Subsea 7 SA slumped the most since October 2008 in Oslo as investors sold shares in the company on speculation there could be even more losses at the Guara-Lula project off Brazil after a bigger-than-expected provision.
Shares in the London-based company fell as much as 18 percent, the most since Oct. 16, 2008, and traded 16 percent lower at 102.9 kroner as of 1:30 p.m. in the Norwegian capital, making it the worst performer on the Bloomberg European 500 Index today. More than 9.7 million shares in Subsea 7 have been traded so far, equivalent to more than eight-times the daily average volume during the last three months.
Subsea 7 experienced delays at Guara-Lula during the second quarter because of “problems with the supply chain, the delayed commencement of pipeline fabrication due largely to customs clearance issues,” as well as adverse weather conditions, it said in a statement yesterday. Estimated project costs are now expected to increase by $250 million to $300 million compared with previous estimates, the company said.
“Although another loss on Guara-Lula was more or less embedded in expectations, the magnitude of the losses now being booked on the project are much higher than feared,” DNB ASA said in an e-mail. Norway’s largest bank had expected costs to increase by $50 million to $100 million, it said.
“We have previously highlighted the risk of additional losses from this project, but we did not foresee losses of this magnitude,” RS Platou AS analyst Goeran Andreassen said.
The broker cut its full year earnings estimates as a result and cut its price target to $26 from $30, he said in an e-mail.
With established fields maturing and new finds becoming more difficult to develop, Subsea 7 has benefitted from rising demand for the subsea engineering services it offers. The group currently operates projects around the world for companies including Statoil ASA, Petroleo Brasileiro SA and BP Plc.
“I’m disappointed that we are obliged to take another loss provision” on Guara-Lula, Subsea 7 Chief Executive Officer Jean Cahuzac said. “Our current financial results in Brazil are unacceptable” and the company won’t bid on any more projects with similar risk profiles, he said.
There’s a “risk of further cost escalation” at Guara-Lula and while the latest provision reflects the current situation, it “does not provide any cushion for further delays in the project,” Exane BNP Paribas analysts led by Alejandro Demichelis said in an e-mailed note. The bank, which cut its rating on the stock to neutral from outperform, said today’s “sharp share price reaction looks to us a fair reflection of the issues faced by Subsea 7.”
Shares in Subsea 7 have declined 7.9 percent during the last 12 months, giving the company a market value of 36.2 billion kroner ($6 billion).