Saipem warning rattles booming oil services sector


Published — Thursday 31 January 2013

Last update 31 January 2013 4:01 am

| نسخة PDF Print News | A A

MILAN: An unexpected profit warning from Europe’s biggest oil services company Saipem sent shockwaves through the buoyant sector on Wednesday and wiped billions off the Italian company’s market value.
Saipem issued a profit warning on 2012 results and offered new 2013 guidance of an 80 percent profit fall to about half the level that had been pencilled in by analysts.
Consternation reigned among analysts during a late night conference call about how a company operating in a business that is basking in the glow of high oil prices and strong demand for rigs and other drilling engineering services could get things so wrong, and so soon after new management had reaffirmed targets.
The company’s shares, already under pressure on Tuesday after talk that a big fund had sold its stake, dropped 34 percent on Wednesday to 19.97 euros, knocking about 4.5 billion euros ($ 6 billion) off its market value.
Shares in Italian integrated oil company Eni, which controls Saipem through a 43 percent stake, were down 4.6 percent. Shares in rivals Subsea 7 and Technip both fell by more than 6 percent.
The Saipem warning was all the more surprising after bumper fourth-quarter results from US service companies, including Schlumberger and Halliburton.
Analysts and industry sources said that the implications for others in the industry should be limited.
Cheuvreux analyst Geoffroy Stern called the news an “unprecedented shock” but said in a research note that the impact of low margins on contracts awarded in 2009 and 2010 “has already been well-flagged by other contractors (Subsea 7, Technip).”
Industry sources also said that the company’s offshore activities in Brazil — a hot sector for the industry, but a place where doing business has proved difficult for many service companies — seemed to be at the heart of its problems.
“It seems many of the reasons are specific to Saipem itself: there have been problems in the way they have dealt with pricing and with the bidding for contracts, especially in Brazil,” said Petter Narvestad, an analyst at Oslo-based Fondsfinans.
“It has long been known that Brazil is difficult — Subsea 7 has struggled with profitability there.
“Saipem has probably competed too aggressively on price and now that they are executing the projects, they see there is not as much money to earn as they thought there would be.”
Norway’s Aker Solutions suffered extensively in 2011 after mishandling its Brazilian subsea operations. It struggled with lengthy delays, cost overruns, quality issues and poor management, which dragged the company briefly into the red.
Analysts say that Brazil is such a hot market that firms are often too eager to get a piece and fail to take note of the difficult local operating conditions, such as the stringent requirements to use local suppliers.
The cut in profit outlook for Europe’s biggest oil services group followed a review of contracts and prospects by a new management team led by Chief Executive Umberto Vergine.
The Italian took over at Saipem after an investigation into alleged corruption in Algeria prompted the resignation of former long-standing CEO Pietro Franco Tali.
In Tuesday’s conference call, Vergine said that a decline in margins on new contracts and fewer high-margin existing contracts would undermine profitability in the year ahead.
Analysts have expressed concern about possible repercussions from the investigation of Saipem’s business in Algeria.
Earlier on Tuesday, traders said that investment fund Fidelity had placed a 2.3 percent stake in Saipem. Last month investment fund Capital Research and Management said that it had reduced its stake in the company to a little more than 1.3 percent from nearly 5 percent.
Fidelity yesterday denied any such move.
“We do not comment on our trading activity, but in light of misinformation in the market place, we would like to clarify that we did not place a 2.3 percent stake this week,” a spokesman said.
Italian regulator CONSOB said that it would investigate Tuesday’s share price moves.

What's happening around Saudi Arabia

JEDDAH: A total of 172,000 pilgrims have arrived via 861 flights from around the world at King Abdulaziz International Airport so far, said Turki Al-Theeb, the airport’s director of media and public relations.He said the number of Haj flights are exp...
RIYADH: Saudis from all walks of life are hopeful that the visit of Custodian of the Two Holy Mosques King Salman to the United States this week will strengthen relations between the two countries and ensure a peaceful and stable Middle East.Shoura C...
JEDDAH: Security forces killed a terrorist who tried to attack a security facility in Abqaiq on Friday, the Interior Ministry said.Sgt. Ali Al-Habeeb, 47, was killed during the confrontation with the attacker, identified as Nawaf Manahi Shabib Al-Ota...
ANKARA: Labor Minister Mufrej Al-Haqabani has said that unemployment among Saudis is relatively high, pointing to the negative impact of retreating oil prices on the economy and labor market. He confirmed that the Kingdom was continuing with the impl...
JEDDAH: The country’s newly elected municipal councils should have a say in selecting mayors and secretaries general of cities, participants at a Municipal Councils Forum suggested on Thursday.They proposed that the councils should compile a list of...
DAMMAM: Many Saudis have complained that while the Kingdom has attractive local tourist spots, several charge high prices, offer poor services and lack proper hygiene.They said that Taif, Abha, Baha, Jeddah and the Eastern Province have popular resor...

Stay Connected