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Rating Action:

Moody's cuts Eni's long-term rating to Aa3; outlook stable

13 Sep 2010

Approximately EUR11.9 billion of long-term debt securities affected

London, 13 September 2010 -- Moody's Investors Service has today lowered the long-term senior unsecured ratings of Eni S.p.A. (Eni) and its guaranteed subsidiaries to Aa3 from Aa2 and the senior unsecured rating of Eni USA Inc. to A1 from Aa3. Moody's also affirmed the P-1 short-term ratings. The outlook for all ratings is stable.

RATINGS RATIONALE

Eni qualifies as a Government-Related Issuer (GRI) under Moody's methodology for such entities, given its 30.3% direct and indirect ownership by the Italian state. This methodology formally disaggregates the rating of a GRI into four components: (i) the GRI's Baseline Credit Assessment (BCA), (ii) the credit risk of the supporting government, (iii) the default dependence between the GRI and the government, and (iv) the likelihood of government support for the GRI. In this context, the rating action reflects the downgrade of the BCA to 5 (equivalent to a high single A rating) from 4 (equivalent to a low Aa rating) -- the BCA being measured on a scale of 1 to 21, whereby 1 exhibits minimal credit risk. The GRI factors relating to government support, default dependence and Italy's credit risk remain unchanged.

The downgrade reflects Moody's expectation that the deleveraging process initiated by Eni management and the recovery in the group's credit metrics will be gradual and unlikely to restore sufficient headroom to help underpin its BCA within the Aa range.

The marked step-up in investments initiated by Eni in 2007-08 in order to sustain its growth strategy by giving a fillip to its hydrocarbon reserve base and production profile and further enhancing the reach of its pan-European gas supply activities, was followed in 2009 by a sharp deterioration in the group's financial performance in line with the sector. This reflected the challenging operating environment arising from the global economic recession, which led to lower hydrocarbon realizations, declining consumption impacting the European gas sector in parallel with intensifying competition in the Italian domestic market, and pressures on refining margins resulting from weaker product demand and a narrowing of the heavy-light crude spread. As a result, Eni has in the past three years had sizeable funding requirements, which led to a significant increase in its indebtedness and weakening in its credit ratios.

While the recovery in oil and gas prices that has extended over the past eighteen months has translated into some material improvement in operating profitability and cash flow generation in recent quarters, Moody's believes that Eni's free cash flow generation is likely to remain constrained in the short to intermediate term despite expectations that capital expenditure will have peaked in 2010. In turn, the recovery in the group's credit metrics is expected to be gradual and towards levels more supportive of a BCA of 5 on a sustainable basis.

However, Moody's also acknowledges Eni management's prudent financial framework as evidenced by the adjustment to the company's dividend implemented in the second half of 2009 and its commitment to bring back balance sheet leverage below 40%. To help achieve this target, it has undertaken a programme of asset disposals expected to raise proceeds of around EUR3 billion, which includes the sale of stakes in three international pipelines offered to satisfy EU antitrust authorities.

While Moody's notes Eni's significant reliance on the continuing availability of short-term (evergreen) and/or uncommitted lines in addition to medium and long-term committed lines translating into a weaker liquidity profile, we do acknowledge the group's favoured access to the capital markets (underpinned by its unique position within the Italian corporate sector) at the current rating level.

Moody's stable outlook reflects expectations that Eni's future operating profitability and cash flow generation will continue to be underpinned by the successful execution of its key upstream projects that enjoy favourable break-even and its leading positions in the European gas supply markets despite recent pressures. Combined with the maintenance of conservative financial policies, this should provide Eni with the flexibility to pursue its growth strategy while keeping credit metrics throughout the cycle commensurate with a BCA positioned at the high end of the A range, including Gross Debt to Total Capital in the mid-thirties and Retained Cash Flow to Net Debt ratio close to 40% through the cycle.

Although unlikely at this time, some permanent material balance sheet deleveraging evidenced by Gross Debt to Total Capital of around 30% and Retained Cash Flow to Net Debt sustainably in the mid to high 40s through the cycle (both ratios on a fully adjusted basis) in conjunction with the successful execution of Eni's key upstream projects, a robust performance from its Gas & Power business and a balanced country risk exposure could support an improvement of the group's baseline credit assessment in addition to more robust liquidity management practices.

Conversely, Eni's baseline credit assessment and final rating could be lowered should the group fail to demonstrate its ability to reduce leverage and sustain credit metrics in line with its current BCA, including Gross Debt to Total Capital in the mid-thirties and Retained Cash Flow to Net Debt ratio close to 40% through the cycle. Eni's final rating could also be adjusted downward as a result of a downgrade of Italy's sovereign rating.

Moody's previous rating action on Eni was the revision of the outlook to negative from stable on 29 May 2009.

The principal methodologies used in rating Eni S.p.A. (ENI) and its guaranteed subsidiaries were Global Integrated Oil & Gas Industry published in November 2009, and Government-Related Issuers: Methodology Update published in July 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Eni, headquartered in Rome, Italy, is one of the largest diversified oil & gas companies in the world with total proved hydrocarbons reserves of 6.4 billion barrels of oil equivalent, production of around 1.7 million barrels of oil equivalent per day, and operations in over 70 countries.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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London
Francois Lauras
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's cuts Eni's long-term rating to Aa3; outlook stable
No Related Data.
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