ENI S.p.A. (ENI) Risk Analysis
Risk Overview Q4, 2018
Risk Change Over Time
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- Corporate Activity and Growth - Risk 1The development of the Group’s proved undeveloped reserves may take longer and may require higher levels of capital expenditures than it currently anticipates or the Group’s proved undeveloped reserves may not ultimately be developed or produced.
At December 31, 2018, approximately 32% of the Group’s total estimated proved reserves (by volume) were undeveloped and may not be ultimately developed or produced. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The Group’s reserve estimates assume it can and will make these expenditures and conduct these operations successfully. These assumptions may not prove to be accurate. The Group’s reserve report at December 31, 2018 includes estimates of total future development and decomissioning costs associated with the Group’s proved total reserves of approximately €35.3 billion (undiscounted, including consolidated subsidiaries and equity-accounted entities). It cannot be certain that estimated costs of the development of these reserves will prove correct, development will occur as scheduled, or the results of such development will be as estimated. In case of change in the Company’s plans to develop those reserves, or if it is not otherwise able to successfully develop these reserves as a result of the Group’s inability to fund necessary capital expenditures or otherwise, it will be required to remove the associated volumes from the Group’s reported proved reserves.
Risk Highlights Q4, 2018
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 31
- Accounting & Financial Operations - Risk 1Uncertainties in estimates of oil and natural gas reserves
The accuracy of proved reserve estimates and of projections of future rates of production and timing of development expenditures depends on a number of factors, assumptions and variables, including: • the quality of available geological, technical and economic data and their interpretation and judgement; ? • projections regarding future rates of production and costs and timing of development expenditures; ? • changes in the prevailing tax rules, other government regulations and contractual conditions; • results of drilling, testing and the actual production performance of Eni’s reservoirs after the date of the estimates which may drive substantial upward or downward revisions; and ? • changes in oil and natural gas prices which could affect the quantities of Eni’s proved reserves since the estimates of reserves are based on prices and costs existing as of the date when these estimates are made. Lower oil prices or the projections of higher operating and development costs may impair the ability of the Company to economically produce reserves leading to downward reserve revisions. ? Reserve estimates are subject to revisions as prices fluctuate due to the cost recovery mechanism under the Company’s production sharing agreements and similar contractual schemes. Many of the factors, assumptions and variables involved in estimating proved reserves are subject to change over time and therefore affect the estimates of oil and natural gas reserves. The prices used in calculating Eni’s estimated proved reserves are, in accordance with the U.S. Securities and Exchange Commission (the “U.S. SEC”) requirements, calculated by determining the unweighted arithmetic average of the first-day-of-the-month commodity prices for the preceding 12 months. For the 12-months ending December 31, 2018, average prices were based on 71.4 $/BBL for the Brent crude oil. Brent prices have declined significantly since they reached a peak at 85 $/BBL in October of 2018 and in the first quarter of 2019 have recovered only partially. If such prices do not increase significantly in the coming months, our future calculations of estimated proved reserves will be based on lower commodity prices which could result in our having to remove non-economic reserves from our proved reserves in future periods. This effect could be counterbalanced in full or in part by increased reserves corresponding to the additional volume entitlements under Eni’s PSAs relating to cost oil: i.e. because of lower oil and gas prices, the reimbursement of expenditures incurred by the Company requires additional volumes of reserves. Accordingly, the estimated reserves reported as of the end of 2018 could be significantly different from the quantities of oil and natural gas that will be ultimately recovered. Any downward revision in Eni’s estimated quantities of proved reserves would indicate lower future production volumes, which could adversely impact Eni’s business prospects, results of operations, cash flows and liquidity.
- Accounting & Financial Operations - Risk 2The present value of future net revenues from Eni’s proved reserves will not necessarily be the same as the current market value of Eni’s estimated crude oil and natural gas reserves
The present value of future net revenues from Eni’s proved reserves may differ from the current market value of Eni’s estimated crude oil and natural gas reserves. In accordance with U.S. SEC rules, Eni bases the estimated discounted future net revenues from proved reserves on the 12-month un-weighted arithmetic average of the first-day-of-the-month commodity prices for the preceding twelve months. Actual future prices may be materially higher or lower than the U.S. SEC pricing used in the calculations. Actual future net revenues from crude oil and natural gas properties will be affected by factors such as: • the actual prices Eni receives for sales of crude oil and natural gas; ? • the actual cost and timing of development and production expenditures; ? • the timing and amount of actual production; and ? • changes in governmental regulations or taxation. ? The timing of both Eni’s production and its incurrence of expenses in connection with the development and production of crude oil and natural gas properties will affect the timing and amount of actual future net revenues from proved reserves, and thus their actual present value. Additionally, the 10% discount factor Eni uses when calculating discounted future net revenues may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with Eni’s reserves or the crude oil and natural gas industry in general. At December 31, 2018, the net present value of Eni’s proved reserves totaled approximately €57.6 billion. The average prices used to estimate Eni’s proved reserves and the net present value at December 31, 2018, as calculated in accordance with U.S. SEC rules, were 71.4 $/BBL for the Brent crude oil. Actual future prices may materially differ from those used in our year-end estimates. Commodity prices have decreased significantly in recent months. Holding all other factors constant, if commodity prices used in Eni’s year-end reserve estimates were in line with the pricing environment existing in the first quarter of 2019, Eni’s PV-10 at December 31, 2019 could decrease significantly.
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