On Monday, Italian offshore engineering contractor Saipem shared some unfortunate news with its investors. After a review of its contract backlog, the firm is withdrawing its earnings guidance for 2021 and now expects to report a significant loss, which will trigger certain legal rights for its lenders.
In addition to the universal challenges of the pandemic era, the reasons for Saipem's changing expectations about its future earnings are twofold. First, a review of its onshore work showed rising costs for materials and logistics, which are "only partially recoverable" from its customers under the terms of its contracts. Second, "recent further difficulties" in its offshore wind projects - including delays in the delivery of critical supplies - are leading to upward revisions of completion timetables and cost.
"The review of the backlog of contracts awarded in the past . . . indicates a significant deterioration of the full life margins of some projects related to [engineering and construction] onshore and offshore wind," Saipem said in an advisory note.
After taking these factors into consideration and marking down its expected earnings from future projects, Saipem's expected EBITDA for the second half of the year is now reduced by about $1.1 billion, with revenues of $3.9 billion rather than an expected $5.0 billion. In the third quarter, the company had predicted a "positive" EBITDA for the second half; that guidance is now withdrawn.
This means that Saipem's full-year earnings are expected to show losses in excess of one-third of company’s share capital, Saipem said. This threshold activates special rights for its creditors under Italian law. Under certain conditions, this may allow its bankers to "accelerate the repayment of certain outstanding loans."
The company said that it has opened talks with its lenders to avoid the consequences of passing this threshold. It is also planning an extraordinary shareholder meeting, as required by statute, to be held once the 2021 annual report is finalized. In the meantime, it is in talks with its two controlling shareholders - Italian oil major Eni and state investment company Cassa Depositi e Prestiti (CDP) - about "their willingness to support an appropriate and timely financing package."
The company's share price lost 30 percent of its value in trading on the Borsa Italiana on Monday, making it the exchange's fastest-falling stock of the day.
