Saipem's H1 Results: A Brief Update
You've got to love European energy services- energy prices fall and they fall, and then energy prices rise... and they fall more. There may not be a more hated or ignored sector in developed markets today, and so it goes with Saipem.
I first bought and wrote about the company earlier this year, so for background information on the company and why I think it is deeply undervalued, please see that piece. Instead, today I will give an update on Saipem's H1 earnings and what I consider the main drivers of the investment.
H1 Results
Surprisingly to no one, H1 has continued to be very challenging, added to by the unexpected political force majeure at Total's Mozambique LNG project. The company is now expecting negligible further revenue from the project this year, however it remains on the order book at €3.6b. As I stated at the time, management has predicted they will be able to keep the fallout to cashflow neutral.
The revenue would have been welcome however, with H1 coming in under even the low mark of H1 2020 at €3.2b (€3.75b 2020) and the company reporting a technical issue on an offshore wind project had negatively affected EBITDA. Bottlenecks and delays, due to Covid, are also hurting margins. More comprehensive results can be seen below:
Short-term profitability remained elusive, with the crushing of margins continuing while energy capex remains depressed and vessel dayrates remain at lows. EBITDA and earnings were both negative, although capex showed discipline, having been reined in to €135m (€195m 2020).
Ultimately, I am fairly unmoved by losses in the current environment. My thesis for Saipem rests on that it will be extremely profitable when the energy capex cycle picks up again and that it has the resources to survive until that point. I view the company very similarly to my write-up of NOV Inc, except Saipem has operating and financial leverage at play (and is cheaper).
As I wrote in that article, I view a cyclical pick-up as not only inevitable, but imminent, as we are now seeing 20 year lows in US and OECD oil inventories and outright shortage in the European gas markets.
There may already be signs of this flowing through, with CFO Antonio Paccioretti stating on the earnings call:
"Our offshore drilling fleet is almost fully under contract, showing positive signs of recovery. This is historically a leading indicator of new investment cycle in oil and gas that can lead to improvement also for E&C."
Saipem is around as leveraged as I am comfortable with to wait out this scenario, so I am primarily watching its results for signs of stress in the debt burden and cash weakness. Management has done a good job in this regard through this crisis, keeping cash losses acceptably low thus far and maintaining ample liquidity of €3.3b.
The projection of €1.6b post-IFRS debt (including leases), is still forecast and this would leave the company with net debt of under 3x 2020 EBITDA- a number I view as close to absolute rock-bottom profitability. Given the further weakness of H1 EBITDA the company will almost certainly breach a covenant requiring it to contain this ratio under 3.5x for 2021, but I fully expect this to be waived.
Below is a chart I posted in my previous piece, giving various snapshots of Saipem over the energy bear market:
Outlook
Could a recovery take another year? It certainly could, though the company is forecasting revenues of €4.5-5b for H2, which would surpass 2020 numbers and edge back towards 2019's €9b. The future also remains bright with the order book well over €20b, even excluding Mozambique.
I reiterate my belief that Saipem is worth €8/share, based on a return to historical margins and €10b in annual revenues. These remain unambitious targets, with much greater upside possible over a full energy bull market cycle.
Just a quick one today, but please pushback if you don't like my assumptions, I am always looking to test the thesis!
I own shares in Saipem.
Guy
Please don’t take this as financial advice. Do your own due diligence and consult a professional advisor, if unsure about your finances.