Improving Offshore Activity Supports Strong Sequential Revenue Growth in Saipem’s Second Quarter

Business Strategy & Outlook

Saipem offers services in four distinct business lines: offshore engineering and construction, or E&C, onshore E&C, offshore drilling and onshore drilling. Offshore E&C is historically one of Saipem’s larger segments, historically representing a bit over 40% of the overall business. Generally, E&C firms manage an array of vessels (often owned) and equipment in addition to overseeing project management and engineering activities involved in developing the well. They also typically manage manufacturing operations, such as pipes fabrication. Saipem is one of the larger offshore E&C providers, mainly competing with Subsea 7 and TechnipFMC. The high degree of engineering expertise required to win contracts in the offshore space partially protects Saipem and its peers from high competition, which helps protect pricing power. Offshore E&C tends to be a profitable segment, though its high reliance on fixed-price contracts introduces a good deal of operating risk.

Increased investment in offshore oil and gas production will provide numerous opportunities for growth in this segment over the next five years, while Saipem’s internal measures (mainly reducing its high capital intensity) will improve margins over time. Onshore E&C is Saipem’s other largest segment, averaging about 43% of the overall business prior to the pandemic. The segment features much lower operating profits, averaging just over 2% prior to the pandemic. Saipem targets infrastructure contracts, mostly for downstream oil and gas projects. Recently, Saipem aims to target contracts that will provide longer-term revenue streams, including biorefineries and fertilizer plants. Expanding beyond traditional oil and gas end-markets means Saipem will compete with generalist E&C providers, reducing the firm’s ability to command the same kind of pricing premiums enjoyed by its offshore E&C business. Overall, the Saipem’s profitability will improve over the next five years as capital expenditure expands in both onshore and offshore markets.

Financial Strengths

Following the capital increase in July 2022, the Saipem’s financial strength is sound. Over the last five years, net debt/EBITDA has averaged around 1.5 times. As Saipem’s profitability improves, This will settle below one time by mid cycle. At the last reporting period, Saipem’s total debt outstanding was EUR 3.7 billion. This includes five tranches of EUR 500 million notes maturing in 2023, 2025, 2026, and 2028, respectively. As such, the Saipem will have sufficient liquidity to make its payments, with about EUR 2 billion in cash on hand as of the last reporting period and EUR 1 billion available on an untapped credit facility. The 2022 debt to capital will be 50%, in line with the firm’s historic average.

Bulls Say

Saipem’s early investment in offshore wind will allow the firm to benefit from the very high growth expectations for offshore wind investment over the next decade.
The firm’s shift to a more asset-light business coupled with longer-term contracts will reduce the impact of downcycles on the firm’s operating results.
The company’s XSIGHT division will help XSIGHT develop more integrated product offerings that create a stickier customer base over time.

Company Description

Saipem is a conglomerate of oil and gas engineering and construction and drilling services. The company began as the services appendage of oil major Eni, although today Eni as a customer account for generally less than 10% of revenue. Saipem is distinguished for leading industry megaprojects like the Nord Stream pipeline carrying large volumes of natural gas from Russia to European markets.

(Source: Morningstar)

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