Eni CEO to Let Saipem Go, Cut Costs to Focus on Oil & Gas

Eni SpA’s new Chief Executive Officer Claudio Descalzi is accelerating cost cuts and disposals and preparing to sell oil-services unit Saipem SpA to focus his company on its main oil and gas business.

“We had to react and change our culture” to meet growing challenges, Descalzi told analysts in a strategy update that the company webcast late yesterday on its website. “We are going to dismiss costs and useless activities.”

Transforming Eni involves 1.7 billion euros ($2.3 billion) of cost cuts, raising planned disposals by more than 20 percent to 11 billion euros, cutting the 774,000 barrel-a-day capacity of the ailing refinery business by half and letting Saipem go.

Eni said in a strategy statement published yesterday it no longer considers Saipem a “core” holding and is examining a range of options with the support of a financial adviser.

After taking the helm of Italy’s biggest oil company in May, Descalzi, 59, began to reshuffle divisions and management and tackle thorny issues like refinery closures. A lifetime oil man, Descalzi joined Eni in 1981, and most recently oversaw the company’s biggest natural gas discovery off Mozambique as head of exploration and production. That puts him in a prime position to steer Eni toward a sharper focus on oil and gas.

“In general we like the new targets and the proposed business simplification, although we remain somewhat skeptical that Eni can achieve the accelerated break-even targets in its low-quality refining and marketing and chemicals businesses,” BMO Capital Markets analysts Iain Reid and Nikolas Stefanou wrote in a note to clients commenting on the strategy update.

Cash Break-even

Eni plans to achieve cash break-even at its refining and marketing division by the end of 2015, and bring forward the break-even point for its gas and power business to this year thanks to renegotiation of long-term gas contracts. Realignment of Eni’s gas supply with market prices is 60 percent complete, and the company said it’s targeting full realignment by 2016.

Speaking about Eni’s refinery business, Descalzi said it “is not the future for us or any other European company.” For Eni as a whole, he said the plan is to cut costs, not jobs.

Disposals and cost reductions will allow Eni to boost operating cash flow by more than 40 percent to over 15 billion euros on average this year and next, the company said. Eni also sees a 20 percent increase in annual free cash flow in the 2014-2015 period compared with last year.

Dividend Policy

The company is “in a good position” to confirm its dividend policy, Descalzi told analysts. Eni plans to propose an interim dividend of 0.56 euros per share, according to a statement published yesterday.

More cash will come from the sale of as much as 20 percent of Eni’s giant Rovuma gas field in Mozambique, confirmed yesterday by the CEO and other Eni managers during the analyst meeting. The company will make a final investment decision on the half it owns in the gas field later this year, they said.

In exploration and production, Eni confirmed its goal of 3 percent average production growth to 2017. To achieve that, the company has begun shifting its focus away from North Africa to other areas of the globe and to sub-Saharan countries where new finds in Ghana, Congo, and Mozambique offer lower risks.

Continuing unrest and violence in Libya, where Eni is the biggest foreign producer, contributed to a 20 percent decline in second-quarter adjusted net income at the exploration and production division.

Eni yesterday posted a 51 percent gain in second-quarter adjusted net income to 868 million euros, missing the 1 billion-euro estimate of 18 analysts surveyed by Bloomberg. The shares slid 0.8 percent to 18.91 euros by 12:17 p.m. today in Milan.

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