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Erik@YWR on Saipem S.p.A. (SPM-MIL | saipemspaspm)

4/30/2025

Summary

Saipem is recovering rapidly. Saipem (SPM-IM), once a darling of the offshore energy services sector, has weathered a decade of turmoil marked by collapsing oil prices, excessive debt, and existential questions about the future of hydrocarbons. From its 2012 peak of €100/share, the stock plummeted to under €1 in 2022, driven by losses, dilutive capital raises, and investor skepticism. However, the company has executed a dramatic turnaround: net debt has been slashed to €473 million (2024), the project backlog has surged to €34 billion (from €23 billion in 2021), and profitability is rebounding. The investment case hinges on three pillars: 1. Structural Improvements: A repaired balance sheet, disciplined capital allocation, and strategic refocusing on high-margin businesses (offshore drilling, project management, and maintenance). 2. Offshore Renaissance: A potential resurgence in offshore oil and gas activity due to plateauing U.S. shale output, geopolitical risks to onshore production, and the logistical advantages of offshore development. 3. Energy Transition Synergy: Saipem’s unique positioning in offshore wind installation and LNG infrastructure, aligning with global decarbonization trends. With EPS projected to grow at a 40% CAGR (2024–2028) and dividends set to reappear, Saipem offers asymmetric upside. A 2027 price target of €3.3/share (+65% from current levels) reflects a compelling risk-reward for investors willing to bet on the revival of offshore energy—and a management team that has learned from past mistakes.

Thesis

Thesis 1. Balance Sheet Recovery and Capital Discipline Saipem’s near-collapse in 2021–2022 (€2.5 billion loss in 2021) forced radical restructuring. A €2 billion equity raise in 2022, backed by top shareholders ENI and CDP, stabilized the ship. By 2024, net debt stood at €473 million (vs. €2.3 billion in 2022), with a path to net cash by 2025. This deleveraging, paired with a €34 billion backlog (70% offshore), provides visibility into future cash flows and reduces refinancing risks. 2. High-Margin Offshore Drilling: A Cash Cow Though just 6.3% of 2024 revenue (€918 million), the drilling segment contributed 25% of group EBITDA, boasting margins of 36.5%. With day rates for premium rigs recovering (currently ~300,000–300,000–400,000/day vs. $250,000 in 2020), this business is poised to drive earnings. Offshore drilling demand is underpinned by: • Geopolitical Shifts: Sanctions on Russia and Iran’s instability threaten 20 million barrels/day of oil traversing the Hormuz Strait, incentivizing non-OPEC offshore projects. • Shale Plateau: U.S. rig counts are at multi-year lows, and shale output growth has stalled. Offshore projects (5–10-year lead times) offer long-term reserves replacement. • Cost Control: Offshore operators prioritize “cash flow visibility” over volume, favoring jurisdictions with stable fiscal regimes (e.g., Brazil, Guyana). 3. Offshore Wind and LNG: Bridging the Energy Transition Saipem’s Asset-Based Services (ABS) segment (55% of revenue, 71% of EBITDA) is pivoting to offshore wind, where its fleet of specialized vessels (e.g., S7000 crane ships) positions it as a key player in Europe’s wind boom. By 2030, the EU aims for 300 GW of offshore wind capacity (up from 15 GW in 2022), requiring €800 billion in investment. Saipem’s expertise in subsea engineering and modularization is transferable to floating wind farms, a $30 billion annual market by 2030. Meanwhile, LNG infrastructure demand remains robust as Europe weans off Russian gas. 4. Fixing the Achilles’ Heel: Energy Carriers The onshore construction unit (Energy Carriers) has been a drag (0.7% EBITDA margin in 2024). Management’s plan to halve order intake (€6bn → €3bn/year), prioritize high-ROE project management contracts, and grow maintenance revenue (recurring, low-risk) could lift margins to 4–5% by 2026. Modularization—prefabricating components offsite—reduces execution risk and costs. 5. Earnings Momentum and Dividend Catalyst Saipem’s EPS is forecast to surge from €0.21 in 2025 to €0.57 in 2028 (40% CAGR), driven by margin expansion and backlog execution. The reinstatement of dividends (€0.17/share by 2028, 4.5% yield) could reignite institutional interest. At 7x 2027 EPS (vs. peers at 10–12x), the stock is undervalued given its leverage to offshore cyclical recovery.

Risks

1. Oil Price Volatility A sustained drop below $70/barrel could delay offshore FIDs (final investment decisions). While Saipem is less exposed than pure-play drillers, 65% of its backlog remains tied to hydrocarbons. 2. Execution Missteps The Energy Carriers turnaround is critical. Failure to improve margins or cost overruns in ABS projects (e.g., offshore wind) could erode cash flows. Saipem’s history of unprofitable contracts (pre-2022) remains a red flag. 3. Middle East Conflict While Middle East conflict could kickstart a global surge in new offshore oil production, it will also disrupt business from Saipem’s biggest customers in the Middle East. Saipem is more exposed to the Middle East than its competitor Subsea7. 4. LNG Supply Glut and Shifting Gas Dynamics Global LNG supply is projected to grow by 50% from 2024 to 2030, driven largely by new projects in Qatar (e.g., North Field Expansion) and the U.S. This surge could depress demand for offshore gas field development, particularly in regions where LNG imports undercut the economics of localized offshore production. Saipem’s offshore construction segment, which includes gas infrastructure, may face reduced tender activity in gas-focused markets. However, this risk is partially offset by the potential for underestimated oil supply needs. With shale growth plateauing and geopolitical constraints on onshore oil, offshore oil projects—where Saipem holds competitive advantages—may see stronger-than-expected demand, balancing exposure to gas.

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