Technip Writedown Gives Investors Jitters on Oil Contract Risks

Technip SA’s plan to cut 6,000 jobs and downsize its fleet to weather the slump in crude prices is adding to investor concerns about the oil-services company’s order book.

Technip shares fell the most in 18 months after it announced a 650 million-euro ($713 million) writedown that the Paris-based company said partly relates to two refinery projects in Brazil and Algeria.

“Management should be more open about inevitable risks in the order book, particularly given the (now justified) questions raised over the last few months,” Sanford C. Bernstein analyst Nicholas J Green wrote in a note Tuesday. “We cannot rule out Technip facing a further writedown in the future.”

While cutting 16 percent of its workforce and more than a third of its fleet of oil-service ships will yield cost savings of 830 million euros through 2017, project delays and cancellations raise doubts about Technip’s order book. The $908 million contract it won from state-owned Sonatrach to refurbish the Algiers refinery has been halted, Chief Executive Officer Thierry Pilenko said on a conference call on Tuesday.

“The slowdown in the oil and gas industry is prolonged and harsh,” Pilenko said in a statement on Monday.

The French oil-services company’s restructuring comes about three months after similar cuts were announced by rivals Baker Hughes Inc., Halliburton Co. and Schlumberger.

Protracted Negotiations

Negotiations with customers on changes to projects are “still protracted but also in some cases stopped and occasionally even legal,” Technip said, without giving details. Pilenko said earlier this year that Technip would spend 2015 working to complete its record backlog of projects and retaining employees in a bid to keep in-house expertise for when the market recovers.

“Investors will be disappointed that the charge against all E&C companies -- that their order books are unreliable -- can today be leveled at Technip,” Bernstein said, referring to engineering and construction companies.

Technip shares fell as much as 9.7 percent, the biggest intraday drop since Dec. 18, 2013, and were down 9.1 percent to 48.88 euros at 1:13 p.m. in Paris. Oil services companies CGG SA and Saipem SpA also declined.

Technip supplies equipment and builds plants for oil and natural gas producers including Total SA, which are reducing spending after warning that some projects are no longer sustainable after the slump in crude prices.

Irrational Behavior

Bidding for contracts has led to “irrational behavior” by some oil-services competitors, Technip said. The cost cuts reflect industry overcapacity and customers’ “relentless” slashing of their own expenses, Pilenko said.

“These measures are taken in anticipation of tough years in 2016 and 2017,” said Societe Generale, which lowered its recommendation on the stock to a sell and cut its target price to 43 euros from 68 euros.

Deepwater offshore investments by oil companies are likely to be affected for longer than U.S. shale or projects in the Middle East, according to the bank.

“The restructuring cost hides what we would normally call a profit-warning,” Mick Pickup, an analyst at Barclays Plc, wrote in a note. Lower financial guidance for 2015 is partly due to the Algeria and Brazil contracts, he said.

The company cut its 2015 forecast for adjusted operating income from recurring activities to 210 million to 230 million euros, from a previous range of 250 million to 290 million euros.

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