Letter to the shareholders

Dear Shareholders,

during 2016, the average price of Brent settled at around $45 a barrel, 15% lower that the approximately $52 a barrel in 2015, because of the weakness of demand and the huge production of available crude oil. Despite the OPEC resolution in November, which contributed to a recent price stabilisation at levels above $50, the target market in which your Company operates continues to be penalised by the delay or cancellations in investment decisions by Oil Companies. In a market environment characterised by high volatility in crude oil prices our customers continue to focus on cost containment. This has a negative impact on drilling activities and on project development activities, particularly in the deepwater sector. The weakness of the market scenario has proven to be even more marked and more prolonged than previously assumed, we achieved important results in 2016. New contracts awarded in 2016 amounted to €8,349 million, 28% growth compared to 2015 with significant acquisitions in the Offshore Engineering & Construction sector, thanks to new and important projects, mainly in the Mediterranean, the Caspian Sea, the Middle East and the Far East. The backlog stood at €14,219 at the end of 2016, with positive visibility for 2017. After leaving the sphere of influence of Eni Group,the financial structure was completed, whose fundamental elements, downstream of the capital increase of €3.5 billion and the simultaneous refinancing of €4.7 billion, were the first ‘dual tranche’ bond issue in September, the negotiation of additional credit lines, as well as early repayment of the bridging loan in December 2016 from €1.6 billion maturing in 2017. Overall, operating performance in 2016 can be considered good: the offshore sectors, both Engineering & Construction and Drilling, had excellent results, the Onshore Engineering & Construction sector broke even, while the Onshore Drilling sector was significantly affected by the decline of activities in Latin America. Deterioration in market conditions have resulted in prospects for recovery that have shifted increasingly over time, leading to the need for a rationalisation of the asset base, mainly concerning some Offshore Drilling vessels and some fabrication sites, as well as the write-down of additional assets, for a total about €2.3 billion, which negatively impacted the results. The savings on operating expenses deriving from implementation of the previously announced Fit for the Future 1.0 programme has already reached almost 90% of its target value. Furthermore, given the decline in the scenario during 2016 the Fit for the Future 2.0 programme was launched and is currently underway, the purpose of which is to review the organisation of the four divisions through which your Company operates in order to improve decision-making, make them more autonomous in pursuing their priorities and objectives, and allowing management to focus even more on operating performance. Under the same programme a new business line was created which operates in the high engineering services industry, in order to expand the range of services and move up the involvement of customers in the decision making process for defining design choices. The year’s key figures were:

- revenues: €9,976 million;

- adjusted EBITDA: €1,266 million;

- EBITDA: €909 million;

- adjusted operating result (EBIT): €582 million;

- operating result (EBIT): -€1,499 million;

- adjusted net profit: €226 million;

- net loss: €2,087 million;

- capital expenditure: €296 million;

- net borrowings at December 31, 2016: €1,450 million;

- new contracts: €8,349 million;

- backlog of orders: €14,219 million.

More specifically, for Offshore Engineering & Construction, revenues for 2016 amounted to €5,686 million, down 17.5% compared to 2015. This was mainly attributable to lower volumes recorded in the Middle East, in Australia and Russia, which were mostly offset by higher volumes registered in Azerbaijan and Kazakhstan. The adjusted operating result in 2016 amounted to €379 million, or 6.7% of revenues, compared to €192 million in 2015, or 2.8% of revenues. The improvement is mainly attributable to the higher contribution of the projects running in Kazakhstan and Azerbaijan. For Onshore Engineering & Construction revenues for 2016 amounted to €2,844 million. The increase of 2% compared to 2015 is due to higher volumes of activity recorded in the Middle East. The adjusted operating result for 2016 amounted to €5 million, versus -€693 million in 2015. For Offshore Drilling revenues amounted to €903 million, a decrease of 15.4% compared to 2015, caused by the lower revenues of the drillship Saipem 12000, due to early termination of the contract, and of the semi-submersible platform Scarabeo 6. The adjusted operating result for 2016 amounted to €234 million compared to €295 million in 2015, with a margin of 25.9%. For Onshore Drilling revenues for 2016 amounted €543 million, a decrease of 28.7% compared to 2015, mainly due to reduced activity in South America caused by the severe effects of the economy in South America. The adjusted operating result for 2016 is a loss of €36 million, compared to a profit of €52 million in 2015, due to higher costs of inactive resources in South America. Special items affecting the result are:

- write-downs of assets resulting from impairment tests; in Offshore Drilling, some vessels, mainly semi-submersible platforms, were partially written down as a result of impairment testing. Furthermore, two jack-ups and one semi-submersible platform were completely written down because they are not expected to be used in the medium term. In Onshore Drilling, some drilling rigs were fully or partially written off because the possibility of their being used in the medium term is expected to be null or limited. In Offshore E&C, a vessel was fully written down because it was not expected to be used in in the medium term, an FPSO was partially written down, and as a result its useful life was revised by making it coincide with the end of the contract, due to the reduced possibility of renewal. In addition, some fabrication sites with little prospects of use in the medium term were partially written down. In Onshore E&C, a fabrication yard was fully written down because there were no prospects for its use in the medium term, and a logistics base was partially written down. Due to the above mentioned write-downs, as well as the reduction of operations and margins in some countries, related tax assets were written down;

- write-downs of drilling credits in South America;

- reorganisation expenses.

The actions taken against a negative market scenario have led to a significant reduction of capital expenditure made during the year, amounting to €296 million (€561 million in 2015), mainly relating to maintenance and upgrading. The breakdown is as follows: for the Offshore Engineering & Construction €117 million; for Onshore Engineering & Construction €8 million; for Offshore Drilling €94 million; for Onshore Drilling €77 million. During 2016, the LTIFR (Lost Time Injury Frequency Rate) stood at 0.20 significantly better when compared to 2015 (0.31), reinforcing a multi-annual trend of continuous improvement of performance. Unfortunately there was a fatal accident in the United Arab Emirates that involved the employee of a subcontractor on a fabrication site. Saipem had hired this subcontractor with the construction of an offshore structure. In-depth investigations were carried out into this event. The causes were identified and corrective actions are currently being implemented. 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 maintained on all sites, yards and vessels where Saipem operates. The year 2017 is expected to be marked by a continuing weak market scenario and the recent signs of oil price stabilisation have currently not resulted in an improvement of the context in which Saipem operates. Nevertheless, the positive visibility of the backlog of orders at the end of 2016 allows us to forecast revenues at around €10 billion, with the EBITDA expected to be approximately €1 billion and net profit to exceed €200 million. Capital expenditure will be about €400 million, while the net indebtedness is expected to amount to €1.4 billion at the end of 2017.


March 16, 2017

for the Board of Directors

The Chairman
Paolo Andrea Colombo

The Chief Executive Officer (CEO)
Stefano Cao

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