Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Eni S.p.A (NYSE:E)
Q1 2020 Earnings Call
Apr 24, 2020, 6:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Eni's First Quarter 2020 Results Conference Call hosted by Mr. Claudio Descalzi, Chief Executive Officer. [Operator Instructions]. I am now handing you over to your host to begin today's conference call. Thank you.

Claudio Descalzi -- Chief Executive Officer

Thank you. Good afternoon and welcome to Eni's 2020 update and Q1 results. We are going through unprecedented times, with the recent collapse in the commodity prices caused by the twin factors of COVID-19 pandemic and supply glut. In facing these scenario, Eni is stronger than it was in the last downturn in 2014; because in the past six years, we have transformed the company into a leaner and more efficient organization, with a robust upstream, and structured mid downstream and a solid balance sheet. Overall, these actions, coupled with the cost and capex reductions have more than halved our all-in cash neutrality, while reducing our net debt.

Today, in facing this new challenge, we are taking a number of initiatives that will further strengthen Eni, both operationally and financially. We are assuming the lockdown until the end of May, and then a gradual demand recovery toward normality by the start of 2021.

In the coming slide, I will detail our action plan for 2020. In these particular circumstances, all our action are being based on the following priorities; people are always at the center of our strategy, and even more so now. Every decision we make is for the health and safety of all our employees and of all those that grid and around us. On top of this, we are taking strong action to reduce our costs across the business and deferring project without impacting long-term. value. In our operations, we will focus on preserving the integrity and continuity of our assets safely.

To date, we have had no interruptions as a result of COVID-19. We consider that our low cost resources and flexibilities across all businesses are distinctive, competitive advantages, which we will leverage to keep our balance sheet strong, while we maintain significant liquidity to pass-through the weak scenario. This year, we will fully leverage the flexibility in our portfolio to reduce our capex by EUR2.3 billion, equal to around 30% of the total annual capex originally planned or 40% over the last three quarters of the year. Over 80% of the capex reduction is from upstream, where capex rephasing affect mainly new development projects by 35%, and production optimization by 20%. Also exploration has been reduced, while in the other businesses, we have optimized maintenance and logistics capex. Our portfolio is both resilient and flexible. The production optimization we have postponed can be restarted quickly, as soon as appropriate market conditions appear, and related production will be recovered accordingly, with limited loss of value.

In addition to the investment we are carrying out a strong cost efficiency program in all our businesses and corporate franchise. We expect an overall benefit of around EUR600 million in 2020 with around 40% of the savings coming from the upstream, with reduction mainly in opex and G&G costs and the remainder across all the other businesses and corporate. Our production costs, notwithstanding the lower production this year is being optimize, and we expect to keep it just below $6 per barrel, confirming our competitive position in the sector.

Production in 2020 is expected to be around 1.75 million to 1.8 million barrels of oil equivalent per day, before the OPEC cut, that are still unknown at field level. The lower production versus budget is two-third as a result of capex cuts and COVID-19, and [Indecipherable] for lower gas demand, mainly in Egypt and force majeure in Libya. A contingency of 40,000 barrel per day is still retained in our projects.

With CapEx at around EUR4.3 billion, we expect to generate free cash flow for EUR1.5 billion in a $45 barrel scenario. The 2020 organic free cash flow of EUR1.5 billion, shows a reduction of EUR2 billion versus the original budget of EUR3.5 billion, at $6 Brent. The weaker scenario account for minus EUR3 billion, while the action we are taking to contract the turmoil will result even considering the lower production in a positive effect we of around EUR1 billion. To evaluate different scenarios, our fee cash flow sensitivity, based on our current outlook is EUR190 million for each dollar move in Brent.

And now, let me focus on the mid downstream businesses. R&M has been the most affected by the virus containment measures, with a contraction in transport fuel consumption of up to 80% in the worst week of the pandemic. Oil product demand is expected to gradually recover, with the easing of restrictions, and the restart of industrial activities. We have optimized maintenance of our refineries and we are containing our -- continuing to run them at reduced operating level. Overall, we expect a yearly utilization rate of around 80%.

In marketing, despite falling oil products demand, we expect EBIT in 2020 in the range of EUR300 million. In Gas & Power, we expect to record to record around EUR400 million of the EBIT, with almost two-third coming from the resilient retail business. In Versalis, we expect to reduce losses by around two-third versus the last year, thanks to a supportive scenario for steam cracking, more than offsetting COVID related demand weakness, in particular for elastomers.

Overall, the mid downstream is expected to contribute for -- over EUR600 million of EBIT, slightly better than last year, notwithstanding the significant impact of COVID. These expected results, when excluding COVID effect, will also exceed the original 2020 budget that was around EUR1.3 billion.

Moving now to the Group's cash position; cash flow from operation before working capital is expected to be EUR7.3 billion in our revised $45 Brent scenario. The reduction versus the original budget of EUR11.5 billion at $6 Brent is due to EUR5 billion of reduction made up of scenario effects, COVID impact and remodulated production. Partially mitigated by EUR800 million coming from the combination of cost saving for EUR600 million and better performance for EUR200 million. The expected cash flow from operation will more than cover the revised capital budget of around EUR5.5 billion.

Turning now to our Q1 results; in response to the COVID-19 pandemic, we immediately put in place, safety measures worldwide to protect our peak and all those around us. In addition, Eni has launched a series of initiatives to help local stakeholders, in areas in which it operates, and also made supercomputers HPC5 available for coronavirus Research.

Turning to business; exploration continued to have success. In Angola, Block 15/06, the Agogo discovery's oil in place was upgrade to 1 billion barrels. As a result of the second successful appraisal well. In Mexico, the first well drilled in Block 10, resulted in an oil discovery containing up to 300 million barrels of oil in place. Several prospects have been identified nearby. In case of success, they can be clusterized in a common development project.

In Sharjah, Area B, we drilled the first well, discovering gas and condensate in just one year from signing the block. The well has been tested with excellent flow rates, that already approved the commercial viability of the discovery. Upstream production was 1.77 million barrel per day, minus 4% year-on-year, impacted by lower gas demand, together with the effect of contract for three years and force majeure in Libya. These effects more than offset the increased production in Norway.

Gas & Power performance proved to be robust, notwithstanding the weakness of the LNG market. In R&M, the improvement was due to both marketing and refining, which in particular, benefited from an enhanced industrial configuration, and higher contribution of the bio business. In the renewable business, in March, we started 50 megawatt wind farm in Kazakhstan and we have completed the acquisition of 49% of the Falck portfolio in the U.S., with the equity production of 57 megawatt.

In the first three months of 2020, we generate EUR2 billion of cash flow from operation before working capital. A reduction versus last year, mainly due to the lower oil and gas scenario, but matching our capex requirement. Our balance sheet is strong, we can rely on EUR16 billion of liquidity to face the drawdown of activities related to the pandemic.

In terms of economic results, upstream EBIT in Q1 was EUR1 billion, impacted for EUR1.1 billion by the lower oil and gas prices. On a comparable scenario basis, upstream EBIT was resilient, notwithstanding the lower production volumes. Moving to mid-downstream, the overall result improved by 40% or 85%, excluding the COVID impact. Gas & Power EBIT was robust at EUR430 million, up almost 30% year-on-year. This result was driven by the GLP business unit, with EUR270 million of contribution, thanks to contract optimization and volatile market scenario. This positive performance was only partially offset by the lower contribution of the LNG business, related to the weakness in the Asian market.

In retail, Eni gas as e luce delivered a result of almost EUR160 million, driven by the addition of almost 250,000 customers and the higher contribution from non-commodity activities, which offset the sales reduction linked to the virus, milder weather conditions and increase expected fall by clients.

Refining & Marketing was at EUR80 million, despite the challenging scenario, in particular, the Refining business benefited from the optimization of industrial asset, lower operating cost and from the positive contribution of the bio business, thanks to the Gela plant ramp up. The marketing result, helped counterbalance the demand reduction related to the lockdown measures. Finally, the Versalis result was impacted by depressed demand, in particular, in the automotive, building and construction sectors, and by competition from U.S. producers.

Turning now to the cash position. In Q1, adjusted cash flow from operation before working capital was EUR2 billion matching, our capex requirement. Excluding this scenario, COVID and non-cash derivative effects, cash flow would have improved year-on-year by EUR200 million. The balance sheet remained robust, with leverage at 28%.

To sum up we have taken action in term of capex, cost savings, and remuneration through the suspension of the buyback, to recover EUR3.3 billion versus our original plans this year. In this new environment affected by the pandemic, with the consequent revised plan, we expect to produce between one 1.75 million and 1.8 million barrels per day. With the flexibility to reactivate production, as this scenario improves. Our mid-downstream will continue to improve year-on-year despite the COVID pandemic. We will maintain sizable reserves of liquidity, which are currently around EUR16 billion, 3.5 times our short-term debt. Together, these actions will allow us to navigate the challenging scenario, while we maintain the highest standards of safety at work.

Thank you very much. We are now ready to answer your questions.

Questions and Answers:

Operator

Ladies and gentlemen we will now begin the question-and-answer session. The first question comes from Oswald Clint of Bernstein. Please go ahead, sir.

Oswald Clint -- Bernstein -- Aanlyst

Thank you very much, Claudio. Thank you for getting on to the call in this tough time. So my first question, please. Thank you for the updated guidance here on 2020 cash flow. You're obviously using $45 for the year, it looks like the market has really gone to $35 for the year. So you've given the sensitivities quite clearly today and obviously your cash flow would just cover capex therefore, for 2020. So obvious question, but could you just talk about how you think about sustaining other distribution -- kind of other distributions like the dividend at such a price level, if it was to happen? Secondly, just on the downstream, pretty impressive Q1, with the operational improvements coming through, offsetting some of the COVID demand impacts and could you just talk about 2Q so far, in terms of gasoline, diesel, jet fuel and just whether you think some of these operational improvements might also come through to offset some of that demand weakness, once again in the second quarter please? Thank you.

Claudio Descalzi -- Chief Executive Officer

Thank you. So about the first questions, I think that -- to talk about dividend and what we are going to do with dividend, is not the time now; because you know, the pandemic and the glut started just 1.5 months ago. So I think that we have to continue working. First of all on the optimization of our capex, opex G&A all the possible optimization that we can do in our structure. We acted very rapidly, we start immediately, the first week of March, we had a first revision in the March 19 and then one 10 days ago -- less than 10 days ago, we finalized the revision that we presented today and we continue to fine-tuning, and also execute this revision in our subsidiaries. So we will see the next couple of months, how the COVID-19 will evolve. In our assumptions. also in term of price, and in term of COVID-19 within that -- by the end of May, the more -- the critical phase is finished, so we start gradually to recover the consumption and go through a possible new normal situation by the end of the year.

So we will see what is going to happen in May, in June, in July and in July, we can update on the dividend. We run different scenario clearly, we didn't just run $45, we were on $40, we were on $35. We still have flexibility clearly, flexibility in the in the cost reductions, and its something that we can apply, if this scenario remain less attractive, that what we thought at the beginning, $45 and then we will -- can think about the dividend, but not, because we -- it has just happened. We don't want to react immediately, before having a clear idea of what we can do, in term of efficiency inside our company.

For the question about refinery, still refinery worked very well. We can say that the biorefineries were very positive, both in Venice and and Gela. From a R&M point of view, they worked [Phonetic] a lot of the cost efficiency, on the logistics, on the stocks and we can have some additional improvement on that, also if now the situation in March was I think the most critical in term of transportation and consumption, because during the week, we had an average of 70% reduction and about 80% during the weekend. Now it is improving, so the good news, that it is improving, some percentage point but it is improving. So we are following up and we'll see what is going to happen in May. We think that in May, the situation in term of transportation and consumption will be better, especially for gasoline. Diesel consumption was, I can say good -- good, also during this period, because the heavy truck continue to work for transporting materials and and food, so that was less impacted. But I think that we can recover also on gasoline.

Oswald Clint -- Bernstein -- Aanlyst

That's very helpful. Thank you.

Operator

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

Michele Della Vigna -- Goldman Sachs -- Analyst

Thank you very much for taking my question, and Claudio congratulations, and best of luck for your new mandate. I had two questions if I may. The first one is around the capex and opex cuts. I was wondering if -- how much in your mind is cyclical and just to belongs to this really difficult time in the market, and how much you think could be sticky, even at the time of a recovery? We've seen before how the industry in difficult times manages to put through cost cuts, which actually then can become quite sticky, even after the price recovers? And then my second question is about price dislocations, we are seeing a lot of dislocation in the physical crude markets, and I was wondering through your business, where perhaps you see realizations really starting to diverge versus Brent? Thank you.

Claudio Descalzi -- Chief Executive Officer

So I answer about the -- maybe with the help of Sandro about what was right, about the cyclicality -- this kind of situation is cyclical or we can manage this kind of up and down in our upstream business, in term of prices and then maybe about prices in divergent between brand, I don't know if Massimo or Pino can answer. I give them time to think about and I answer to the first question.

So Michele, you know in the last six years, we had very low price. We have up and down. For that reason, we start already before, but we change also, our way of developing fields and ROA to select the field that we want to develop and try to explain better this -- what I mean. First of all, as you know very well, we put a lot focus on the exploration to be very resilient time, of course because our exploration of course is less than $1 per barrel. So we start from a very strong basis. Then we start working on short cycle; what I mean for short cycle -- also for big project, we start working on phase one, phase two, phase three, to be able to capture with a very good time to market, the cash flow return -- the return on the project. So we don't do anymore, the giant, supergiant project where we put all the investment upfront and then we start recovering. Because of that reason, because today we can have $60 tomorrow, $80 and then we can jump down to to $30. So you must be very-very fast in your development.

Clearly, the world need energy. Until December, the consumption was at 1 million, 1.2 million barrels per day on average -- yearly average. So we need oil, we need gas, we need energy. So we have to adapt ourselves. We must have the flexibility to be able to -- to be inside this short cycle. For that you must have the right asset, and also the right strategy in term of development, and geography where you are, to exploit at the maximum level, your position and the position on your consumers -- or your customers, we can say. So, that is my answer to your question.

Now I give the floor to Pino, to talk about the diverging price between Brent and other crude.

Giuseppe Ricci -- Chief Refining and Marketing Officer

Today, the volatility of the -- the financial volatility of the crude, of course we are in a period, where in only one week, we changed completely the spread between Brent Ural or Brent Middle East crude. And the question is, to try to take the maximum advantage of this volatility. Of course in the last month, we took advantage to buy crude for our refining system with very good discount on OSP, on the official pricing. And the -- about the the equity production, we try also to maximize the use of our equity production in our refining system, in order to avoid to be damaged from the sale of our crude on the market. Okay,

Massimo Mondazzi -- Chief Financial Officer

If I may add something on this, Michele; so talking about the average price we got in the first quarter, the average has been versus Brent minus 5, versus minus 2.6 that was in the first quarter of 2019. But I would say that, the minus 5 is more normal than the minus 2.6 that we had last year. You remember last year, the heavier oil had, I would say, a very high potential on the market, because of the first uppercuts, then Venezuela and so forth. Now the minus 5 is more in line with what we have seen in the past, giving some advantage to our refinery system that you remember, is quite complex. In term of sales, I would like to add that you know all the forward sales of in May has been already placed, as far as our equity production. So everything has been sold.

Giuseppe Ricci -- Chief Refining and Marketing Officer

Thank you.

Operator

The next question comes from Alessandro Pozzi of Mediobanca. Please go ahead, sir.

Alessandro Pozzi -- Mediobanca -- Analyst

Good morning all. I wanted to go back to the comment about the flexibility in costs, and I was wondering, where are the areas, where you think you see you can take a bit more decisive actions, in the event to the oil price remain depressed? I'm asking that because, I mean, compared to the last downturn, I think oil majors are much leaner. So potentially the room for cutting costs, maybe on the opex side, may not be that great and therefore you have to lean on the capex side. And maybe a follow-on from that, can you give us a bit more color on what projects you put brakes on, because I think you reduced the capex by 30% and which other projects are still going ahead? Thank you.

Claudio Descalzi -- Chief Executive Officer

Thank you. So I hear the floor to Sandro Puliti to answer your question.

Alessandro Puliti -- Chief Upstream Officer

Okay. Good morning. So the reduction in capex was basically located for EUR400 million to production optimization activity, that means on the short cycle, and EUR1.2 billion, that is located on the long cycle, the main projects. The main projects that have been postponed, are the Rovuma LNG in Angola, our activities in the Cabaca and Agogo. The Merakes in Indonesia, expenditure in Zubair, some reduction in Egypt, and in the UAE. Those are the main areas where we postponed projects to achieve cost reduction this year. On top of that, are there are EUR300 million reduction on the exploration activity,

So definitely, how we can do more? Clearly, doing more, we can do it in further rationalization in our operation, especially on the operating cost side.

Alessandro Pozzi -- Mediobanca -- Analyst

Okay, thank you. Just second...

Claudio Descalzi -- Chief Executive Officer

Sorry, just to complete, just to give you more color on this, how we can be resilient if the price is lower or what we can do more. Yes, I think that this is the size of the revision of our capex, opex and costs generally has been performed practically in one month. So we reacted immediately, as we started first week of March. But we can do much more, working on each single subsidiary, inside the inner costs. We are a big company, so it's something that we can perform further, and we can optimize and there is a [Indecipherable] finish. We run fast to be -- to give immediately, to be immediately in the right side, and to be to -- clearly to impact positively the year. But this optimization is going to continue. For that reason we run sensitivity at $35 or $40 and we continue to understand how to optimize it. So it's something that -- the budget we prepare, we presented the strategy, we have been working for five, six, seven some months and now in practically one and half months, working with all the people starting from top down and then bottom up, we revise, we make an aggression. We have been very aggressive and determinate to do that and now we continue to finalize. So not just in the upstream. We have several other component, where we are looking inside corporate costs and G&A. So in a broad range of course that we can optimize and we have optimized, also changing organizational structure, to be even more flexible and resilient in the future.

Alessandro Pozzi -- Mediobanca -- Analyst

Okay, thank you very much. Just maybe a second one on the tax rate, it has been fairly high in Q1 in the upstream. But I guess that mainly a reflection of the lower oil price. Can you give us a guidance for the tax rate for the rest of the year? Thank you.

Claudio Descalzi -- Chief Executive Officer

Thank you.

Massimo Mondazzi -- Chief Financial Officer

So the tax rate, so targeting a $45 per barrel and for average this year means a lower oil price for the remaining nine months. It means that we expect an increase in the E&P tax rate, that is correlated to the oil price. So we expect for this reason, a tax rate adjusted for the full year, that would be more or less same level around 100% as you have seen in the first quarter. A different story as far as the cash tax rate, because of the different composition in this environment between deferred taxes and cash taxes, we will project a reduction in net cash taxes to be paid. That's the reason why we expect a decrease in the cash tax rate from the 33% we had in 2019 to around 25% in 2020.

Alessandro Pozzi -- Mediobanca -- Analyst

Thank you. Very clear. Thanks.

Operator

The next question is from Thomas Adolff of Credit Suisse. Please go ahead, sir.

Thomas Adolff -- Credit Suisse -- Analyst

Good morning, good afternoon. I've got a few questions please. Just firstly on cash flow; obviously cash flow is one thing and working capital is another thing. If you can't sell what you produce, you don't get paid what you sell, then obviously the cash flow would look worse than your base case. So I wondered if you can give some guidance for working capital, and how that evolves over the balance of the year? Secondly, I wondered if you can also give a comment on the supply chain? Obviously, we are seeing major disruptions there, are you seeing any major issues there, that could impact your operations? And then finally, if I may, just on global gas you've announced obviously force majeure on Libya, what does that mean in terms of production? You probably have some issues in Indonesia, and you've highlighted issues in Egypt. What is oil producing there? And what generally is happening to your LNG portfolio? Is your share of spot LNG higher than in 2019? Thank you.

Claudio Descalzi -- Chief Executive Officer

So I think for the cash flow, working capital, Massimo. And then the supply chain, Sandro Puliti, and then for the LNG and the gas issue and force majeure between Cristian and Sandro Puliti, they can answer.

Massimo Mondazzi -- Chief Financial Officer

Okay. So as far as the working capital, you have seen that we absorbed in the first quarter, EUR640 million because of the seasonality, but much better than in the first quarter 2019, that contained some, you probably remember some special item and we paid around EUR300 million for an arbitration and definitely, we are taking advantage from the decrease in the prices environment, that is giving us an advantage. So we are cashing in, base that we issue in '19, when the oil price and the gas prices were higher and we are releasing new bills with lower scenario.

Projecting what do you expect for the full year, is a bit complex, because all the reason that you mentioned. So the market is really volatile. But can I say that, taking into consideration what we expect in terms of, I would say an higher probability of default from our clients, mainly in Gas & Power, Retail, specifically, we can project a net cash absorption for the full year. That could be, I would say in the range of EUR100 million to EUR300 million. So let's say, in average EUR200 million cash absorption for the full 2020.

Thomas Adolff -- Credit Suisse -- Analyst

Can I just quickly, just follow up on the working capital? Obviously, the comment you made just now, the release of the LIFO-FIFO effect right, inventory losses and inventory gains or the offset in the cash flow. So I was just wondering about the underlying working capital effects, not the LIFO-FIFO?

Massimo Mondazzi -- Chief Financial Officer

But again, the line is more or less stable. So we do not expect a significant change, in respect to what we have seen last year. So remaining more or less flat. So, out of the -- for the full year, out of the EUR100 million to EUR300 million; so EUR200 million I would say. The most important deterioration is linked to the reduced level of cash in from our clients. And so if you take this out, we will be in the range of between zero and minus EUR100 million.

Thomas Adolff -- Credit Suisse -- Analyst

Okay, thank you.

Operator

The next question is from...

Claudio Descalzi -- Chief Executive Officer

It is not finished, we have other two question to answer. Sandro and then Cristian.

Alessandro Puliti -- Chief Upstream Officer

Okay. Regarding regarding supply chain and disruption due to the pandemic. The pandemic is mostly affecting those activities that requires international support and mobilization and therefore we are suspending or we are rephasing most of our drilling and especially deepwater drilling, drilling activities. While on production operation, always, with the aim to protect our people while granting production continuity, we have been able to maintain production level, thanks to the fact that we have a prevalence of local workforce in our producing countries, so we are not affected by the blockage of traveling between countries. And then we also reinforced our eight quarter support where possible and we identified critical manpower and optimized HR management.

And then we have also improved our supply chain monitoring regarding spare parts, to ensure there our ability and advance booking and and delivery. Now I'll leave the floor to Cristian for...

Cristian Signoretto -- Chief Gas & Lng Marketing and Power Officer

Yeah. Hello everybody. So when it comes to let's the global gas environment, clearly, we entered in 2020, which already the fundamentals were still weak in terms of supply balance and demand. Just to remind, in the first quarter of 2020, there has been 15 million ton of more LNG floating, around due to the start-up of of U.S. LNG trains, vis-a-vis last year quarter. Clearly the lockdown linked to the pandemic has increased, let's say, the weakness of the market due to the demand. The reduction we have seen it, firstly in China in February. But I have to say that now, we see China picking up in terms of demand and actually recovering from that slump. But clearly, Europe has been affected. So let's say, all in all, this weak market environment as affected also, let's say, our results. But as you can see from the result of the first quarter, our exposure to LNG spot prices are fairly limited. In fact, we are growing our portfolio of LNG and we tried to balance and to manage the exposure to that balance and so our, let's say, exposure to spot prices are not that high. So that's why, you don't see a huge impact on the results.

Thomas Adolff -- Credit Suisse -- Analyst

Thank you.

Operator

The next question is from Lydia Rainforth of Barclays. Please go ahead ma'am.

Lydia Rainforth -- Barclays -- Analyst

Thank you and good afternoon. Two questions if I could. The first one was on the strategy presentation, and I appreciate it was only a month ago, and that a lot has changed since then. But does the current crisis that we are going through and depending on the duration, change how you think that might evolve? So does it mean that you accelerate your energy transition ambitions or is it really just too early to think about that? And then the second one was more of a social question, as to can you talk about some of the initiatives that Eni has been deploying in terms of response to the pandemic introducing a little offset, really in examples of the help that Eni has been giving to the wider society? And what initiatives are you seeing making the most difference? Say for example, the supercomputer that you use for the virus [Indecipherable]. Thanks.

Claudio Descalzi -- Chief Executive Officer

I will take the first questions, and Massimo for the second questions. First of all, the long-term don't change at all, because I think looking at what is happening, I feel more to accelerate the long term, it means that the action to go to a different kind of retails products, so green or blue or bio that are working well now, and are really resilient and give a good balance with the traditional business. I think that's counterbalanced then this possible volatility that we'll see in the future, what we presented in the long term has to be improved and may be accelerated. Clearly we have to understand how and also find the means -- money to accelerate it. We have also, as I said during the strategy, we are working through a different organization, that will be useful to accelerate and also to reduce our overall structural cost. But for sure, that remain our main target to continue and to go to -- really to work on this scope one, two, and also the scope three, and that is our plan and we go ahead with determination.

The second question, Massimo?

Massimo Mondazzi -- Chief Financial Officer

So, second question about what we are doing. So we are doing something in Italy and abroad. So in Italy, mainly we are helping hospital to deal with -- to cope with this critical moment. So we provide them briefing systems. We helped them to set up additional beds to assist the more critical people. We did it everywhere in Italy, from south to north. And maybe I'll leave the floor to Alessandro, to give you some detail about what we are doing abroad.

Alessandro Puliti -- Chief Upstream Officer

Okay. Abroad basically, we are adopting same strategy. In each of our subsidiaries we are in contact with the local health authorities, and according to their needs, we are helping in the response to the COVID by providing either beds, ventilators or personal protective equipment when required and always in accordance with the local authorities.

Operator

The next question is from Jason Kenney of Santander. Please go ahead.

Jason Kenney -- Santander -- Analyst

Good morning and wishing everyone at Eni on this call, good health and sanity at this time. Crazy, as it is, I've got a couple of questions if I may. The first on going back to capex; out of the EUR5.5 billion, how much of that is absolute minimum maintenance capex do you think in 2020? And then the second question, I think you commented the 1.75 million to 1.8 million barrels, and a volume guidance for this year is three OPEC cuts. I'm just wondering if any of the OPEC nations or indeed any country that is going to support production cuts later in the year has contacted you about field restrictions? I know you've mentioned a 40,000 barrel a day contingency, is that purely for possible OPEC cuts or is it contingency on operational procedures? Just a bit more color around where volumes might be impacted if OPEC were to contact you. Thanks.

Claudio Descalzi -- Chief Executive Officer

Okay, Sandro, you can start talking about, I think both, because the first question is about the minimum capex for maintenance and the second, if somebody's already contacted us and if there is a contingency in the contingency for upper cut?

Alessandro Puliti -- Chief Upstream Officer

Okay. So we always divide our capex in capex related to development project, production optimization and also, what we call it as mandatory capex that are the one that are related to our asset, basically our asset integrity. So the level the level of that capex is around EUR2 billion per year. So this is our minimum capex level that we have to maintain, to ensure full asset integrity of our operation. And the other question...?

Claudio Descalzi -- Chief Executive Officer

OPEC, if countries start contacting us and we have contingency in our plan.

Alessandro Puliti -- Chief Upstream Officer

Okay. In our plan, we have a contingency of 40,000 barrels of oil equivalent per day. To cover also -- that is covering also, possibility of some OPEC cut. Although to date, we don't have any requests recorded to-date of OPEC cuts from our producing countries.

Jason Kenney -- Santander -- Analyst

Okay. Many thanks.

Operator

The next question is from Irene Himona of Societe Generale. Please go ahead.

Irene Himona -- Societe Generale -- Analyst

Thank you very much. I had two questions please. Firstly, thinking about the two affiliates now, ADNOC and Zohr energy, can you tell us what they contributed to the first quarter results, either in terms of profit or dividend? And then what do you expect from them for the full year please? And my second question, Claudio, as you mentioned you worked hard over the last few years to strengthen the balance sheet, and all your actions in response to this crisis is indeed to protect the integrity of the balance sheet. What would be the maximum, the ceiling level of leverage that in this environment, you would be prepared to tolerate? Thank you.

Claudio Descalzi -- Chief Executive Officer

Okay, thank you. I hand that for the first question --the first question and also the second question Massimo can answer. Please?

Massimo Mondazzi -- Chief Financial Officer

Okay. So as far as ADNOC and Zohr, in terms of cash, we -- talking about Zohr, we already cashed in our share of EUR150 million of dividend. That is the first quarter dividend. So because of the situation definitely, we distributed what was available to be distributed in the first quarter, and then we are waiting for, I would say, more clear information I had, in order to decide what to do in the remaining three quarters. So last year, we distributed something in the range of EUR850 million, 100%, I would say more clear decision on this respect would be taken probably in June-July, talking about the second quarter and the remaining quarters. Maybe Pino could give you some additional detail as far as ADNOC and then I'll be back, talking about leverage.

Giuseppe Ricci -- Chief Refining and Marketing Officer

ADNOC in the first quarter of this year added a general turnaround of Ruwais East and West. The general turnaround is already finished and often it adjusts in the same time of the developmental crisis in China for COVID. So this is a good news. Now the units are already in operation, and the refinery is quite empty, because the turnaround is ready to supply the Far East, where the crisis is finishing and the consumption is increasing. So we consider to be in a good situation to cover the market after the crisis from from Ruwais.

Notwithstanding this, we considered in the second quarter, a conservative throughput of the refinery, around the 60% to consider in the Q in April of the turnaround end of ramp up slowly, in parallel, we did grow the consumption and full utilization in the second half of the year.

Massimo Mondazzi -- Chief Financial Officer

And Irene, in term of leverage. So it's a bit difficult to make such a projection this year, due to the very high volatility. For sure we will be -- have been more precise in July, presenting the first semester. The first uptime should be this year, notwithstanding all this volatility to try to stay below 0.4, in term of maximum leverage.

Irene Himona -- Societe Generale -- Analyst

Thank you very much.

Operator

The next question comes from Mr. Martin Rats of Morgan Stanley. Please go ahead, sir.

Martijn Rats -- Morgan Stanley -- Analyst

Hi, hello. Thanks for taking my questions. Frankly, a lot of them have already been asked, so I only had one. So clearly, 1Q saw a significant decline in earnings, but it doesn't look like 2Q is going to look any better and it's a little difficult to gauge how much what the incremental impact is from here on 2Q results. Now, the closer we get to second quarter results, the more difficult with this, I would imagine for you to brief the market on it, so this might be an opportune time. Could you talk us through generally what your observations are when it comes to the second quarter and the factors that could impact earnings from here on?

Claudio Descalzi -- Chief Executive Officer

Sorry, from what I understood, you want to understand some color about the second Q and how it can be for us? Because didn't catch your question?

Martijn Rats -- Morgan Stanley -- Analyst

Yeah, exactly.

Claudio Descalzi -- Chief Executive Officer

Okay. So as I told you, we analyze from different point of view, because the COVID-19 is really propagating in different parts of the world with different timing. What I can say that, from a downstream point of view, from a retail market point of view, we see that we have some recoveries and is recovering. And also, you see that refining in the first quarter, in any case in marketing work quite well in a very quite difficult condition. So I hope that we can see some recovery in the second quarter, in terms of consumption. That means consumption, meaning, also that it will be easier also for our productions. I cannot give you from a contingency point of view, because I will be able to just give at the end of the quarter. But I think -- I see the progression positively, with respect to the last 1.5 months.

From a production point of view that means that -- our production in Middle East or Far East is -- as Massimo or Pino said before, for May and June, we already sell our production, that is a good at this point and we see a recovery in China, and generally in the -- in East Asia. So if that happened completely and we can have a recovery as expected, about 70%, 80% on the consumption, that means that give give space for our production in the area. Then we have Africa; Africa is linked term of of our production to the European market and the European market is as I said before for Italy, is improving also in other countries, Germany is already improving, its better than in Italy. It was improving also for other country, could be good also for our production in Africa.

We have another point, that its not just COVID-19, it is how the -- a big plus will be -- framework will be implemented, because that is clearly going to impact on the price and as soon they start implementing, I think that we can have an improvement in the price. So, should be positive from that point of view, in term of recovery for the reason I said. Clearly we have to analyze and understand the impact of COVID, and so the impact in term of time of COVID, and the implementation of the OPEC plus resolutions.

So if the two things are working in the positive way, I think that we can have some recovery in the second quarter. But as we said this morning, the situation is very volatile, and we have to understand end of April and May, what is really going to happen for these two points.

Martijn Rats -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

The next question is from Jon Rigby of UBS. Please go ahead.

Jon Rigby -- UBS -- Analyst

Thank you. Can you just -- [Indecipherable] on the call, just give a bit more colored detail around the two areas where you're producing below capacity? So Libya with a force majeure, Egypt, I think you referenced demand. Just sort of, if you can give me a little bit more detail about the -- around that and also have some indication of how far below theoretical capacity you're running in both those countries? Thanks.

Claudio Descalzi -- Chief Executive Officer

Pino, can you answer please?

Giuseppe Ricci -- Chief Refining and Marketing Officer

Okay. So you know, situation of force majeure in Libya is dictated now by two main events. One is the lock of all the ports in the east side of the country that is blocking basically the oil production of Libya, and recently, we registered also an illegal closure of the valve on the coastal line for gas distribution. So currently, we have these two events that are reducing production for Libya. Our expectation are, that by end of June, situation should be back to normal, and this will allow us to recover around 30,000, 40,000 barrels of oil equivalent production from -- equity production from Libya.

Regarding Egypt, situation is still recording low gas demand, low internal gas demand, due to the COVID situation, especially nowadays. But we do expect a recovery of the demand with summer, increase of temperature and so more concern shown for power generation. So we expect a recovery of the demand in Egypt in the second half of the year.

Jon Rigby -- UBS -- Analyst

Thanks. Thanks. That's great.

Operator

The next question comes from Christyan Malek of JP Morgan. Please go ahead.

Christyan Malek -- JP Morgan -- Analyst

Hi, thanks for taking my questions. I do hope you are keeping healthy and safe, and the same to your esteemed counterparts. I mean, just to -- sorry to come back on the dividend. But it seems to me, that on a critical part of the dividend decision, is whether we see an end to lockdown next month. Appreciate its certainly not binary in there of any variables, but would it be fair to say that if nothing has changed three months from now, we would actively cut the dividend, to protect the gearing in your future capex? Because the way that it probably stands, the capital [Indecipherable] already constrained. You seem to be working very hard to protect it with gearing moving higher, and I just want to understand, what the industrial logic here is to keep the dividend at these levels through cycle, not just in 2020? Secondly, and I guess linked to the gearing, is there a threshold to yourselves and the Board like a red line you wouldn't across, before prices remain low and gearing continues to rise? Thank you.

Claudio Descalzi -- Chief Executive Officer

Massimo, please?

Massimo Mondazzi -- Chief Financial Officer

On both question, Claudio?

Claudio Descalzi -- Chief Executive Officer

The first one, I didn't understand the second one.

Massimo Mondazzi -- Chief Financial Officer

The first one is about the dividend and the...

Claudio Descalzi -- Chief Executive Officer

And through the first one...

Massimo Mondazzi -- Chief Financial Officer

The [Indecipherable] to judge about the future decision on dividend. So may I try to answer and you can definitely complement, Claudio. So Christyan what you said is not completely right. So we are not going to take the decision about the dividend, looking at the lockdown only, and we are not taking the decision looking at what's going on in 2020 only. So what we are going to evaluate midyear is a more complex environment including, by definition, what we expect in 2021. So definitely, if we see a recovery in the overall situation, including prices, during 2020, in order not to -- we say -- compromise our balance sheet equilibrium. And we see a price in 2021 that is close to our cash neutrality. I would say that the decision would be in some direction. If the situation would be different, then I just figure out the decision would be probably the opposite. Now, as I answered to Irene, we tried to fix the maximum level of leverage, not the gearing but I would say, you can calculate the difference easily, that is the maximum 0.4 that we would like not to cross in 2020. But even on this, we will be more precise, when we elaborate a bit more in July, based on additional information that we have, as far as what's going on in 2020 and what we can -- more grounded we can judge about what's going on in 2021.

Claudio Descalzi -- Chief Executive Officer

So if I can complement what Massimo said. First of all, where work in a quarter is just 1.5 months clearly. We as a company, as an energy company and an oil and gas company, we work on long cycle. So may make projection and talking about details in a -- with a statistic of 1.5 months is absolutely incorrect, is not only possible, but is not reasonable. Clearly, when you talk about gearing, Massimo said, and I agree, the gearing is based on the gearing I can -- I can have is based on the medium term. So what I can do this year and next year in the three years, we can recover my debt. So it's something that is made by different variables. At the moment, we have really few elements. Clearly we showed from the beginning in the last six years that the debt, so the gearing and the leverage, is very important for us, is a priority, is one of, also the basis of our remuneration policies. But in this case, we have to understand, if what happened in 2020 can be recovered in 2021, I want to -- I cannot and it is wrong to react after 1.5 months and the change everything drastically also for my shareholders, I cannot be schizophrenic, without having the right parameters to take a decision, share with my shareholder and explaining why the range of a hypothesis [Phonetic] and the gas are too many, now to take this kind of decision.

We said very clearly and we demonstrated that is a priority, the capital allocation, the gearing, the dividend, but I cannot be reacting like if I run a small motorcycle. I am running a big truck -- I am running the life for a lot of people and my shareholders have to be reasonable in each step I take. That is my answer.

Christyan Malek -- JP Morgan -- Analyst

Thank you.

Claudio Descalzi -- Chief Executive Officer

The next question is from Biraj Borkhataria of Royal Bank of Canada. Please go ahead.

Biraj Borkhataria -- Royal Bank of Canada -- Analyst

Hi, thanks for taking my questions. Just a couple of quick ones. The first one is on your R&M guidance this year, EUR300 million, that was just earning up year-on-year and given the current environment at least heading into Q2 looks quite challenging. So could you just run through the assumptions behind that? And the second question, another easy one is, your -- for Egypt, that's one of the countries you've highlighted for the year-on-year declines in volume. Could you just highlight what the contribution you expect to your 2020 -- production budget is for that? Thank you.

Claudio Descalzi -- Chief Executive Officer

I understand the second question that is for Sandro. I didn't understand anything about the first question, honestly. Massimo, you are from there, because I didn't catch what you said, sorry.

Alessandro Puliti -- Chief Upstream Officer

So the question is about the assumption underlying our guidance in R&M full year result, about EUR300 million I guess that Pino would be in the position to answer.

Giuseppe Ricci -- Chief Refining and Marketing Officer

About this, its very simple. Our cash program to improve the efficiency, again to the good result of the ramp up of Gela biorefinery, and some optimization in the marketing cover in part the effect of the scenario in COVID, and that we have evaluated in more than EUR800 million. So with this improvement in this area, together with a strong cost cutting, and reoptimization of the maintenance in the refineries, allow us to confirm a guidance of EUR300 million for the year.

Claudio Descalzi -- Chief Executive Officer

Sandro?

Alessandro Puliti -- Chief Upstream Officer

Okay. Regarding Egypt production and the contribution to the overall Eni production in 2020, it is around 300,000 barrels of oil equivalent as an average of the year.

Biraj Borkhataria -- Royal Bank of Canada -- Analyst

Thank you.

Operator

The next question comes from Mr. Peter Low of Redburn. Please go ahead.

Peter Low -- Redburn -- Analyst

Hi, thanks for taking my question. Just one left, in your scenario, you see recovery to $55 oil in 2021. But you still intend to cut capex even further in that year. Can you perhaps explain what's the driver of that? And then as a follow-up, would investment at that level be enough to maintain your production flat or should we then assume it's kind of declining at that level of spending? Thank you.

Claudio Descalzi -- Chief Executive Officer

Massimo?

Massimo Mondazzi -- Chief Financial Officer

The answer right now would be, yes. So even if the scenario will be $55, we will intend to reduce capex, as we said. Nothing new versus what we said one month ago, when we revised our scenario. So $45 this year and $55 next year. It means that we are giving some priority to recover what we are losing in 2020, thanks to the the cuts, reducing a little bit our production expectation, but giving priority to the cash, in order to increase the cash to be generated that year. So, we'd say that, thanks to this action, we expect that all in all, our cash neutrality will drop to around $50, $52 per barrel, giving us the possibility to leave with some comfort in world of $55. So the decision will be to keep the capex cuts, in order to increase the cash generation, keeping production same level as is expected in 2020.

Peter Low -- Redburn -- Analyst

Thank you.

Operator

[Operator Instructions].

Claudio Descalzi -- Chief Executive Officer

If there are no questions, please let's close the call here. Thank you.

Operator

There are no questions registered sir.

Claudio Descalzi -- Chief Executive Officer

Okay, thank you very much, everyone.

Massimo Mondazzi -- Chief Financial Officer

Thank you very much. Bye-bye.

Operator

[Operator Closing Remarks].

Duration: 77 minutes

Call participants:

Claudio Descalzi -- Chief Executive Officer

Giuseppe Ricci -- Chief Refining and Marketing Officer

Massimo Mondazzi -- Chief Financial Officer

Alessandro Puliti -- Chief Upstream Officer

Cristian Signoretto -- Chief Gas & Lng Marketing and Power Officer

Oswald Clint -- Bernstein -- Aanlyst

Michele Della Vigna -- Goldman Sachs -- Analyst

Alessandro Pozzi -- Mediobanca -- Analyst

Thomas Adolff -- Credit Suisse -- Analyst

Lydia Rainforth -- Barclays -- Analyst

Jason Kenney -- Santander -- Analyst

Irene Himona -- Societe Generale -- Analyst

Martijn Rats -- Morgan Stanley -- Analyst

Jon Rigby -- UBS -- Analyst

Christyan Malek -- JP Morgan -- Analyst

Biraj Borkhataria -- Royal Bank of Canada -- Analyst

Peter Low -- Redburn -- Analyst

More E analysis

All earnings call transcripts

AlphaStreet Logo