Saipem in profit warning as margins deteriorate due to pandemic and rising costs

Following a revision of its backlog, Saipem, an Italian offshore engineering and construction services provider, has withdrawn its outlook from October 2021, citing significant deterioration of some projects’ margins due to the protracted Covid-19 pandemic and cost increases of raw materials and logistics.

As a result, the financial statements in 2021 are expected to show a loss for more than one-third of the company’s equity.

Saipem’s board of directors, chaired by Silvia Merlo, met over the weekend to examine the scenarios arising from the work currently being undertaken by management to prepare the preliminary consolidated results as of 31 December 2021.

According to Saipem’s statement on Monday, the review of the backlog of contracts awarded in the past indicates a significant deterioration of the full life margins of some projects related to E&C Onshore and Offshore wind, due to the persistence of the pandemic and the current and prospective increase of the costs of raw materials and logistics. This will have an impact on the company’s consolidated financial results.

When compared to the outlook communicated to the market on 28 October 2021, preliminary estimates of the 2021 consolidated preliminary results show that Saipem’s consolidated adjusted EBITDA for the second half of 2021 was down by approximately €1 billion ($1.1 billion) compared to the positive outlook for consolidated adjusted EBITDA.

As explained by Saipem, this reduction is entirely attributable to the backlog review for Onshore E&C projects for which the increase in costs for materials and logistics is only partially recoverable and attributable to the recent further difficulties in offshore wind projects, for which impacts from delays in critical supplies are combined with revised estimates of execution times and costs.

Furthermore, preliminary estimates show the contraction of consolidated revenues for the second half of 2021 from €4.5 billion (about $5 billion) to €3.5 billion (about $3.9 billion). The projected increase in whole-life costs results in lower project margins, which also translates into lower revenues.

Considering also lower volumes for reimbursable costs (with no effect on EBITDA) and the slowdown in the progress of some contracts due to the protracted pandemic, consolidated revenues for the second half of 2021 are expected to be €3.5 billion compared to the outlook of around €4.5 billion.

As a result of this review, Saipem’s statutory financial statements for 2021 are expected to close with losses in excess of one-third of the company’s equity, triggering the application of Article 2446 of the Italian Civil Code. These conditions may, following the expiry of the contractual terms, and in the absence of a specific waiver from the banks, give rise to the right of the banks to accelerate the repayment of certain outstanding loans to Saipem.

Saipem has, therefore, initiated preliminary discussions with these banking counterparties to preempt the potential consequences on the loan agreements. The company has also started preliminary discussions with the shareholders exercising joint control over the company – Eni and CDP Industria – in order to ascertain their willingness to support an appropriate and timely financing package.

As a result of all this, Saipem has decided to withdraw the outlook announced in October 2021. Once the statutory and consolidated preliminary results have been completed and approved, the company’s board will call the shareholders’ meeting to take the appropriate measures.

In related news, Saipem earlier this year secured two new offshore contracts for a total amount of $1.1 billion. Under these two new contracts, Saipem will work on Woodside’s Scarborough project in Australia and on ExxonMobil’s Yellowtail development project located in the Stabroek block offshore Guyana.