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                                       Expenses and
Revenues

   In this part, we are going to look through
to the financial review of ENI over the period of 3 years(2014, 2015 and 2016).
 In 2014 net profit attributable to Eni’s
shareholders was 1,303 million.  The
total revenues and total operating expenses during 2014 were 99,297; 80,333
accordingly. Business performance was adversely impacted by lower oil prices
which decreased revenues in the Exploration & Production segment. The
mid-downstream business segments reported cumulatively an improved performance
of €1.2 billion reflecting gas contract renegotiations, cost efficiencies, as
well as optimization and restructuring initiatives, in spite of an unfavourable
trading environment. Furthermore results were affected by a €221 million loss
on the fair-valued interests in Galp and Snam which underlay two convertible
bonds. In addition to these business trends, 2014 net profit was impacted by
net charges of €2,416 million due to the alignment of crude oil and product
inventories to current market prices, asset impairments driven by a lower price
environment in the near to medium term impacting the recoverable amounts of oil
& gas properties and of rigs and construction vessels in Saipem, as well as
the write-off of deferred tax assets of Italian subsidiaries (€976 million) due
to the projections of lower future taxable profit (€500 million) and the
write-off for €476 million of deferred tax assets accrued in connection with an
Italian windfall tax of 6.5 percentage points which adds to the Italian
statutory tax rate of 27.5%. This windfall tax, the so-called Robin Tax, was
ruled to be illegitimate by an Italian Court on February 11, 2015. It was the
first time that a sentence stated the illegitimacy of a tax rule prospectively,
denying any reimbursement right. As a result of the abrogation, deferred tax
assets of Italian subsidiaries were recalculated with the lower statutory tax
rate of 27.5% instead of 33%, with the difference being written off. The effect
was considered to be an adjusting event of 2014 results, on the basis of the
best review of the matter currently available, considering the recent
pronouncement of the sentence. These effects were partly offset by the
recognition of a tax gain of €824 million due to the settlement of a tax
dispute with the Italian fiscal Authorities regarding how to determine a tax
surcharge of 4% due by the parent company Eni SpA (the so called Libyan tax)
since 2009. In 2013 significant disposal gains were recognized due to the
divestment of a 20% stake in the Mozambique discovery (€2,994 million) and the
fair-value evaluation of Eni’s interest in Artic Russia (€1,682 million),
partly offset by extraordinary charges and inventory holding losses for €4
billion (post-tax). These transactions affected the year-on-year comparison of
reported net profit.

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    In 2015 Eni reported a net loss pertaining
to continuing operations of €8,778 million, considerably down compared to the
previous year. A prolonged slide in crude oil prices has negatively affected
the Group’s performance, impacting results from operations and the value of
assets. Operating performance resulted in a loss of €2,781 million. These
negatives were driven by lower E revenues reflecting reduced oil and gas
realizations negatively impacted by sharply lower Brent prices (down by 47%),
the alignment of the carrying amounts of oil and product inventories to current
market prices and the recognition of material impairment losses mainly taken at
the Group oil & gas CGUs (€4,502 million). In performing the impairment
review, Eni’s management assumed a reduced long-term price outlook for the
Brent crude oil price down to $65 per barrel compared to the previous $90 per
barrel scenario adopted for valuating asset recoverability in the 2014
financial statements. Furthermore, the operating loss was impacted by an
estimate revision of €484 million taken at revenues accrued on the sale of
natural gas and electricity to retail customers in Italy dating back to past
reporting periods and the establishment of a provision of €226 million for
those accruals. Eni’s management has implemented certain initiatives to
mitigate the negative effect of low oil prices on profitability and cash flow.
These initiatives include the reduction of E operating expenses and the
curtailment of capital expenditure by carefully selecting exploration plays,
rescheduling and re-phasing large development activities and renegotiating
supply contracts for plants and other E infrastructures, as well as
leveraging oilfield services rates on the deflationary pressure induced by the
decline in crude oil prices. This reduction in capital expenditure only had a
modest impact on hydrocarbon production, which grew by 10% to 1.760 kboe/d. The
production plateau has been the highest since 2010, on yearly basis. The
Refining & Marketing segment returned to underlying profitability supported
by plant optimizations and an ongoing margin recovery. The G segment
almost achieved operating profit break-even, net of extraordinary charges
related to the unfavorable outcome of commercial arbitration, and in spite of
the postponement of the recognition of gains on the renegotiations of certain
long term supply contracts. Finally, G expenses were reduced by €0.6
billion. Net loss for 2015 was significantly affected by an increased tax rate
driven by a deteriorating price scenario in the E segment, which resulted
in the segment’s taxable profit earned in PSA contracts, which, although more
resilient in a low-price environment, nonetheless bear higher-than average
rates of tax and a higher incidence of non-deductible expenses on the pre-tax
profit that has been lowered by the scenario. In addition, the tax rate was
impacted by lower recognition of deferred tax assets relating operating losses
due to a reduced profitability outlook (€1,058 million). The Group tax rate was
also impacted by the write-off of Italian deferred tax assets of €885 million
in the full year due to projections of lower future taxable profit at Italian
subsidiaries and the reduction of the statutory tax rate from 27.5% to 24%,
which was considered as substantially enacted at the reporting date.

    At the end of 2016, Eni reported a net loss
from continuing operations of €1,464 millio, which far lower than the €8,778 million
loss recorded in 2015. This improvement mainly reflects a mild recovery that
has been staging in oil markets from the second half of the year. Better market
fundamentals were factored in the upward revision to management’s long-term
assumption for the benchmark Brent price to $70 per barrel from the previous
$65, which has been adopted in the financial projections of the 2017-2020
industrial plan. This revision triggered asset revaluations of €1,005 million
post-tax at oil & gas properties, which were absorbed by impairment losses
due to a lowered outlook for gas prices in Europe and other drivers, as well as
other non-recurring charges for an overall negative impact of €831 million. On
the contrary, the FY 2015 result was negatively affected by the recognition of
special charges of €8.5 billion. Those comprised impairment losses of upstream
asset (€3.9 billion) and the write off of deferred tax assets for €1.8 billion
due to a lowered outlook for oil prices. Furthermore, the year-ago charges
included the impairment of the Chemical business (€1 billion) whose carrying
amount was aligned to the expected fair value based on a sale transaction then
ongoing designed to established an industrial joint venture, as well as other
extraordinary charges of €1.8 billion mainly in the G segment. Still,
2016 underlying performance was negatively affected by a continued slump in
commodity prices mainly in first half of the year which determined y-o-y
declines in crude oil prices (down by 16.7%, from 52.5 $/b reported in 2015, to
43.7 $/b in 2016), in gas prices (down by 28.2%) and in refining margins (down
by 49.4%). These declines drove a 23% reduction in the Group consolidated
turnover. In addition the performance was affected by a four and half-month
shutdown of the Val d’Agri oil complex in Italy. Management implemented a
number of initiatives to withstand the negative scenario including tight
investment selection, with capex down by 19% y-o-y at constant exchange rates,
control of E&P operating expenses (down by 14%), optimizations of plant
setup at refineries and chemical plants, savings on energy consumptions and
logistic costs and G&A cuts. All these measures improved EBIT by around
€1.7 billion. Finally, income taxes declined by €1,186 million due to the above
mentioned extraordinary drivers. The tax rate has been affected by the high
relative incidence on taxable profit recorded in the first three quarters of
2016 of results under PSA schemes, which are characterized by higher-than-average
rates of taxes.

 

 

 

 

 

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