Short and medium term strategy updated: cost and investment optimization increased; energy transition objectives confirmed and investments in various businesses related to decarbonisation increased. New shareholder remuneration policy formulated.
In order to deal with the effects of the Covid-19 pandemic on the energy sector in terms of high market volatility and contraction in commodity prices, Eni updated its short and medium term strategy and developed a new shareholder remuneration policy .
The Chief Executive Officer of Eni, Claudio Descalzi, commented:
“In the period that I define as the worst in the history of the Oil & Gas industry, hit by the effects of the pandemic and the“ price war ”, Eni's reaction was prompt and radical. We have prepared a review of our short / medium-term strategy by reducing the disbursements for costs and investments by 8 billion euros in the two-year period 2020-21 which we expect will be the most critical. This will lead to a change in the growth profile of upstream production, while the objectives already set for the other businesses, which are proving to be highly resilient, can be relaunched thanks to the allocation of additional resources.
Once the strategy review was completed, we therefore redefined our remuneration policy to adapt it to the current scenario, expected to be volatile and with prices lower than the previous one. The policy is innovative, because it combines a progressive base component parameterized to a Brent of at least $ 45 / barrel with a variable component commensurate with the price growth of up to $ 60 / barrel, beyond which the buy back plan will be reactivated. The dividend will no longer be a fixed number in a world increasingly subject to high variability, but will be a function of the scenario and industrial development of the group that wants to continue growing by offering its shareholders a competitive return every year ".
Relaunch of the business plan
During the months of March and April, Eni carried out a first review of the activities planned for the years 2020 and 2021, identifying actions which, while maintaining the highest safety standards, will make it possible to contain expenditure on investments and costs.
The review subsequently continued, making it possible to identify even more incisive measures to rationalize and contain cash outlays. In particular, for 2020 overall actions to optimize investments and costs were identified for 2,6 billion euros and 1,4 billion euros respectively, with a further reduction of 300 million euros for investments and 800 million euros euros for costs compared to what was previously communicated. For 2021, actions for a total of € 3,8 billion have been identified, of which € 1,4 billion for lower costs and € 2,4 billion for lower investments, an increase compared to the € 2.5-3 billion of just lower investments previously communicated .
25-30% of the lower costs identified in the two years will be structural in nature.
Strategy update
The review of the activities for the years 2020 and 2021, aimed at maintaining a solid capital structure in the presence of a depressed and unstable price scenario, led to the reprogramming of some of the activities envisaged in the plan approved last February by the Board of Directors.
Oil and gas production is now expected to reach approximately 2 million barrels equivalent per day in 2023, then reaching the peak in 2025 with approximately 2,05 - 2,10 million barrels equivalent per day.
On the contrary, all the other objectives to 2023 referring to the energy transition businesses are confirmed. In particular, the installed capacity for generating electricity from renewable sources is expected to reach 3 GW, while retail gas & power customers are expected to reach 10,5 million.
The overall investment maneuver in the four-year period 2020-2023 stood at 27 billion euros, a decrease of 4,7 billion euros compared to the Plan originally approved due to the actions decided for the years 2020-2021 in the Upstream business. On the other hand, the transition businesses, and in particular projects for bio-refineries, renewable generation and retail customer growth, were allocated incremental funds for 800 million euros divided over the years 2022-2023. The increase in growth targets for these businesses following this greater allocation of resources will be communicated by the date of the next strategy presentation.
As a consequence of these revisions, "green" investments will represent 17% of the total expenditure in the four years (12% in the previous approved plan), reaching 26% of the total investments in the year 2023.
It should be remembered that on 4 June the establishment of two General Management was announced in Eni SpA. The Natural Resources Department will enhance the upstream oil & gas portfolio from a sustainable perspective, also taking care of energy efficiency activities and CO2 capture projects. The Energy Evolution Department will take care of the evolution of the business of generation, transformation and sale of products from fossils to bio, blue and green. This new organizational structure represents a fundamental step for the implementation of Eni's 2050 strategy which combines value creation, business sustainability and economic and financial solidity.
Finally, on July 6, Eni adopted a new scenario that envisages a Brent price of $ 60 / barrel in real terms 2023 compared to the previous assumption of $ 70 / barrel. For the years 2020, 2021 and 2022 the price is expected to be respectively 40, 48 and 55 $ / barrel (previously 45, 55 and 70 $ / barrel).
The new shareholder remuneration policy
Faced with the changed context, its high volatility and the actions put in place to face its effects, Eni reviews the shareholders' remuneration policy in order to give them maximum visibility on the distribution of dividends and future buy back plans.
The new remuneration policy, valid for annual Brent prices equal to or greater than $ 45 / barrel, provides for:
- an annual dividend consisting of a base value now set at € 0,36 per share, commensurate with an annual Brent average of at least $ 45 / barrel, and a variable component increasing as the Brent price increases;
- the reactivation of a buy back plan of 400 million euros per year for Brent scenarios from 61 to 65 $ / barrel and 800 million euros per year for scenarios above 65 $ / barrel.
The base value of the dividend will grow according to the degree of achievement of the Group's growth strategy and will be revalued every year.
The variable component of the dividend is quantified on the basis of the expected Brent average for each year and is calculated as an increasing percentage, between 30% and 45%, of the incremental free cash flow generated by the scenario (+ € 900 million for each + € 5 / Brent barrel) for Brent prices above $ 45 / barrel and up to $ 60 / barrel.
The basic dividend of € 0,36 per share will also be insured in 2020 despite the forecast to date of an average annual Brent of $ 40 / barrel, and will be paid 1/3 with the September 2020 advance and 2/3 with the balance for May 2021. For subsequent years, in the event of an annual Brent scenario assumed of less than $ 45 / barrel, the shares will be valued on the basic dividend according to the extent of the price reduction and its expected duration.
From 2021 the basic dividend will be paid 50% as a down payment and 50% as a balance, while the increasing variable component will be fully paid together with the down payment in the year in which the conditions for its distribution are met, even if anticipated compared to what is expected from the Eni scenario.
If applied to the Brent scenario adopted by Eni, and without assuming for the moment any increase in the value of the basic dividend, the new remuneration policy involves the distribution of a dividend of 0,55, 0,47, 0,56 and 0,70 in cash , 2020 euros per share in the years from 2023 to XNUMX.
A buy back for 400 and 800 million euro per year will be carried out in full years with Brent prices expected to be between 61 and 65 $ / barrel and above 65 $ / barrel respectively, representing a further element of progressive growth of the remuneration.