Eni bolsters oil price defences after ‘year of war’

Eni bolsters oil price defences after ‘year of war’

Eni is stepping up plans to adapt to a lower sustained oil price as the Italian energy major braces for more volatility after “a year of war”. 

Francesco Gattei, chief financial officer, said the company was seeking to ensure it can break even with oil prices at even lower levels than previously targeted.

Mr Gattei, who took up his role in August, told the Financial Times that “2020 cannot be considered a normal year — it’s a year of war”. But he said the company had to be able to “absorb these big swings. Volatility is growing every year.” 

He said the pandemic-related hit to oil demand, which prompted dramatic shifts in the crude price, had brought home the need to ensure Eni had an adequate cash buffer at all times.

Brent crude, the international oil benchmark, collapsed from nearly $70 a barrel in January to an 18-year low below $20 in April, before rebounding to about $50 a barrel this month.

The crash followed turmoil between 2014 and 2016 that had already forced an industry rethink about long-term, big-ticket oil projects and propelled companies to sell assets and cut costs. Eni had already sought to bring down the oil price required by the company to break even to about $50 to $55 a barrel.

“Now we want to push this down to the lower $40s,” Mr Gattei said. “We have tested that even $50 is not safe enough.”

European oil groups are trying to invest in low-carbon energies and technologies despite reining in their overall spending, as environmentalists and investors push them to take greater accountability for their role in climate change.

“The primary goal is to manage this [price] volatility,” Mr Gattei said, “and be as flexible as possible” to meet more aggressive climate goals.

Eni announced an adjusted net loss in the third quarter of €150m, down from a €780m profit a year ago as the pandemic squeezed oil demand, amid lockdowns and travel bans.

The company has issued bonds, slashed billions of euros in capital spending, cut costs and is selling off assets. It also cut its dividend and introduced a new payout policy linked to the Brent crude price.

Eni is also acutely focused on its longer-term ability to raise cash. “As a company we want to be sure our financiers see us as an attractive player,” Mr Gattei said.

Eni recently secured new loan arrangements with a dozen banks, with interest rates linked to its ability to meet renewable power capacity targets, a first among its peers.

“If after a number of years I am not able to reach the target released to the market . . . we will be penalised with a higher interest rate,” said Mr Gattei.

The move comes as the cost of capital for oil and gas projects is increasing rapidly versus renewables. While Eni has not encountered any problems yet, it is aware of the changing market sentiment.

“I don’t see any risk of funding,” said Mr Gattei. But he acknowledged the perception that there was a growing risk in financing certain hydrocarbon projects.

“We cannot know what is going to happen,” he said. “The volatility of the business, the [swings in] prices, that is the main source of risk.”

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