Past Haunts Saipem But Future May Be Brighter
BMI View: A ruling from a Milan c ourt found Saipem guilty of corruption related to operations that were conducted between 1994 and 2004 by the then Eni-owned branch of the company. This further reinforces our concern that reputational damage could cost to the company in the short term. However, we maintain our view that Saipem still benefits from strong fundamentals based on its highly competitive deepwater and subsalt expertise which we believe will support the company in the long term.
Saipem has suffered from several set-backs since the beginning of the 2013. With two issuances of profit downside warning throughout the year, it is without surprise that the company's share price has plummeted from about EUR30 (US$39) in January to less than EUR15 (US$ by the beginning of July. This is far below the performance of several of Saipem's peers, such as Seadrill , Subsea 7 , and Transocean .
There are two key elements affecting Saipem's downturn:
The company has faced tightening margins on its Algerian and Brazilian activities due to cost overruns. The subsea services indus try in Brazil has seen progressive margin cuts due to the highly competitive environment companies entered into to obtain the contracts offered by Petrobras and due to repeated and costly administrative delays. In Algeria, failure to reach an agreement on project developments with state-owned Sonatrach resulted in rising costs for Saipem's local operations pushing the country's EBIT down by EUR750mn.
The company continue s to face reputational damages following allegations of corruption with regards to its Algerian activities. Saipem was also found guilty of bribery in Nigeria by an Italian court mid July. The case covered conduct to win contracts that allegedly occurred between 1994 and 2004.
While there are no indications that the corruption allegation and sentence have directly worsened significantly Saipem share price, we do expect that reputational damage may have played a role in the company's teetering earnings. Accordingly, we expect that it is likely to continue playing on Saipem's relationship with Sonatrach and other Oil and Gas majors. The sentence for Nigerian briberies by the Milanese court resulted in an asset confiscation of EUR24.5mn and a EUR600,000 fines. However, and despite the company filling an appeal of the case, the decision appears to have relieved investors as share prices edged upward on the day. Not only did the fine end-up lower than initially expected, but also it will be covered by parent company Eni following an agreement between the two companies.
|Saipem May Be Done With The Past, But The Past Is Not Done With Saipem|
|Saipem, Subsea 7, Transocean, Seadrill Share Prices & Bloomberg OFS Index, rebased|
Strong Fundamentals Remain
Nonetheless we remain confident in Saipem's ability to compete with its peer s in global operation s . On the longer term, we believe that Saipem's technical expertise and existing ties with international and national oil companies constitute strong fundamentals for the company to return to a more profitable financial position.
We expect that Saipem will gain considerable expertise in providing subsea services for the coming boom in subsalt E&P. Numerous plays and opportunities that are opening, especially in West Africa and the Caspian Sea, could provide the company with a competitive edge in the coming years. In Latin America, the extent of opportunity will in large part depend upon Petrobras ' ability to fulfil its own E&P objectives. Recent disturbances in profitability of Brazil's downstream have pushed the national company toward worryingly high levels of debt that could pose a threat to much needed long term investment plans. Petrobras could be tempted to further slow down upstream activity in order to regain commercial stability in its downstream. This could, in turn, be detrimental for companies such as Saipem, which display high exposure to the Brazilian upstream sector.