Oil industry services group Saipem’s shares sink after profit warning

Saipem’s share price fell by as much as 25% yesterday, after Europe’s biggest oil industry services group gave its second major profit warning in less than six months due to problems with contracts in Algeria, Mexico and Canada.

Saipem, 43% owned by Italian oil company Eni, said it now expected to make a net loss of €300 million to €350m this year instead of a profit of €450m.

Saipem is at the centre of corruption probes in Italy and in Algeria relating to large contracts that Saipem had entered with local gas giant Sonatrach, a long-standing business partner, and had already surprised the market with a profit warning in January which it blamed on weakening contract margins.

The second surprise on Friday angered the market.

“There is no investment case,” Credit Suisse said in a note to clients after slashing its share price target to €16 from €22.

“We believe Saipem will be uninvestible until major unknowns are clarified... We expect the shares will remain dead money and will underperform the sector.”

“Many investors got back into Saipem after the first profit warning, thinking the worst was over, but they were burnt again this time around,” a Milan- Saipem’s former chief executive Pietro Franco Tali was ousted in December when news of the Algerian probe first emerged. One month later the new management triggered a 34% drop in its share price in a single day by slashing its profit forecast for 2013.

In April, at the behest of Italy’s Consob market regulator, auditors of Saipem said they had found failings in the internal control system. Saipem has since said it is taking a more conservative approach in setting targets.

In its statement last Friday, Saipem said two problem contracts in Mexico and Canada would cost it €260m, adding there were also some problems at its E&C Offshore business.

Saipem, now run by new chief executive Unberto Vergine, said on Friday it still expected a strong recovery in profits in 2014 and thereafter.

“Saipem’s second-profit warning in six months increases the uncertainty, in our view, regarding the pace of earnings rebound and the likelihood of negative surprises,” said analysts at Morgan Stanley.