Eni S.p.A. (E) Q4 2023 Earnings Call Transcript

Eni S.p.A. (NYSE:E) Q4 2023 Q4 2023 Earnings Conference Call February 16, 2024 8:00 AM ET

Company Participants

Claudio Descalzi – Chief Executive Officer

Francesco Gattei – Chief Financial Officer

Cristian Signoretto – Deputy Chief Operating Officer, Natural Resources

Guido Brusco – Chief Operating Officer, Natural Resources

Stefano Ballista – Chief Executive Officer, Eni Sustainable Mobility

Adriano Alfani – Chief Executive Officer, Versalis

Conference Call Participants

Biraj Borkhataria – Royal Bank of Canada

Oswald Clint – Bernstein

Alessandro Pozzi – Mediobanca

Matt Smith – Bank of America

Irene Himona – Societe Generale

Giacomo Romeo – Jefferies

Michele Vigna – Goldman Sachs

Josh Stone – UBS

Alejandro Vigil – Santander

Lydia Rainforth – Barclays Capital

Bertrand Hodee – Kepler Cheuvreux

Massimo Bonisoli – Equita

Operator

Good afternoon, ladies and gentlemen. And welcome to Eni’s 2023 Fourth Quarter Results Conference Call hosted by Mr. Claudio Descalzi, Chief Executive Officer. For the duration of the call, you will be in listen-only mode. [Operator Instructions]

I am now handing you over to your hosts to begin today’s conference. Thank you.

Claudio Descalzi

Thank you. Good afternoon and welcome to our 2023 Full Year and Q4 Result presentation. 2023 was an excellent year for Eni. 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 assets. This resulted in the second best financial performance by Eni 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 active year, so now let’s go through the highlights.

In the upstream, we brought on stream two important operated projects in line with our fast track model of phased development. Baleine Phase 1 started production at the end of August, less than 18 months from the FID. 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 EMP strategy is fitting in new advantage resources from our industry-leading exploration. The highlight was Geng 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 costs.

But Indonesia was not a standalone success. In fact, our Nargis exploration well in Egypt, offshore was also a top five discovery. A distinctive feature of Eni strategy is our organic model, but also focus portfolio management plays a critical role as we shape our business. Undoubtedly, our highest profile deal was the purchase of Neptune, 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 high grade our portfolio also via divestment. And in the year, we announced the sale of noncore reproducing 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 EUR 10 billion of enterprise value is a key enabler for Eni to sustain growth and deliver shareholder value across the multiple energy vectors we are focused on.

In EniLive, our purchase of a 50% stake in the Chalmette biorefinery in the US marked a new stage of in establishing a leading international and integrated biorefining business. In addition, we acquire full control of Novamont, a market leader in biochemical sector, which will become another pillar in our strategy of transformation. In CCS, we reached an agreement with the UK government on key terms of the economic, regulatory and governance model for the transportation and storage of CO2 on INET. This is a major step forward for a line of business that will be increasingly important over the coming years and where Eni 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 1.65 million barrel per day in the upper end of the guidance range and 3% higher year-on-year. We discovered around 900 million barrel of new resources which more than covers 2023 production. A mid-lower European demand of gas, our GDP was effective in meeting customer needs in the absence of Russian volumes, and also recorded the highest result in the East Israel. Plenitude to end of the year with a 3 gigawatt of historic renewable capacity, up by more than one-third year-on-year and in line with guidance. 2023 biorefineries throughputs were up almost 60% year-on-year, while biofuel capacity at 1.65 million ton per year was 50% higher after our US acquisition. Our upstream net carbon scope 1 and 2 footprint, fell by 10% in 2023 and is now down by 40% versus the 2018 baseline, in line with our aim to net zero in the upstream by 2030.

Turning to our financial results, the news is also positive. EBIT performance of EUR 17.8 billion including EUR 4 billion from associate is second highest result in the history of the company in its current form. Net profit of EUR 8.3 billion converts to EUR 16.5 billion of CFFO and both confirm the historical top end of our yearly performance. In fact, this excellent result reflects a very significant improvement versus our expectations. Around EUR 3.5 billion on EBIT and EUR 2 billion on cash flow, that offset the impact of the weaker scenario. CapEx of EUR 9.2 billion was below our budget of EUR 9.5 billion, confirming that we are at efficiently investing in the context of a rigorous capital discipline. We stepped up, shared buyback in the fourth quarter to EUR 790 million, totaling EUR 1.8 billion for the year with a round of EUR 400 million to finish our program in Q1. Our full payout is equivalent to around 32% of our 2023 adjusted CFFO, above our original guidance. Shares issue is down 9% over the past two years, enhancing the participation in a business that is also increasingly bigger and better. Indeed, in the past two years, Eni distributed almost EUR 11 billion to its shareholders, the highest amount since our listing. Leverage at 20% remains low by historical standards, and the balance sheet provides 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 EMP production for the fuel year was 1.66 million barrel per day, up 3% year-on-year, and up 6% in the quarter to 1.71 million barrel per day. In the quarter, we saw higher activity in Algeria, seasonal effects in the North Sea, and the benefit of strong regularity in Kazakhstan. Baleine ramp up and better performance and entitlement in Libya. Full year proforma EBIT in EMP of EUR 13.3 billion mainly reflect the impact of lower prices when compared with 2022, partly compensated by higher volumes while Q4 earnings include higher exploration write-offs which is typical of the quarter. GGP reported EBIT of EUR 680 million in Q4, benefiting from a favorable outcome to an arbitration in the quarter, but with an underlying result muted by lower gas prices and reduced trading flexibility, as we had expected it to be. Record full year EBIT of almost EUR 3.3 billion took the benefit of strong optimization activity in the first half of the year, in particular highlighting the leverage to favorable conditions that GDP retains by virtue of its diverse supply and infrastructure position.

Our Neptune acquisition was one of the key events of 2023. After announcing the deal in late June, we achieved completion on the 31st of January for an investment of $2.4 billion in cash out and debt acquired. Adjusted down from the headline of $2.6 billion as a result of the cash flows accruing since the deal’s reference date. Net production consolidated directly by Eni and through our share of Var is currently over 100, 000 barrel 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 $0.5 billion 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 announced divestment in West Africa to complete in 2024.

Turning to energy evolution, EniLive 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 the feedstock flexibility confirming our vertically integrated model is delivering. With activities now in eight countries, agri feedstock production has increased to more than 40, 000 tons per year and it is on track to provide meaningful earnings over time. Our refining earnings were impacted by the fall in the SEM but also by the narrowing in light, heavy and sweet sour differential. Our chemicals result reflects 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. Plenitude delivers on its target for store renewables capacity of 3 gigawatts at the end up by more than one third. Renewable energy production actually grew more, up by over 50%.

But more importantly, Plenitude to deliver financial result with a full year EBIT up 50% year-on-year to over EUR 500 million and EBITDA up 40% year-on-year to over EUR 900 million. After the remarkably strong first 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 result of Plenitude came in the context of another highly volatile and challenging year for energy suppliers and again emphasized the quality of the model. This fact is recognized in the enterprise value of EUR 10 billion placed on the business by the recent agreement with Energy Infrastructure Partners 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 deliver the best shareholder returns among our peers group in 2023.

We will update on our strategic progress and future targets when we meet again on the 14th of March for our Capital Markets Day. We will elaborate on how Eni is 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, team that are evident in our 2023 result.

And now with our top manager, we are ready to answer your question.

Question-and-Answer Session

Operator

[Operator Instructions]

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

Biraj Borkhataria

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?

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 receivable balance as it stands today. Thank you.

Claudio Descalzi

Just a few words about 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 continuing trying to change some line, but now it’s time to consider more radical initiatives that are going to a transformation in the same way we did for our biorefineries. So we have to transform the plan. And clearly the direction to go to a biochemicals. Also, in light of the acquisition we made of Enimont and also the other project that we developed implemented from our R&D, that is one, but it’s not enough. Go through all especially 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.

Adriano Alfani

Sure, thanks, Claudio. Thanks for the question. I mean, first of all, as Claudio was saying, we need to go extremely bullish in terms of the 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.

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 and entire process. But in terms of the other three pillars that we are focusing on is one is the specialization portfolio with the recent acquisition of a [inaudible] project and some other development in relation of integration of the business with our portfolio. We decided to further speed up the growth in thermal specialization diversification of the portfolio. So this is one.

The second one is circularity. And we are moving very fast on circularity. This year we are going to start the phase one of the mechanical recycling in Porto Marghera. And by the end of 2024, we expect to complete the construction of the first chemical recycling plant in Mantua. It is a pilot plant or semi-industrial plant with intention then to speed up in terms 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 direction Novamont was already doing, but also integrating the portfolio with our specialized portfolio and so to really double digit to grow in terms of biochemistry.

Claudio Descalzi

Thank you. Adriano, so a few words about Egypt. Then I give the floor to Guido, Head of Natural Resources. So first of all, clearly, Egypt is passing through as all North African Middle East through a quite difficult situation in light of the event we had 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. 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 Easters. So what I think and what is my perception that everybody is trying now to help them. So saying that if you talk about receivable, there is a small margin of 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. So now I’ll give the floor and 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.

Guido Brusco

Yes, on LNG the question was in the summer, I think. And 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, a sharp reduction of the import to Israel. So the export of LNG in Egypt was impacted. In December, they restarted with some volumes. And we have seen from Eni side three cargoes in December. And we are foreseeing between 8 to 10 cargos in the forthcoming months before the end of the winter season.

Operator

The next question is from Clint Oswald of Bernstein.

Oswald Clint

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 sizeable or more aggressive upstream focus divestments. So in still a lot of continued expression success, your 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 infantry. 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. I remember the great trip we had last year in Venice and we talked about SAF upside of up to 2 million tons per annum based on demand. It seems like demand is taking off. You’ve had this more sizable Ryanair deal recently. Much more material than the DHL deal a couple years ago. So the question is there, 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. Is this three times jet fuel? Is this five times jet fuel? It’s hard to get an idea of what this might mean financially for the company. Thank you.

Claudio Descalzi

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

Yes.

Francesco Gattei

Okay, thank you. The question is about the gearing. Clearly, you have seen us step up in the quarter. The quarter increase was expected. Actually, we had a result towards this line with our target. Taking into account that there were some save variations in the exchange rate, that was a bit more higher for the euro, and also because of the lack of the income that we were expecting to come before the end of the year related to Plenitude. Anyway, that increase was generated mainly by the inclusion of a Novamont adapt 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 past plan was a plan where we had a relatively balanced in our management of portfolio with only EUR 1 billion 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&A and this will have a clear, strong effect on the net amount of CapEx we are going to pay.

Claudio Descalzi

Hello for SAF trends and —

Stefano Ballista

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 2030. And logistic players targeting up to 30% still at 2030. In Europe, we got refuel aviation already approved. It means starting from 2025, 2% of global fuel will be bio jet. This means more than a million tons, let’s say from one day to the other. On top recently, the IEA said an increased target for bio jet demand already in 2027 by up to 30% and definitely confirmed a 50 million ton at 2030. Just give a high level number. In 2050, we see 500 million ton of jet fuel. Even assuming only 20% of bio jet, we jump at 100 million ton of bio jet demand. This means that the market is going to be in strong demand for bio jet and given the time to get facility in place, we are in a very good position to take advantage from this tide market, we are going to see in the medium term.

Oswald Clint

Anything you could say about pricing? Sorry?

Stefano Ballista

Yes, no, pricing and profitability is expected around 1.3, 1.5 above HVO. This is not right now. Right now it’s higher but it’s given to the very short market. So today doesn’t make too much sense to look at current number. A reason for that is exactly what I said. The market is going to be short in terms of supply given the current state of the art and the expected demand evolution on the other side. So that’s the profitability we are going to expect. So good boost on our results in the next future.

Operator

The next question is from Alessandro Pozzi of Mediobanca.

Alessandro Pozzi

Hi there. I have two questions. The first one is related to the production in Q4 which was really strong and I was wondering if you can give us more color on the various moving parts. What I’ve seen 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. So if you can give us some color on whether maybe that could be sustainable going into 2024. And also, I think Zohr is well Egypt production from Egypt is coming down a little bit and what should we expect from Zohr in terms of production going forward.

The second question is on Cronos-2. The recent positive results on the appraisal well are that a catalyst for developing Cronos 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. Thank you.

Claudio Descalzi

That’s our question for Guido. So please Guido.

Guido Brusco

Yes, indeed. I mean you spotted rightly the production in Q4 was strong and this was thanks to the ramp up of Baleine, 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 uprisings as well gave us comfort on the extension of the field, confirming the upper side of the estimation, while deliverability is excellent. 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.

Operator

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

Matt Smith

Hi there, good afternoon. Thanks for taking my questions. A couple please. The first one would be on GDP, another extraordinary year for the division. But I suppose the arbitration award aside in 4Q, it’s very much been a year of two-halves in regard to profitability. I just wondered whether you could sort of speak to the current market conditions in terms of arbitrage opportunities and also touch upon the visibility you have in 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 on there be useful please. Thanks.

Claudio Descalzi

Okay. Cristian Signoretto for GGP please.

Cristian Signoretto

So thanks for the questions. Surely 2023 has been a very unusual let’s say year and exceptional year because of important optimization and trading opportunities and also positive arbitration and settlements in our results. When we look at 2024, clearly, I mean the market has been reducing its flag 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. So we expect 2024 still to be a very volatile year with opportunities to be captured via trading optimization activities.

Claudio Descalzi

Okay, so I think that [inaudible] is very fast because we are drilling so we cannot say anything. Anything. Is correct?

Cristian Signoretto

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

Operator

The next question is from Irene Himona with Societe Generale.

Irene Himona

Thank you. Good afternoon. On the upstream, I see that you now recognize the UK energy profit level as a recurring item. I wonder if you can provide some guidance on the EMP tax rate going forward includes two of these in the current environment. And secondly, on the numbers, the fourth quarter net interest expense you had EUR 54 million, was down very substantially, over 50% sequentially. 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.

Francesco Gattei

Thank you, Irene. On the UK levy, we kept these scenes the start as a recurring item. We consider this due to the fact there is no expiration date, but there is a generical sentence related to the potential oil price for the removal to consider that in a recurring way. We are not able yet to provide you what will be the tax rate in the plan. What you can tell you is that the impact of these taxes versus last year, taking into account of the start at the end of the last year, year-on-year basis in the range of 1%, 0.7%, 0.10%. On the net interest, we will be very happy if we continue, but unfortunately, it’s not possible because that this is related to the financial asset that we have. We have almost EUR 80 million of liquidity that are gaining from the benefit of the interest rate growth. While on the other side, we have 70%, 75% of our gross debt that is at fixed rate. 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 continue to use different tools to keep as low as possible, to capture, let’s say, as much as saving as possible through our liquidity positions.

Operator

The next question is from Giacomo Romeo of Jefferies.

Giacomo Romeo

Yes, thank you for taking my question. First is a very quick follow-up on your comments on GDP. And just. I understand you are expecting to see more volatility in 2024 and just try to understand how to read into the Q4 numbers, if we take out the impacts from the arbitration. Should that be a good indication of a normalized level of profitability in the absence of significant volatility? Second question is on Plenitude. We have seen some comments during last month from your future partners that sort of talking down the prospects of an IPO of the business, just wanted to check whether this is still the ultimate goal for Plenitude for you and whether there is a full alignment at this point with your future partners. Thank you.

Claudio Descalzi

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

Cristian Signoretto

So, well, I mean in general, our results are, 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.

Francesco Gattei

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 elements for valorizing our satellite models specifically. And clearly, we will continue to monitor the market condition 2024 and 2025. Our partner that is yet to let’s say to enter in the entity, in the partnership, clearly as mentioned, something that is probably more let’s say, generic and 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 cut to the best value from this opportunity.

Operator

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

Michele Vigna

Thank you very much and congratulations on the strong debt delivery and the exploration of the past –

Operator

Mr. Della Vigna, we can’t hear you very well. Can you please speak closer to the microphone?

Michele Vigna

oh, sorry, can you hear me now?

Claudio Descalzi

A bit better, but the line is not very good. But try again, Michele. Yes, better now, yes.

Michele Vigna

Okay, sorry for that. I only have two questions. The first one. Clearly, in printing your data, both you and Michele have been becoming here.

I was wondering if you could update us [inaudible] and my second question relates to carbon capture. We’re seeing a lot of progress in view of the market policy support. You have watched the biggest development before this. I was wondering, if you could give us an update on the progress of that.

Claudio Descalzi

So, Michele, we just understood the second but not really very well, we understood the one on 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, update, Guido, you can update please on CCS.

Guido Brusco

I can give you Michele an update on our major CCS project. So for the Ravenna phase one the project is in execution at the moment and we are planning an early Q2 the startup while for the phase two the project I mean we are now doing the engineering work and we’re 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 the UK, you may have read that we have agreed with the UK 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. Another important element is that in April, five emitters out of a total of eight which have been selected by the UK authorities belongs to the INET Northwest cluster and those have been selected as a priority emitter to access the fund made available by the UK government.

Operator

The next question is from Josh Stone of UBS.

Josh Stone

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 by refinery. So was there maintenance impacting that or any comments 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 US, and how much of your feedstock program is able to offset that?

And then second question on working capital, there was some released during the quarter, but if I go back over the last two years, there’s sort of been a trend, or there’s about EUR 4 billion billed over the last two 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.

Claudio Descalzi

Stefano?

Stefano Ballista

Yes, in HVO, and on bio product, 2024 is 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. It’s 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, I just touched the RED III directive, the Renewable Energy Directive that has been approved by year 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 II to 29% RED III. Same in US, we got this year a significant capacity getting in, well known in advance. Demand is increasing linearly. In 2025, we’re going to get impact from, among others two main topic. One 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 US. We have an estimate number of more than one million ton coming to US from foreign countries in 2023. The second point is, the second element is carb is expected to increase California target in terms of GIG reduction from 20% to 30%, 2030. And then last just a small signal, but we got a couple of days ago, New Mexico is the first non-West Coast state in U.S. approving an LCFS obligation mechanism. Again, 20% GIG reduction in 2030. 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.S. to Europe wherever arbitrage is going to be open.

Francesco Gattei

In terms of working capital trend, it’s very difficult to anticipate how it could be in the next quarters. 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 a growing price, 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.

Operator

The next question is from Alejandro Vigil of Santander.

Alejandro Vigil

Hello. Thank you for taking my questions. I have two. One about the implications for Plenitude on 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. And the second question is about the outlook for refining in Europe. In the beginning of the year we also see an increase in refining margins in January if you can elaborate on your thoughts on that. Thank you.

Claudio Descalzi

Okay, Stefano, Guido, Plenitude answered the first question.

Stefano Ballista

Thank you, Alejandro. On the energy price level of course on the renewable production where we are spot prices who will take the impact of 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 helps us to pass through this period like we did this year with the result of 2023.

Claudio Descalzi

Pino? Yes sir.

Stefano Ballista

Okay. Could you hear me?

Claudio Descalzi

Yes, very well.

Stefano Ballista

About the refining in Europe in this first 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 the brand that are arriving more or less during the first phase of the war Russia-Ukraine. It means a very high impact on the margin on the traditional refining. 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. So the results are quite good. Notwithstanding this, we will continue our strategy for the mid and 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 in the program of evolution and transformation of the traditional refining in biorefinery. We are maintaining the Middle East refining system that is less volatile and more stable in the profit.

Operator

The next question is from Lydia Rainforth of Barclays Capital.

Lydia Rainforth

Hello, and thank you for taking the question up. Two, please. Firstly, just in terms of the upstream and the five day fast track start-up coming onstream, 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. And then secondly, and I appreciate it if you don’t want to answer this question, but just around the conversations that the government is looking to sell part of the stake in ENI, what do you think about when you’re thinking about 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.

Claudio Descalzi

Okay, so the first question, maybe I give some first answer then, I don’t know if Guido want to add something. Clearly, when we talk about the margin 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 you must have a very low exploration cost, you must have a very low operating cost, and a very low development cost. So our cost in terms of exploration this year was approximately $1 per barrel discovered. 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 a risked exploration, you have to spend much more, you have to spend around between $5, $6 or up to $10 per barrel. Then we had the operating cost. Our operating cost remain in the lower side of the industry, about $6 per barrel, and the development cost is ranging between $9 and $10. Why? Because it’s organic, it’s also following our strategy. We develop near field, close to existing facilities. So that means we are below, and that is also for the acquisition we made. There are well below, thermo stacking cost well below $18, $17 per barrel. So that helps the margin. 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 organics, but we work also through acquisition, 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 diluted our cost. The second round, buy back, Francesco, sorry, Guido, you want to add something or is it okay?

Guido Brusco

No, I would add just the time to market.

Claudio Descalzi

Yes, retention market.

Guido Brusco

Yes, return on our project.

Claudio Descalzi

Sure, you’re right.

Guido Brusco

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

Francesco Gattei

On the buyback, generally speaking about the distribution, you have seen that we announced last year the distribution policy between 25% to 30%. Actually, we designed a distribution it was at 30% on the basis of the assumption of the cash flow we planned at the beginning of the year. 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, 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 planner related both on the dividend and buyback.

Operator

The next question is from Bertrand Hodee of Kepler Cheuvreux.

Bertrand Hodee

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

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

Claudio Descalzi

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&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 on which we are working a lot. And so CapEx is, so the gross capital will remain below EUR 9 billion, I can say, also if my people are not very happy, but that will be, and then that 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 Gaza and producing associated strategic gas, but we are going to develop Gaza, so it’s something that we can have a look, but I cannot tell you anything now. 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 Losking of JP Morgan.

Unidentified Analyst

Hi, thanks for taking the questions and congratulations on strong execution through 2023. Two quick ones, if I could please. First, exploration has 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 or the next sort of six to 12 months, any sort of key exploration opportunities that you have lined up within the portfolio and perhaps the next steps around Indonesia as well.

And then secondly, just on GDP, the arbitration proceeds were a key component of the fourth quarter. Obviously, that’s a lumpy component within the business. And could you just talk about how we should view that on a three-site basis and any further arbitration upside that you see over the medium term. Thank you.

Claudio Descalzi

The first question about arbitration and future development is Guido or Aldo that is not in charge of the exploration cycle. One is Cristian.

Guido Brusco

On exploration, I think you said it’s one of the levers of the value creation in our company. The results this year were outstanding as also in the past year and particularly in Indonesia. We have some high impact well ongoing at the moment and of course the result of those will happen soon. In 2024, we will continue our near field ILX exploration in proven basin that proved to be very effective and successful. Indonesia is one of the key areas. Geng North and the acquisition of the acreage around the discovery proved that that play as well as other play that we drilled in the past year can deliver significant resources. When we made the discovery in Geng, we outlined also the potential of the area which is in the region of the tens 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, we have junk creek we have in the south with almost 750 million scuff per day. This hub will bring a production which is approximately close to the 2 billion 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.

Other important areas, 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. But, of course, the near filled nature of our discovery will also enable us to bring them quickly on onstream.

Claudio Descalzi

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 and we own between 80 and the percent of all these discoveries, also with what we acquire. So that is another important upside that we can have in our next four year plan. So now we have Cristian and then one more and then we have finished. Thank you very much.

Cristian Signoretto

So in terms of renegotiation, as you can imagine, I mean these are normal features 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 arbitrational 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.

Operator

The next question is from Massimo Bonisoli of Equita.

Massimo Bonisoli

Thank you. Two quick set of questions. So the first one the chemical business. I’d like to know how much of the negative performance of Versalis in Q4 is coming from the consolidation of Novamont 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 2024? And then a question on the refining business in Italy following the change in ownership of ISAB 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 and if this may represent an opportunity for ENI? Thank you.

Cristian Signoretto

Okay, thank for the question on the chemical side. Novamont has been consolidated just for a quarter, so the impact of the four 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 one quarter. About outlook for Q1, we don’t give yet to the outlook for Q1 but of course it’s not the three digits. About the refining in Italy.

Claudio Descalzi

Refinery in Italy, I ask Pino if he’s still there.

Stefano Ballista

Yes, of course.

Claudio Descalzi

Okay, if you good, Pino, you address this, okay, you can.

Stefano Ballista

Yes. Okay. No, the refining in Italy — in the refining in Italy, we have seen a lot of change in the last period and two bigger finalists are moving to the trade ownership. What does this mean? That there is 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 well as for Europe, is affected by the very high cost of energy, very high cost of CO2, very low size of the plant. So it’s very, very difficult to maintain in the long term the profitability. The effect of the transformation of Livorno refinery, bio refinery, helps to balance also the demand and offer in a market that is naturally declining in the mid to long term. So what we expect to see in Italy is that in our system, more balance between production and refining and the consumption in the marketing in the retail system and wholesale system, we could gain the 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 help two times. First, because you enter in a new business, it’s very, very profitable as we have seen before. Second, you rebalance the demand and offer in the traditional refining system.

Operator

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

Claudio Descalzi

Thank you very much. Goodbye.