Saipem and South Stream: Eni ideas?
Russia’s surprise decision on South Stream hits Saipem
The Black Sea is the largest basin of anoxic water in the world: it lacks oxygen. So it is a bit like the long-delayed South Stream gas pipeline to Europe from Russia. On Tuesday Vladimir Putin cut off the air entirely. The project will not go ahead, he said. South Stream always had its doubters. But one committed fan was the Italian oil services company Saipem. It won two projects worth €2.4bn this spring to lay pipe under the Black Sea from Russia to Bulgaria.
South Stream was always more of a political project, designed to bypass Ukraine, than an effort to add capacity. All the gas would have gone to Europe, via the Black Sea. This would have left few options for Russia’s Gazprom, which has a tense relationship with Europe. A new pipeline plan, announced Monday, will instead serve friendlier Turkey first, providing 14bn cubic metres of gas, almost a third of Turkish demand. The pipe could go from there to southern Europe.
While Saipem has yet to receive formal notice, termination of South Stream will hurt. The project represents over a tenth of its €22.5bn backlog. Next, assuming that Saipem delivered roughly €2bn of the project next year (preparatory work had already begun), Credit Suisse thinks the company could lose €200m in operating profits, a fifth of the total. The shares lost nine per cent.
South Stream is not the only problem. Saipem must contend with the threat of declining capital spending from oil companies in the years ahead, and with a leveraged balance sheet. At over three times net debt to earnings before interest, tax, depreciation and amortisation, Saipem stands out as the most indebted of its rivals. Technip (even after recently buying CGG), Subsea 7 and Wood Group all carry little gearing.
Proposed South Stream pipeline route map
To make matters worse, its main shareholder ENI (with 43 per cent), the Italian state oil company, has recently reiterated the need to eventually exit non-core investments such as Saipem. ENI is also Saipem’s creditor, lending directly to it. ENI may wish to exit but Saipem would first need to find more capital to plug this €5bn hole.
Russia’s decision on South Stream has left Saipem gasping. Analysts expect cash flow after spending will be positive next year. If so, Saipem should use the money to cut debt and prepare for the new atmosphere in the energy industry.