way to improve margins.

Adjusted operating profit excluded a positive adjustment of €139 million.

Refining & Marketing and Chemicals

In 2017, the Refining & Marketing and Chemicals segment reported an adjusted operating profit of €991 million, increasing by €408 million from the previous year.

The Refining & Marketing business reported an adjusted operating profit of €531 million, the best full year result in the last eight years, increasing by €253 million. The benefits from the initiatives implemented over the last years, which were designed to improve the set-up of Eni’s refining system allowing to reduce the break-even margin below the 4 $/barrel threshold. The improved cost structure enabled the Company to fully capture the upside in the scenario recorded in the first nine months of 2017, despite the shutdown of Sannazzaro refinery. This results were also strengthened by the gain from the licensing of the EST conversion technology to Sinopec and positive performance driven by the effective commercial initiatives, which supported the premium segments.

The Chemical business reported an adjusted operating profit of €460 million, increasing by €155 million, representing the best performance reported in the recent history of Eni’s Chemical business. This result demonstrates the value of the progress in the turnaround process that through the restructuring plan to optimize plant set-up at core hubs and reposition the product portfolio towards higher-value segments, was able to fully capture the upside in the trading environment and to achieve volume upsides.

Adjusted operating profit excluded a positive adjustment of €223 million.

Zohr, one of our seven special products

The remarkable discovery of Zohr, the gas field offshore of Egypt, was the result of Eni's skill, innovation and the courage of its people, who are willing to accept even the most difficult of challenges.

Eni’s business outlook and financial and operational targets are disclosed in the section: “Scenario and Strategy” of this Integrated Annual Report.

The risks described below may have a material effect on our operational and financial performance. We invite our investors to consider these risks carefully.