Saipem Profit Tops Forecasts as Contract Margins Pick Up

Italian oil services group Saipem on Monday reported stronger than expected first-quarter operating profit thanks to healthier profit margins from new orders.

 

Saipem, 43 percent owned by oil major Eni, is trying to phase out so-called low-margin legacy contracts that were awarded before 2013 and have weighed on profitability.

 

The company aims to phase out most of these contracts, totalling less than 1.5 billion euros, by the end of this year though management said there could be some slippage into 2016.

 

Saipem said earnings before interest and taxes (EBIT) came in at 159 million euros ($172 million) compared to a Thomson Reuters I/B/E/S consensus of 85 million euros. Saipem confirmed its outlook for the current year.

 

"A lot of people were expecting writedowns on legacy contracts and pending revenues and they didn't come. That's boosted the shares," Andrea Scauri, energy analyst at Mediobanca Securities, said.

 

Saipem shares closed up 6.6 percent at 12.23 euros, while the European oil and gas index was up 0.9 percent.

 

Its shares have fallen more than 60 percent in the past two years after two profit warnings, a corruption investigation in Algeria and bleak outlook.

 

Debt in the first quarter rose 381 million euros to 5.2 billion as a result of a cash outflow taken on forex derivative contracts hedging the dollar exposure of big projects.

 

"We forecast a 500 million euro impact on debt this year if the forex rate stays at current levels," CFO Alberto Chiarini told analysts, adding it would be fully recouped as the hedged projects are executed and cash flow arrived.

 

State-controlled Eni is drafting in Stefano Cao as Saipem CEO at the end of this month to turn around the company where he used to work and prepare it for a sale.

 

Eni is looking to sell down its stake to get Saipem's debt off its balance sheet.

 

Besides legacy contracts, Cao will also have to resolve the immediate problem of 1.1 billion euros of unpaid revenues for work done on projects that oil major clients are reluctant to recognise.

 

Falling oil prices have prompted oil companies around the world to suspend or delay projects, pressuring oil contractors to cut their margins.

 

Saipem, which last year saw a lucrative contract to build the South Stream pipeline suspended by Gazprom, is hopeful it can win work on a new "Turkish Stream" project that the Russian energy giant is mulling in the same area.

 

"Saipem is ready to start work on the Turkish Stream when requested," outgoing CEO Umberto Vergine said.