Saipem SpA, Italy’s largest oil and gas engineer, plunged to a four-year low in Milan trading after saying rising costs in Algeria will cut earnings.
The stock closed down 29 percent at 14.24 euros, the lowest since April 2009, reducing the company’s market value to 6.3 billion euros ($8.4 billion).
Saipem reduced a forecast for earnings before interest and tax this year by as much as 750 million euros ($1 billion), saying June 14 that it won’t be able to recover rising costs for Algerian projects as talks with client Sonatrach have failed.
The cut in guidance, the company’s second this year, shows Chief Executive Officer Umberto Vergine is still grappling with Algerian contracts that caused his predecessor to resign in December after magistrates opened a corruption probe. Saipem has sunk more than 50 percent since lowering its outlook on Jan. 29.
The latest forecast “puts new uncertainty on the investment case, but more importantly a hurdle in the recovery of the operations,” UBS AG wrote in a note. “While issues appear to relate to projects signed by the previous management, the messages since the Jan. 29 warning gave the impression that the entire portfolio had been thoroughly reviewed.”
The Milan-based company, 43 percent-owned by oil producer Eni SpA, said “operating issues” at onshore contracts in Mexico and Canada and “technical challenges” offshore would also weigh on earnings. It forecast a net loss of as much as 350 million euros this year, and said profit will recover in 2014.
“Since my appointment as chief executive, I have been focused on the cleanup of major legacy issues which have proved to be of greater magnitude than we envisaged,” Vergine said in a June 14 statement. “In Algeria, our business has been impacted by a dramatic escalation of the investigation in the country and the consequent commercial fallout.”
Saipem’s Algeria unit is contending with frozen accounts amid the corruption probe into contract awards. Saipem said it’s offered its full cooperation to the prosecutor’s office.
Parent company Eni SpA dropped as much as 4.9 percent in Milan today and closed down 2.1 percent at 16.5 euros.
“The scale of the deterioration of Saipem’s performance will start to impact Eni’s own performance and could constrain its ability to grow cash returns to shareholders,” Exane BNP Paribas wrote in a note today. While not expecting a dividend cut, it estimates that Saipem could “suck in another 1 billion euros from Eni’s funding in 2013.”