Oct 30, 2013
Executives
Massimo Mondazzi - Chief Financial Officer Marco Alverà - Senior Executive Vice President of Trading Business Unit Claudio Descalzi - Chief Operating Officer of Exploration & Production Division
Analysts
Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division Alejandro Demichelis - Exane BNP Paribas, Research Division Irene Himona - Societe Generale Cross Asset Research Jon Rigby - UBS Investment Bank, Research Division Mark A.
Bloomfield - Deutsche Bank AG, Research Division Michele della Vigna - Goldman Sachs Group Inc., Research Division Marc B. Kofler - Macquarie Research Lydia Rainforth - Barclays Capital, Research Division Jason Kenney - Grupo Santander, Research Division Andrea Scauri - Mediobanca Securities, Research Division Neill Morton - Investec Securities (UK), Research Division Dario Michi - Banca Akros S.p.A., Research Division Alastair Roderick Syme - Citigroup Inc, Research Division Roberto Letizia - Equita SIM Spa, Research Division
Operator
Good afternoon, ladies and gentlemen, and welcome to Eni's 2013 Third Quarter Results Conference Call, hosted by Massimo Mondazzi, Chief Financial Officer. [Operator Instructions] I'm now handing you over to your host to begin today's conference.
Thank you.
Massimo Mondazzi
Good afternoon, ladies and gentlemen, and welcome to our third quarter results. Before I take you through the financial results, let me give you a summary of the main highlights of the quarter and few words about the market environment.
Highlights first. E&P we finalized the sale of CNPC -- to CNPC of a 20% stake of Area 4 in Mozambique.
This sale realized a EUR 3 billion net cash monetizing early our world-class exploration success. [indiscernible] was another world-important [indiscernible] of exploration with almost 700 million barrels of resources added to [indiscernible].
Production in the quarter was impacted by the political factors with significant force majeure events in Nigeria and Libya. In Gas & Power supply, contract negotiations are progressing, while market conditions remained soft.
In line with our plan, we are continuing to expand our retail base, particularly in Europe, and we recorded good results from our trading and LNG businesses. In Downstream, we are continuing to aggressively reshape our business.
Around 13% of our refining capacity has been permanently taken offline. In addition, we are progressing with the rationalization of capacity in our chemical sector.
Finally, if we receive the board's approval, we are ready to start our buyback program. In term of market conditions, third quarter 2013 was quite tough.
The average Brent price was $110.4 per barrel, slightly up year-over-year. However, the euro appreciated 6% versus U.S.
dollar to $1.32, reducing, as a result, by 5% the euro-denominated oil price. Refining margins were particularly depressed.
The Brent/Ural margin averaged $1.7 per barrel, down 77% year-on-year. On top of these, Italian gas demand was down 14% year-on-year and also demand for refined products continued to decline in the quarter versus last year.
And now, a few comments on our results. Adjusted operating profit was EUR 3.44 billion, down 15.7% versus the third quarter of 2012.
Exploration & Production was down EUR 419 million due to the scenario [ph] effect in extraordinary disruptions of production. Refining & Marketing and Gas & Power divisions reported deeper losses as a result of the continued deterioration of market conditions.
Adjusted net profit was EUR 1.17 billion, down 29.4% versus the previous year. The decline was due to the reduced operating performance, an increase of almost 9 percentage points year-on-year in the group's adjusted tax rate, due to the greater contribution of the E&P division, which is typically subject to higher fiscal take [ph].
Turning to E&P. In the third quarter 2013, Eni's total production was down 3.8% versus last year, reflecting significant force majeure events in Nigeria and Libya, and divestment made in 2012.
The decline was partially offset by the new field start-ups [ph] and continuing ramp-ups mainly Russia, Algeria, Angola and Egypt. Operating profit was down 9.7% due to lower production and the scenario [ph] effect.
And now, Gas & Power. Eni's gas sales declined by 1 billion cubic meter to 17.8 because of the ongoing downturn in demand.
Sales in Italy reported a slight increase, up to 2.9%, due to higher spot [ph] sales offsetting continuing lower supplies to the power generation segment. International sales decreased by 9.1% as a result of increased competitive pressure in industrial segment.
Gas & Power division reported deeper losses of EUR 356 million, EUR 52 million loss versus third quarter 2012, due to the continued deterioration in sales price and margins, reflecting weak demand, oversupply and increasing competitive pressures. It's worth mentioning that our results benefited only partially from certain price revisions at long-term supply contract, some of which are still pending and, therefore, delaying the recognition of the associated economic effects.
As far as R&M, in the third quarter of 2013, the division reported an adjusted operating loss of EUR 61 million. The reduction by EUR 113 million year-on-year was mainly due to the falling of the refining margin which, on the contrary, was very high in third quarter of 2012.
On the other hand, we recorded an improved performance in our Marketing business, notwithstanding depressed market environment. Refining throughputs declined by 12%, in particular due to the scheduled standstill of those refineries most exposed to the ongoing industry downturn and the shutdown of Venice plant for its conversion to a Green Refinery.
Overall, sales declined by 6.6% year-on-year, driven by the falling retail sales in Italy that was partially compensated by an increase in Europe and in the wholesale sector. And finally, the other businesses.
Versalis, our chemical branch, reported an adjusted operating loss of EUR 111 million, improving by EUR 62 million from the third quarter of 2012. It was thanks to the recovery of the cracking margin and the continuous improvement of our operations.
Engineering & Construction segment reported an operating profit of EUR 238 million, down 39% from the third quarter of 2012. Other activities in corporate posted an aggregate loss of EUR 144 million versus a loss of EUR 104 million in corresponding period of the last year, mainly due to one-off higher insurance claims.
Turning now to the debt. Net cash generated by operating activities and disposals amounted over to EUR 6.5 billion, of which EUR 3 billion from operating activities and EUR 3.5 billion from divestment, [indiscernible] related to the Mozambique amount [ph].
Capital expenditure for the quarter amounted to EUR 3.1 billion, of which 83% in the E&P sector. Total CapEx up to September amounted to EUR 9 billion, while on a yearly basis, we expect an overall amount broadly in line with 2012.
As a result, after dividend, net financial debt at year end -- sorry, at September 2013, was down EUR 1.4 billion, resulting in a leverage of 24%. Before the Q&A session, a few words on buyback.
Considering the strong fundamentals of our businesses, our board has approved the start of our buyback program. As we presented in March, Eni's multiyear buyback program is projected to be a flexible tool aimed at contributing to progressive dividend policy.
The pace would be, therefore, a function of our strategic achievements and prevailing market conditions. Share purchases will begin in the next weeks.
And now, I'm pleased to answer your questions with colleagues, Claudio and Marco. They are here with me.
Marco Alverà
Please, we can start the Q&A session.
Operator
[Operator Instructions] First question comes from Mr. Theepan Jothilingam from Nomura International.
Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division
Three questions, please. Just firstly on the buyback and your comment on the satisfactory level of leverage.
Could you just expand on that where you think that the upper end of that range would be particularly in relation to the credit rating? Secondly, just in terms of Algeria, if you could perhaps tell us where we are in the ramp-up of assets there and perhaps how the relationship is evolving with Sonatrach going?
And then thirdly, with the Q2 results, you announced the Nene Marine discovery in the Congo. I was just wondering if there was a further update there.
Massimo Mondazzi
Okay. So I'll answer your question about buyback, and then I'll hand you over to Claudio to answer the question about Algeria.
So as far as the relationship between the buyback and the leverage, yes, you're right, but let me respond very clear more, maybe recapping what we already said starting from the strategy presentation we presented last March. During the strategy presentation, we said that we have a priority investing our capital -- our cash in -- and the priorities are the following: first, investments; second, dividend; and third, buyback.
And definitely, we said that this, we say, allocation would have been looked together with the level of the leverage that you remember has been fixed up to 30%, so in the range of between 10% and 30%. We are still there, so no news on this first aspect [ph].
So I do not expect any kind specific comment from the rating agencies.
Claudio Descalzi
Now on Algeria. We can say that after a difficult start up of the main project that are remember, are MLE, CAFC and El Merk, at the beginning of the year.
Now, I think that the ramp-up is going quite well. We reached about 250 million standard cubic feet in MLE and CAFC.
And also, El Merk is progressing very well. I've been just a few days ago in Algeria with the chairman also on a truck as to review all the projects.
And I've seen that from a relations point of view and from the -- also [indiscernible] point of view, a new initiative. Because there are some new initiatives in shale gas with Sonatrach, everything is going very, very well.
For Congo, as you know, we made the discovery in the pre-salt in a very shallow water across the coast in Marine XII. We are still in the trial [ph] phase, but after now, we can say that we have discovered about 700 million barrels of oil reserves.
So with the potential to about 2 billion, so it's really a giant discovery. We had in mind a fast track, with the early production phase, and then if we feel, development.
And so anything -- that is absolutely very good news from the exploration point of view.
Operator
Next question come from Mr. Alejandro Demichelis from Exane.
Alejandro Demichelis - Exane BNP Paribas, Research Division
A couple of questions. Coming back to the buyback, Massimo, I think if we go back to the discussion in March, I think Mr.
Scaroni was saying that there was also a level of the oil price that will determine whether the buyback will be on and off. Could you confirm what kind of level of oil price we're talking about here?
And then the second question is, maybe you can give a bit of an update on Kashagan, and how do you see the pace of the ramp-up here?
Massimo Mondazzi
Okay. So I'll answer the first question.
So yes, for sure. And the level of Brent price is one of the issue we're looking at in order to launch the buyback.
There is no specific pressure I would like to comment. It goes without saying that the current level is enough to us to go ahead buying back our shares.
Claudio Descalzi
So for Kashagan, as you know, we start-up -- we have the start-up in September. And the start-up was successful.
We have no problem in the overall process on critical components such as rotating machinery and the salt processing units. A part, which is not usually supposed to be critical, the gas transport pipeline had leakage problems.
This were immediately identified and segregated with no environmental impact. Joint venture experts are investigating the root cause of the leaks.
These activities are expected to take several weeks. The oil and gas production remains shut until we have all the elements identified the cause of the leaks.
The start of the facilities will be carried out only when full satisfied -- safety is guaranteed. Given the investigation are ongoing, we cannot disclose any further details.
Operator
Next question comes from Ms. Irene Himona from Societe Generale.
Irene Himona - Societe Generale Cross Asset Research
I had 2 questions, please. Firstly on Refining & Marketing, where the quarterly loss was certainly below expectations.
Can you talk a little bit about the split of Refining versus Marketing this quarter and what are the -- what is improving, basically, versus 1 year ago? Secondly, on Gas & Power.
I mean, obviously, it's not sustainable to be losing EUR 1.2 billion a year. And can you give us some sense of once you renegotiate the big contracts, what is your view of sort of normalized profitability in that business?
Massimo Mondazzi
Okay, so I'll answer the question about R&M, and we can ask Marco for the second question. Everything in the [indiscernible] is strongly impacted by the very low refining margin.
We experienced an average of $1.70 per barrel, and these days, we're even at a lower level of margin. On top of this, I commented that the marketing performance being better than the quarter in 2012 because of the level of margin.
But as I also remember that the third quarter 2012 we launched the "riparti con Eni" campaign that is embedded internal numbers in the number of the third quarter 2012. And now, I'll leave the ground to Marco.
Marco Alverà
Thank you, Massimo. On Gas & Power, I would say we are on track on the negotiations as we had outlined, and we confirm what was our previous guidance.
Just as a reminder, that was to close 2013 broadly in line with underlining [ph] 2012 assuming all the renegotiations are closed. Where, if they aren't closed, we will simply be postponing the advantage from the renegotiation.
So I don't think we will be closing all the negotiations. You heard at the last quarter, we announced the initiation of an arbitration with Statoil and negotiations are progressing, I would say positively, on the GasTerra contract.
I would sum up confirming what we have previously said that on the price front, we have sufficient provisions in the contracts to stabilize the prices to a level where we restore profitability. The other arbitrations that have been awarded all go in the direction of claiming that these take-or-pay contracts have, let's say, no clause in them that should be forcing a long-term loss.
Where I think the issue is, is on the timing of these negotiations, because from a pricing perspective, they all have a backward-looking formula, so we can only assume that we will recover the 2014 deterioration and 2013 deterioration that we're seeing into the future. From a volume side, there are no specific volume question.
So what we have achieved with Sonatrach in 2013 is really what is enabling us not to go into take-or-pay -- or further take-or-pay situation, notwithstanding a significant drop in volumes that Massimo has just mentioned because we're faced with a market that is shrinking in some sectors, in power by 20% to 25%. So I would say on the price front, over time, we will recover profitability certainly.
On the volume side, it's a continuation of playing our portfolio within the different contracts, taking into consideration that there's no volume clause, per se, in the contracts.
Operator
Next question comes from Mr. Jon Rigby from UBS.
Jon Rigby - UBS Investment Bank, Research Division
I think one of my questions is to Marco, and then one for Claudio, if that's all right. So Marco, I always kind of ask you about this.
But going back to the previous question. If you were to sort of normalize the demand and/or normalize for sort of contract pricing structure, how would each of those contribute to the restoration of your earnings?
So if we were still operating under the existing pricing structure that you have now, but you weren't selling a portion of your volumes on the spot market and were able to sell them to the back-to-back into a restored demand scenario, how much different would your earnings be? And against normality, what are you having to sell on the spot market versus what would be your normal contractual demand?
And then secondly, just to Claudio. I mean, your exploration success continues to be fairly extraordinary in the context of the other majors.
Do you, at some point, stand back and think, well, we have a bit of an embarrassment of riches here and we need to think about where our CapEx going forward needs to be spent and maybe start to optimize your sort of portfolio in terms of countries, regions, et cetera. And therefore, does that then prompt a degree of sort of portfolio management over the next couple of years, just because you have so many options?
Marco Alverà
Okay. I'll start, Jon.
I think what we're seeing now with the market deteriorating quite rapidly is there's not -- first, there's not a lot of volumes that we are selling directly at the hubs as a result of the Sonatrach agreement this year. That may change as that agreement expires at the end of next year.
But we don't see that much of a difference in selling directly to customers and in selling onto the hub. As the price signaling effect of the PSV becoming a real hub have been very, very rapid.
Not only the regulator has, on the retail side, decided over time to introduce the PSV as a reference. But I would say, 100% of our industrial customers were asking for PSV-type component into the contract structure, whether it's in reference terms or in absolute-price level terms.
So this is what we have on the pricing front, there's not that much of a gap between sales onto the market and sales to end users. What we do expect as the market tightens up, hopefully, eventually is to see more value recognized for the quite unique flexibility that we have in the portfolio.
So the reference Massimo made to trading before is really portfolio optimization profits, where we move profits from what was historically a customer B2B activity to a more, let's say, advanced portfolio optimization activity.
Jon Rigby - UBS Investment Bank, Research Division
Right. And just to follow up -- are there 2 elements to any settlement going forward that, i.e., one, that stabilizes your profitability at the sort of levels that you've described I think in your strategy presentation back in March?
But also, were you alluding to some catch-up, as we've seen historically, at some point as in when those contracts are agreed, i.e., to compensate you for the fairly large losses you've made through 2012 and 2013?
Marco Alverà
I would say, yes, they do have retroactive, as you know, benefits and we do expect to recover the losses, I would say, particularly with Statoil the numbers at play or significant, because we have been out of money significantly for a long period of time. So yes, you should see some retroactive compensation going forward as those numbers are settled.
I wouldn't say there's an absolute level on the pricing front that we target, and I would say from the volume front, really, the only problem is in Italy, because of the lack of reverse flow and because of the Gazprom, Sonatrach, Libyan and Italian equity gas are physically delivered in a country that doesn't have yet reverse flow. So that's where we have the volume issue.
Claudio Descalzi
So exploration, I think exploration, you're right, is really doing very well. We are continuously growing our asset source base and -- not only gas, there's also -- we discovered also oil.
And we discovered big field, giant field where we added a very important working interest. And that gave us the flexibility for the future and several choices to optimize our portfolio.
And the first step, as you mark the first step, we are reducing our working interest in some giant project where we own 70% or 60% or 50% in the recent discoveries, and that could be a trend also for the future to monetize and get value immediately on these assets. So that is the first point.
We are starting also a restructuring of our portfolio, and that is not -- at the moment to disclose about this. But I think that the -- in the future meetings, next year, we can give more color and light about what we are doing.
Operator
Next question comes from Mr. Mark Bloomfield from Deutsche Bank.
Mark A. Bloomfield - Deutsche Bank AG, Research Division
Two, if I may. Firstly, just coming back to the share buyback.
One of the 3 criteria you gave was that the dividend payment was fully covered. I just wonder if you could give us any sense of what oil price you think is needed to achieve that in 2014?
Second question, just turning to production in West Africa. Volumes both oil and gas looked pretty strong this quarter relative to the second quarter.
I appreciate we've now got some volumes -- or had some volumes from Angolan [ph] LNG. Perhaps you could walk us through the other moving parts, just give us a sense of where Nigeria volumes are moving and if there were any major improvements elsewhere?
Massimo Mondazzi
Okay, Mark. So as far as the -- you'll try to sustain the current deal [ph], I guess, that is the best place to comment on this would the next strategy presentation when we'll present the update, an overall update on our [indiscernible].
And then, Claudio, about Nigeria?
Claudio Descalzi
About Nigeria, about West Africa. Generally speaking in the production, West Africa is doing quite well.
We increased production in Congo where we are now producing close to 110,000 barrels per day and that is oil, just oil, so that we gave a strong contribution especially in the third quarter. We increased production in Nigeria, but in the offshore.
That has been offset by the losses that we have in onshore. But the offshore has a very important value in PSV, and it's where we have a strong share.
So West Africa from the oil point of view, from discovery point of view and from production point of view, is going quite well. The Angolan [ph] LNG, as you know, we are missing a lot of production and -- about 15,000 barrels per day.
That is the only critical point to say in the West Africa production.
Operator
Next question comes from Mr. Michele della Vigna from Goldman Sachs.
Michele della Vigna - Goldman Sachs Group Inc., Research Division
First of all, Marco, I was wondering if you could tell us if you see any sign of demand stabilizing in Italy on either gas or in the oil products side. And Claudio, could you update us on progress for some of the key start-ups for 2014 such as Goliat and Block 15/06?
Marco Alverà
Thank you, Michele. I think, finally, we are seeing the early signs of some stabilization, particularly on the gas side.
So yes, some encouraging signs of stabilization. That's not to say growth, but I would say that's what we see right now.
Claudio Descalzi
So for our projects, so next project we're talking about 2014, we can just give you few data about 2013. Because in November, we'll start to have Jasmine, Jasmine is quite an important project for us because it's going to give us more than 30,000 barrels per day very quickly.
And then we have additional wells in CAFC gas, 3 [ph] Wells this year and additional wells next year. And then we will have the full production in 2015.
In Block 15/06, we confirm the production start-up in the fourth quarter in 2014, and that's the same for Goliat. We have also other projects in Yamal Peninsula [indiscernible].
That will start at the end 2014. And Yaro, as well, will start in 2014.
So that is the main contribution for the next year.
Operator
Next question comes from Mr. Marc Kofler from Macquarie.
Marc B. Kofler - Macquarie Research
Just 2, please. I'm sorry, I didn't really catch many of the projects you're referring to [indiscernible] 2014.
So at the risk of either repeating yourself or -- I was interested if you could give a rough sort of expected contribution in terms of new projects, that would be great. And then secondly, in the upstream again in Egypt.
There has been some recent reports about the Damietta potentially starting up again towards yearend. I'd be interested to get your view there.
Marco Alverà
I'll start with Damietta. It's Marco here.
We manage Damietta through our 50-50 joint venture Union Fenosa Gas. I would comment by saying that we expect 2 cargoes of LNG to come before the end of the year, so we leave it at that.
Claudio Descalzi
So for the contribution on these projects, so when we talk about contributions in 2013, we don't just talk about new project, but also around part of existing projects that just started. So we have, in terms of peak oil in 2014, we have about 30,000 barrel per day coming between MLE and CAFC, and 14,000 barrel per day at the end of 2014 for El Merk.
Then we have the Block 15/06 West Africa [ph]. We have a preproduction of 25,000 barrels per day.
The contribution for 2013 is for just for a few months. And then Angola LNG, that we really hope that will start in a steady way in 2014 with contribution of about 24,000 barrels per day.
And other projects in 2014 is -- okay, Jasmine, I said is a fully growing. It's about -- started from 30,000 barrels per day to 38,000 barrels per day in the peak production.
And then we have Goliat. Goliat has a preproduction of about 55,000 per day, but will start at the end of the year, so will give a full contribution only in 2015.
And then we have also the start-up at the end of the year, 2014 [ph], that Jasmine [ph] that just for 2,000 barrels, because it's just a short period.
Operator
Next question comes from Ms. Lydia Rainforth from Barclays.
Lydia Rainforth - Barclays Capital, Research Division
Three questions, if I could, please. Firstly on Mozambique.
Can you talk about how the condensate discovery there impacts your thought process on the development schedule there, and whether you would look at accelerating that -- the development of that discovery ahead of [indiscernible] early discovery. And then secondly, in terms of the buyback program.
You did talk [indiscernible] Covered, the balance sheet should be in a good state, which it is at the moment. Does that mean that any divestment that you would consider when you talk about monetizing the exploration portfolio that those would be returned to shareholders in the form of an accelerated version of the buyback over, and a bit of what you set out within the -- of what [indiscernible] an operational [ph] Basis?
Claudio Descalzi
Mozambique, I think that you are referring to the last discovery, or Goliat, that has been done in the new area, in the new zone the Block 4, which is in the southern area. We are in the early stage.
We have to drill additional 2 private wells to understand exactly the lower section of this reservoir in terms of liquid or condensate or the quality of these hydrocarbons. So we cannot say anything at the moment.
Marco Alverà
Okay. And as far as the -- your second question, Lydia.
Yes, for sure. As already said by Claudio, the portfolio management would become definitely part of our cash management in the future.
And it will contribute, as is the case to our overall cash to shareholders. But for a greater view on this prospect, definitely the best time to comment on this would be next strategy presentation in February 2014.
Operator
Next question comes from Mr. Jason Kenney with Santander.
Jason Kenney - Grupo Santander, Research Division
Just wanted to ask you a question about your position in Galp. And you have the option with Amorim -- or Amorim has an option with 5% stake.
Could you tell me if you've disclosed the closing date for the production [ph] and can you discuss whether you're actively looking to sell that stake, perhaps with the 3.4% that's also -- if you've got enough rights? And then secondly, just on the Gas & Power return to profitability outlook.
I mean, should we really be modeling a positive underlying profit from Gas & Power within the next 2, 3 years? I know you're not commenting specifically, there's a lot of detail about this, but just very broadly where you see us going to breakeven.
Claudio Descalzi
Okay, yes, so I'll answer your question -- first question about Galp. Yes, definitely, you're correct.
Amorim is retaining a call option to acquire 5%. This call option will definitely expire by the end of this year.
And as far as the remaining 3.4% on which Amorim retained the right of first offer, I guess that all I could do is to confirm that our intention is to dispose of as soon as possible these shares. And the same comment there would be valid, therefore, the overall package respecting the rights retained by Amorim.
Marco?
Marco Alverà
On Gas & Power outlook, I would say the timing for the new guidance will certainly be around the February presentation. It's fair to say that because of the retroactive nature of the price negotiations we talked about, there's probably a 1- to 2-year time lag in between the market deterioration happens and when it's fully captured and reflected in the prices we pay.
And 2013 was certainly a weaker market than 2012. So only in 2014, '15, we will be able to fully reflect that in the price negotiations.
Operator
Next question comes from Mr. Andrea Scauri from Mediobanca.
Andrea Scauri - Mediobanca Securities, Research Division
A couple of questions from me. The first one refers to your joint venture with SeverEnergia.
I was wondering what are your plans for your 30% stake that you have there. If you're going to sell this day core, it is core.
Second question, could you please provide us an update on the situation in Libya. What is the situation there and what is the missing production that according to the current situation you're expecting fourth quarter?
Massimo Mondazzi
Okay. So as far as the reduction aspect, it's the fact that there is a current transaction from this asset, we will prefer not to comment on this.
And Claudio about Libya...
Claudio Descalzi
So Libya. So the situation in Libya, as you know, is not very good.
We're losing more than 120,000 barrels per day, so the production on today is only 135,000 barrels per day against the normal production this year of about 240,000 and a potential production of 280,000 barrels per day. So we are really losing a lot of production.
We are losing more oil than gas. We are still sending to the domestic market about 7 million cubic meter per day and the rest [indiscernible] Stream 9.4 million cubic meter per day.
So we hope that Wafa, that is the south desert asset that is producing most of the gas for the domestic and oil and condensate, we can start in the next weeks. If that doesn't happen, I think that all our average production for the next 2 quarters in Libya will be around 130,000, 135,000 barrel per day.
We -- I think that situation is unpredictable, so we cannot say what is going to happen in the next days. But we are optimistic, I can say, for the medium and long term, because it's clear that's there is a process.
We are in a transition process. This country for 50 years gave a lot to Eni in terms of hydrocarbon and production.
Now it's in a transition phase. There are a lot of potentiality, so just have to look at that moment, as a spot moment.
But I'm sure that in the future, in the future, things will improve.
Operator
Next question comes from Mr. Neill Morton from Investec.
Neill Morton - Investec Securities (UK), Research Division
I had 2 follow-ups on earlier questions. Firstly in Refining & Marketing.
If I look at the result in Q2, it was a loss of minus 174. I'm still struggling to understand that if Refining got worse in Q3 versus Q2, where that improvement in profit has come from?
Is it simply Marketing or is it perhaps also treating? And then just secondly, a question for Marco on Gas & Power.
You've reiterated your full year 2013 guidance assuming contract renegotiations are successful. Would you care to give full year guidance assuming there are no renegotiated contracts by end of year?
Massimo Mondazzi
Okay. So I'll answer your first question about R&M.
And the main reason why the third quarter has been better than the second quarter is because of the driving season that in Italy is in the summer time, so it's included in the third quarter. So the very [indiscernible] that is including in the market activity [ph].
Marco Alverà
On the 2013 guidance, I think the 2 outstanding contracts are Statoil and GasTerra. I think the results you see in this quarter do not reflect either of those.
I think in -- I would be happy to successfully complete one of those, which would bring upside to what you're seeing in the 9 months to date. But I would think that you're overly optimistic to assume both.
There's always a chance things settle pre-arbitration. But I think to assume that both are closed at this point would be overly optimistic.
Neill Morton - Investec Securities (UK), Research Division
Would you care to quantify the impact if neither is negotiated by end of year?
Marco Alverà
No. It wouldn't be helpful because it's -- the lump sum impact is a combination of so many factors.
I wouldn't do it, but it also wouldn't be helpful. I think you have 9 months of performance that exclude those 2.
And I think you have what would be the guidance, which is last year's performance which, just to remind everyone, is about minus 200 million assuming both are closed. I think in between those 2 numbers, you have the value of what these 2 collectively could be worth.
Operator
Next question comes from Mr. Dario Michi from Banca Akros.
Dario Michi - Banca Akros S.p.A., Research Division
I would like to ask the following questions. According to local press, there could be some penalties if production in the Kashagan field isn't started soon.
Is it true? Could you please quantify these penalties?
And the second question is about the negotiation for the disposal of a 10%, 15%, stake in the Area 4 in Mozambique, how are they going?
Claudio Descalzi
So the first question about Kashagan. So from a contractual point of view, there is no penalties if you are not able to reach the KCP by the end of September.
What happened that the joint venture cannot recover the cost incurred to reach after [indiscernible] the KCP. But there isn't any contract clear penalties.
At the moment, honestly, they are not looking at the control discussion about contractor [ph] issue with the [indiscernible]. All this joint venture is focused to solve the problem with the leaks of the gas pipeline.
Sorry, can you repeat the Mozambique, what are you asking? Maybe you can repeat...
Dario Michi - Banca Akros S.p.A., Research Division
How are the negotiations?
Claudio Descalzi
Okay, okay. So negotiation.
I think that we cannot disclose anything because that is a commercially sensitive issue. What we've said, what Paolo Scaroni said that we have a very strong position in terms of working interest.
We want to be the leading partner, keep the operatorship and keep -- and hold a material stake in our joint venture. That due to the -- so big, large project in an opportunistic way, we will analyze, I mean, any proposal about this 10%, 15% maximum stake in the future.
But I cannot say more about that.
Operator
[Operator Instructions] Next question comes from Mr. Andrea Scauri from Mediobanca.
Andrea Scauri - Mediobanca Securities, Research Division
Yes, I got a follow-up question. I know that it is something that you do not usually comment.
But Saipem, we saw a good trend of result in the third quarter that might suggest an inflection point for Saipem. I was wondering if you could comment what are your plans for Saipem?
If there is an update on your view on Saipem in terms of potential deconsolidation of these assets or what else?
Massimo Mondazzi
Andrea, as you know, we spoke at length in the recent past about what we call the unbalanced position of Eni in Saipem, and this unbalanced position is still there. On top of that, I would say that we don't have anything to add, unless that we're very pleased about the results that Saipem comment yesterday.
And secondly, that definitely we will keep on supporting Saipem from a financial point of view.
Operator
Next question comes from Mr. Alastair Syme from Citi.
Alastair Roderick Syme - Citigroup Inc, Research Division
Very quick questions. At the beginning of the year, I think around the strategy presentation, you gave guidance on -- in the upstream on the unit margins, particularly around the DD&A charges.
You expect to see some escalation this year. I just note that, that hasn't really happened.
Is that a production [indiscernible] effect or is that inflation in DD&A still to come in the fourth quarter?
Claudio Descalzi
So, no. I think that from a cost point of view, an overall cost point of view, I think that we optimized our cost there in terms of operating cost and also DD&A.
So we didn't reach the moment [ph] value that we forecast for different reasons. Also because there are some delays, there are some delays in some projects and some disruptions that's going on in Libya where we are not able to develop the projects that we scheduled.
So that created a reduction in overall costs. And that is the main reason.
Alastair Roderick Syme - Citigroup Inc, Research Division
So as you look into the fourth quarter, do you expect to see a significant change?
Claudio Descalzi
No. Because, as I said, the main reason was Libya, and what we couldn't develop in Libya.
I think that we remain in the same range, I think.
Operator
Next question comes from Mr. Roberto Letizia from Equita SIM.
Roberto Letizia - Equita SIM Spa, Research Division
Very quickly on the debt, on the guidance you gave on the leverage flex at your end. I'm just asking if this guidance already include the effects of the buyback?
I think it won't be very deep, but is it included in the guidance already? And if it includes the effect of any Gas & Power gas contract renegotiation and any additional disposal that could happen by year end?
Massimo Mondazzi
Okay. So let me elaborate a bit on this.
So what we are seeing now is that we are giving a guidance that would be around 0.25, so broadly in line with 2012. And this guidance is taking account some, I would say, negative issue that arose [ph] in the very same period.
Technically, the lower upstream production versus what we expected and what we said in June, in July. Second, yes, we are taking into consideration the fact that probably not all the imposition [ph] Will take place by the end of 2013.
Third we are taking into consideration a weaker downstream environment that is been some way shown by this base [ph] . And even in exchange rate that, currently, is worse than what could have been projected by June, July.
Having said that, as far as the disposal, no, we are not including any specific additional disposal in this guidance.
Operator
[Operator Instructions] The control room confirmed there are no more questions.
Massimo Mondazzi
Okay. I think that the call is over.
If you have any further questions please don't hesitate to contact our Investor Relations team. And thank you, all, for your contribution.
Bye.
Marco Alverà
Thank you very much. Bye.
Operator
Ladies and gentlemen, the conference is over. Thank you for calling Eni.