Saipem Faces Falling Margins and New Rivals

 

Oil services firms have been among the hardest hit by a two-thirds drop in oil prices since July 2014 as oil producers slashed spending by more than $100 billion.

 

The timing could not be worse for Saipem's ageing vessel fleet as rival new capacity erodes typically high margins enjoyed by the company, which is controlled by oil major Eni and Italian state fund FSI.

 

"We have already observed Allseas' giant newbuild vessel, Pioneering Spirit, winning work and taking market share from Saipem in its core pipe-laying and heavy lift markets," Andrew Dobbing, oil services analyst at SEB Equity Research, said.

 

Swiss-based Allseas' Pioneering Spirit is due to start operations in mid-2016.

 

Saipem, which declined to comment for this story, is a leader in complex deepwater projects and is currently working on the world's most expensive oilfield Kashagan and Azerbaijan's Shah Deniz.

 

But Redburn analyst Michael Rae says its offshore engineering and construction (E&C) fleet is the oldest in the industry, more than twice the age of peers.

 

Netherlands-based Heerema Marine Contractors' heavy lift vessel, Sleipnir, now under construction is also set to compete directly with Saipem's high-margin ships, notably crane vessel Saipem 7000, SEB's Dobbing said.

 

Saipem raised 3.5 billion euro in a rights issue last month as it mounted a major cost and job cutting programme to help it lift margins.

 

Shares in the firm have plunged 90 percent since 2013 due to profit warnings and general industry malaise, prompting spending cuts to keep its investment grade rating. Last year it scrapped four vessels.

 

Investors are concerned that the company lacks the cash to raise its game and see off competition from financially stronger rivals Technip and Subsea 7 as well as smaller outfits McDermott and DOF.

 

Shares in Technip jumped more than 15 percent last week after the company said its dividends were well covered thanks to a strong backlog of projects.

 

"The deep-water drilling fleet used to generate a lot of cash for Saipem but each month the value of contracts falls and the new jobs that are out there to replace them are loss-making," said Canaccord analyst Alex Brooks.

 

Heavy lift and pipeline laying accounted for 10-20 percent of Saipem's earnings before interest and tax last year, according to one analyst, who did not wish to be identified.

 

"They will now struggle to keep these (pipe-laying and heavy lift) boats busy (as will their competitors) and achieve comparable margins on them," said Nicholas Green at Bernstein.

 

Saipem, which has traditionally benefitted from its size and reach, expects idling costs of nearly 150 million euros this year for vessels not working, most of it in E&C offshore work.

 

"Saipem vessels are competitive but the bigger issue is that Saipem is not investing and so is expected to lose market share in the short term, if competitors add capacity it will further erode its market share," an analyst who declined to be identified said.