UPDATE 3-Saipem warning draws investor anger

Wed Jan 30, 2013 11:45pm IST

Stocks

   

* Cuts 2012 EBIT forecast by 6 pct

* Expects gloomy 2013 on contract margins

* Regulator CONSOB to investigate

* Warning sends shares in European peers lower (Reworks lead, adds shareholder comment, details)

By Stephen Jewkes and Henrik Stolen

MILAN/OSLO, Jan 30 (Reuters) - An unexpected profit warning from Europe's biggest oil services company Saipem sent shockwaves through the buoyant sector on Wednesday and drew investor ire as billions were wiped off the Italian company's market value.

Saipem issued a profit warning on 2012 results late on Tuesday 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 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.

"We're furious because we don't understand what's happening. There's new management that is obviously trying to clean things up. But what on earth happened to explain such a massive shift?" a Saipem shareholder told Reuters asking for anonymity.

"We've got elections soon and it's just one scandal after another. Monte Paschi and now Saipem. Who's next?" he said.

Turmoil at Italy's No. 3 lender Banca Monte dei Paschi di Siena over risky deals prompting legal investigations has rocked the Italian financial and political establishment.

Oil and gas major Eni, which owns 43 percent of Saipem, said on Wednesday Saipem's outlook warning would cost it around 200 million euros on the bottom line.

Saipem shares, already under pressure on Tuesday after talk that a fund had sold a stake, dropped 34 percent on Wednesday to 19.97 euros, knocking about 4.5 billion euros ($6.1 billion) off its market value. Eni shares were down 4.7 percent.

SCARY

Analysts expressed concern that recent developments at Saipem could scare off investors.

On Tuesday traders said that a 2.3 percent stake in Saipem had been placed on the market, while last month investment fund Capital Research and Management cut its stake to 1.3 percent from nearly 5 percent.

"In all my years I've never seen something like that. A placement a day before a profit warning," the shareholder said. The shareholder said the shares had been sold by Merrill Lynch.

BofA Merrill Lynch declined to comment.

Consob will be investigating the placement and share price movements at Saipem, a source at the Italian regulator said.

The cut in profit outlook followed a review of contracts and prospects by a new management team headed by Chief Executive Umberto Vergine.

The Italian took over at Saipem after an investigation into alleged corruption in Algeria prompted the resignation of former 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.

MAKING WAVES

The Saipem warning, which sent shares in European rivals lower, was all the more surprising after bumper fourth-quarter results from U.S. service companies, including Schlumberger and Halliburton.

Shares in rivals Subsea 7 and Technip were both down more than 7 percent.

But 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."

($1 = 0.7420 euros) (Additional reporting by Giancarlo Navach in Milan, Lorraine Turner in London and Gladwys Fouche and Balazs Koranyi in Oslo; Writing by Andrew Callus; Editing by David Goodman and Louise Heavens)

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