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Rating Action:

Moody's downgrades Eni to Baa1; stable outlook

24 Mar 2016

London, 24 March 2016 -- Moody's Investors Service (Moody's) downgraded ENI S.p.A.'s (Eni) Issuer Rating and ratings on the long-term debt of its guaranteed subsidiaries to Baa1 from A3, and affirmed the Prime-2 short term ratings of Eni and guaranteed subsidiaries, including Eni Finance USA Inc. and eni finance international SA. Moody's also downgraded to Baa2 from Baa1 the unguaranteed senior debentures of its wholly-owned subsidiary, Eni USA Inc. The outlook on all ratings is stable. This rating action concludes the review for downgrade announced on January 22, 2016, in a sector-wide review prompted by the fall in oil prices and weak industry conditions.

"Eni's operations and credit metrics will be weak in 2016 and 2017 as low oil prices and weak downstream gas markets continue to take a toll on the company's cash flow," said Tom Coleman, a Senior Vice President at Moody's. "We view Eni's upstream growth story positively and expect that new lower-cost production scheduled to come on stream in 2016/2018, as well as rising prices, will lead to improvements in the company's pressured cash flow-based credit metrics in 2017 and beyond. Asset sales will help Eni to cap borrowing requirements and bridge the projected negative free cash flow over 2016/2018."

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: ENI S.p.A.

.... Issuer Rating, Downgraded to Baa1 from A3

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

..Issuer: eni finance international SA

....Backed Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

..Issuer: Eni USA Inc.

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

Affirmations:

..Issuer: ENI S.p.A.

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: eni finance international SA

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Eni Finance USA Inc.

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: ENI S.p.A.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: eni finance international SA

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Eni USA Inc.

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

The downgrade of Eni's Baa1 rating factors its weaker cash flow and debt protection metrics, as well as execution risk on asset sales and the delivery of production growth over the next 2-3 years. It also reflects the company's strong track record in exploration success and reserve replacement, which will give it development optionality and capital spending flexibility in a lower oil and gas price environment.

Based on Moody's price assumptions of $33/boe and $38/boe in 2016 and 2017, we project that Eni will generate lower EBITDA and operating cash flows over 2016/2018, with Net Debt/EBITDA peaking at around 2.5x (compared to about 1.6x in 2015 and 0.9x in 2014) and Retained Cash Flow/Net Debt falling within a 12%-15% range in 2016 (from about 21% in 2015 and 50% in 2014), with gradual improvement in metrics expected in 2017/2018.

The company's net leverage benefits from its reduced 30.4% stake in Saipem S.p.A. ((P)Baa3, under review for downgrade) and the cash inflows from repayment of large intercompany loans by Saipem to Eni in 2016. We project Eni to generate negative free cash flow in 2016/2018 and to use its substantial cash balances (EUR 10.9 billion as of year-end 2015) and proceeds from divestments to bridge the funding deficit without materially adding to debt.

Eni cut its dividend by approximately 28% in 2015 based on the lower price outlook, and has confirmed the payout for 2016 at the same level. We regard this as a positive move by the company in a low price environment but note that the payout remains a sizeable call on cash flow, estimated at as much as half of projected funds from operations in 2016 (although declining in relative terms thereafter).

Eni is targeting solid organic production growth of about 3% annually over the course of its 2016-2019 spending plan based on investment in projects currently in development or identified. The focus on shorter-cycle higher return projects will help offset the higher embedded costs of other large Eni projects, such as the Goliat field development in Norway, which recently came on stream, and the giant Kashagan field, which is expected to return to production later in 2016.

Like its peers, Eni is taking steps to maintain flexibility during a period of weak pricing and negative free cash flow. Capital spending in its new 2016-2019 strategic plan has been reduced by about 21% compared to the prior plan, with spending expected to be in the area of EUR 9 billion in 2016 and at similar levels thereafter.

Eni has a strong track record in exploration success and reserve replacement at competitive costs in recent years. It has focused on taking large equity positions in new basins that have yielded major resources, among the most recent in the Rovuma basin in Mozambique and the large Zohr gas discovery offshore Egypt. These and other discoveries will require substantial development capital, as projected in the strategic plan.

Eni's resource discoveries also provide monetization opportunities. The expected benefit of cash proceeds to Eni from large asset sales in the near-term, mainly from its stakes in Mozambique and a portion of its interests in Egypt, should help fund the negative free cash flow gap over the next three years.

Eni's downstream businesses provide integration benefits, but have had a limited positive impact on earnings in recent years. Gas & Power has generated losses as a result of weak demand and prices for natural gas and electricity. We expect that Gas and Power will gradually improve, as the company has largely restructured its high cost take-or-pay gas supply contracts to align more closely with hub pricing. Similarly, Refining & Marketing should benefit from capacity rationalization undertaken since 2013 and from other cost reductions, but even after a stronger year in 2015, it remains subject to weak demand in its core markets as well as volatile margins.

Eni, with 30.1% ownership by the Italian state (Baa2, stable outlook), is a government related issuer (GRI). Eni continues be rated above the sovereign, deriving no ratings benefit from assumptions of low support and dependence. While its operations are global in scope, Eni continues to have strong linkage to Italy via its operations in gas trading, marketing and power generation, as well as refining, retail and exploration and production operations. As a result, its rating will continue to be constrained by the sovereign's rating.

Rating Outlook

While we expect cash flow metrics to remain weak in 2016-2017, the stable outlook reflects Eni's solid scale and positioning in the integrated peer group, a rising production profile, and an expected gradual improvement in the downstream operating and financial performance. While some execution risk is attached to asset sales, we believe the company will be able to largely deliver on its sales plans.

What could change the rating -- UP

Sustained improvement in the financial profile, driven by the delivery on the key growth projects and cost and efficiency measures, with RCF/Net Debt positioned in mid-30s, will put positive pressure on the Baa1 BCA.

The Baa2/stable rating for the Italian government continues to constrain Eni's rating upside.

What could change the rating -- DOWN

Eni's ratings could be downgraded if operational and cost reduction improvements and expected asset sales fail to materialize, with prospects for low Retained Cash Flow/Net Debt and Net Debt/EBITDA staying weak in the 15%-20% range and above 2x, respectively.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry Industry published in April 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Eni to Baa1; stable outlook
No Related Data.
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