Letter to the shareholders

Dear Shareholders,

during 2015 the price of oil, having begun a rapid descent in the latter part of the previous period ($50 a barrel), recovered up to the beginning of May ($70 a barrel) and then endured a further drastic fall at the end of the year to below $40 a barrel.

The causes of this phenomenon are attributable essentially to a change of energy market scenario with an oil supply greater than demand. The phenomenon began in the second half of 2014 with the decision of the OPEC countries not to react to this situation by reducing their own market share. The subsequent decrease in oil prices had a negative impact on oil company investments and those of producer countries who witnessed a significant fall-off in their earnings. In those months, the market, which is seeing the development of increasingly complex projects, has suffered the effects of the new scenario. The main consequences of this situation are the awarding of a limited number of projects and an increasingly rigid negotiating position adopted by clients in recognising change orders and claims which emerge during works execution.

This had an impact in terms of fewer acquisitions of new contracts in 2015 compared to 2014 (down 64%) with a particularly high weighting in Engineering & Construction.

This drastically deteriorated market context had additional effects in the competitive scenario in which Saipem operates, including:

- delays or cancellations of orders in progress, and a more rigid approach of clients during negotiations when dealing with change orders and other changes occurring during project execution;

- an increase of credit risk in certain geographic areas;

- the need to review the operating strategy and to bring forward to the end of 2015 the drafting of a new strategic plan;

- the need to review the strategy of negotiations for pursuing settlements with clients in order to minimise potential legal proceedings and seek an immediate financial benefit;

- the need to act quickly and decisively on the cost structure by launching programmes for optimising operating, overhead and investment costs.

During 2015, Saipem faced a markedly deteriorated scenario by launching an important operating and investment cost optimisation programme, defining the guidelines of the ‘Fit for the Future’ project, implementing a revision of the items of the balance sheet that takes into account the new context, drafting a new strategic plan, defining a complex financial manoeuvre consisting of a capital increase of €3.5 billion and a refinancing of €3.2 billion needed to consolidate the Company’s equity situation and make it financially autonomous. This financial manoeuvre was concluded positively in the first quarter of 2016.

Saipem’s operating profit was therefore supported by optimisation actions, such as limiting its presence in certain countries, rationalising engineering and construction capacity, reducing overheads and disposing of obsolete and unprofitable vessels. Taken together, these actions had a positive impact on EBIT in the amount of €150 million.

The year’s key figures were:

- adjusted EBIT of -€254 million, which includes a reduction of €718 million through the write-downs in the second quarter of 2015 of contractual variations and claims subject to negotiation regarding contracts awarded over the last few years and the write-down of receivables in Venezuela;

- EBIT of -€452 million, including the write-down of certain assets and two construction yards;

- capital expenditure amounting to €561 million;

- net borrowings amounting to €5,390 million;

- acquisition of new orders in the amount of €6,515 million and a residual portfolio of orders amounting to €15,846 million, affected by the cancellation of the remaining orders of the South Stream contract and the charter agreements of the Scarabeo 5 and Saipem 12000 vessels.

In Offshore Engineering & Construction revenues were down by 4%, with the lower volumes recorded in North and South America offset partly by the greater volumes in Azerbaijan and Kazakhstan. The adjusted operating result (EBIT) amounted to €192 million, a significant worsening if compared with the figure of €435 million of 2014. This was due mainly to the cancellation of the South Stream project and the lower profitability of projects in South America. The 2015 operating result (EBIT) was €54 million following the write-down of some fleet assets and a construction yard for a total of €138 million.

Onshore Engineering & Construction saw revenues down by 26%, primarily through the effect of the write-down of contractual variations and claims under negotiation in relation to various contracts of lower volumes in North America, Australia and Western Africa. Adjusted operating result (EBIT) amounted to a loss of €693 million (compared with the figure of -€411 million in 2014). However, the year saw a recovery of margins in the second quarter thanks to a positive contribution from new projects which allowed the Company to break even. 2015 operating (EBIT) amounted to a loss of €742 million, affected by the €49 million write-down of a construction yard.

Drilling operations contributed positively, with an adjusted operating result (EBIT) of €247 million, down from the €441 million recorded in 2014, primarily through the effect of the decreased contribution of the semi-submersible platforms Scarabeo 3 and Scarabeo 4 (Offshore Drilling), which had operated for the whole of 2014, and through the effect of the write-down of a proportion of overdue receivables following the greater country risk of Venezuela, and the costs of the inactivity of vessels in South America during the second part of the year.

The operating result (EBIT) amounted to €236 million, including the write-down of the semi-submersible rig Scarabeo 4, sold for scrapping.

In 2015, there were two fatal accidents in Saudi Arabia. In-depth investigations were carried out into these events. The causes were identified and corrective actions are currently being implemented. The LTIFR (Lost Time Injury Frequency Rate) stood at 0.31, slightly up compared to 2014 (0.28), but in reality confirming a multi-annual trend of performance improvement. Attention to health and safety is at all times at the highest levels and awareness raising and training programmes, as well as risk analysis and implementation of prevention and protection measures, have been adopted on all main sites, yards and vessels where Saipem operates.

Capital expenditure in 2015 was €561 million. The primary activities related to the maintenance of the asset base comprising the fleet of vessels for Offshore Engineering & Construction, the class reinstatement of the drillships Saipem 10000, Saipem 12000, Perro Negro 2 and Perro Negro 8, as well as the improvements to and modifications of other onshore drilling rigs destined to operate in Saudi Arabia.

As anticipated, the capital increase of approximately €3.5 billion and the refinancing of the residual debt of €3.2 billion were initiated in the fourth quarter of 2015, and will be completed in the early months of 2016, in order to reinforce the Company’s equity structure. Thanks to a solid financial structure, an efficient operating model, and our distinctive expertise, Saipem is now in a strong position to improve profitability, generate cash flow and create value for its shareholders. Contemporaneous with this operation, Eni SpA sold a holding amounting to 12.5% of the share capital of Saipem to Fondo Strategico Italiano SpA; Eni SpA and Fondo Strategico Italiano SpA have stated that the assets related to the governance agreed upon in the inter-company agreement and underwritten by them in relation to the shareholding in Saipem SpA, are directed towards realising joint control over Saipem by Eni SpA and Fondo Strategico Italiano SpA.

Consequently, from January 22, 2016, Saipem is no longer under the direction and coordination of Eni SpA.

In 2016, in a market context showing no signs of recovery, Saipem envisages revenues in excess of €11 billion, a forecast that takes account of the visibility of the activities of the existing portfolio of orders. EBIT is forecast to be in excess of €600 million; net profit is expected at around €300 million. Capital expenditure will amount to €500 million, below the final figure for 2015, thanks to the adoption of measures for optimising and improving efficiency and for reducing net indebtedness, predicted to fall to €1.5 billion at year end 2016.


March 16, 2016

for the Board of Directors

The Chairman
Paolo Andrea Colombo

The Chief Executive Officer (CEO)
Stefano Cao