Still in Saipem

Italy ends up on wrong side of oil punt

There may have been many good reasons for the Italian government to invest in oil services company Saipem last November. Here's one: it employs 7,600 Italians. Another was to help Eni, the state oil company which had been saddled with indebted and scandal-ridden Saipem, to deconsolidate the group from its accounts.

Eni sold a 12.5 per cent stake to Fondo Strategico Italiano, a wealth fund controlled by state bank Cassa Depositi e Prestiti, which was recently revamped by Prime Minister Matteo Renzi. Its mandate is to support Italian business. FSI also committed to shoulder its share of Saipem's 3.5 billion euro rights issue. That was in November, when the oil price was around $50 a barrel. Now, with oil at $35, Saipem's business plan is off course, and its stock has collapsed.

The government invested 463 million euros to buy a 12.5 percent stake. The rights issue will bring its total investment to 900 million euros. Based on current prices, the value of its stake today is just under 600 million euros. The shares fell more than 10 per cent on February 8, after the rights issue completed.

A paper loss won't matter if oil prices recover. Saipem expects operating profit of at least 900 million euros by 2019, implying earnings per share of around 0.06 euros. Put on a multiple of 15, FSI's stake could be worth 1.1 billion euros, implying a respectable internal rate of return of about eight per cent. Yet that plan assumes oil will hit $75 by 2018: if oil is below $55, more restructuring will be needed. Canaccord Genuity expects earnings of just 0.04 euros a share in 2019, suggesting a value of 758 million euros for FSI's 900 million investment.

However bad an investment Saipem may turn out to be, the government has some comfort, because it also owns a big stake in Eni. Unfortunately, that is only 30 percent. The transaction was done on market terms, so is unlikely to break state-aid rules. Nonetheless, Eni's private shareholders have come out on top.