Letter to the shareholders

Dear Shareholders,

In 2017, the average price of Brent was around $53 per barrel, up more than 17% compared to about $45 per barrel in 2016, supported by agreements to reduce production signed by OPEC countries and Russia, increased consumption and geopolitical tensions in the Middle East. This trend, concentrated in the latter part of the year, did not have significant effects on the growth of investments of Oil Companies, which remained much lower than pre-crisis levels. Specifically, in 2017, the sectors in which Saipem operates continued to be affected by cost reduction programmes, organisational rationalisation, restructuring and extraordinary transactions, aimed at pursuing the optimisation of operational efficiency and strategic diversification. In 2017, Saipem radically changed its organisational structure, splitting into five divisions characterised by greater operational autonomy and streamlined decision-making, and by greater responsibility on operating performance and financial results. The Floaters business line, formerly part of the Offshore Engineering & Construction division, was included in the Onshore Engineering & Construction division, and the new XSIGHT division, dedicated to engineering services with a high added value, was created. The challenging market environment was reflected in the new contracts acquired, which amounted to €7,399 million in the year, down 11.4% compared to 2016. Significant acquisitions concerned the Offshore and Onshore Engineering & Construction sectors, the result of new major projects mainly in the Middle East, the Mediterranean and West Africa. The backlog as at the end of 2017 amounts to €12,363 million. Operating performance in 2017 was above expectations in the Offshore sectors, both Engineering & Construction and Drilling. The Onshore Engineering & Construction sector, excluding the effects of arbitration regarding Algerian projects, continued on the path to recover margins, while the Onshore Drilling sector continues to suffer from a much slower recovery than expected in Latin America. The trend of debt reduction continued: the net financial position at the end of 2017 amounted to €1,296 million compared to €1,450 million at the end of 2016. The year’s key figures were:

- revenues: €8,999 million;

- adjusted EBITDA: €964 million;

- EBITDA: €862 million;

- adjusted operating result (EBIT): €440 million;

- operating result (EBIT): €126 million;

- adjusted net result: €46 million;

- net result: loss of €328 million;

- capital expenditure: €262 million;

- net debt at December 31, 2017: €1,296 million;

- new contracts: €7,399 million;

- backlog: €12,363 million.

Specifically, revenues in Offshore Engineering & Construction for 2017 amounted to €3,692 million, down 21% compared to 2016. This was mainly attributable to lower volumes recorded in Kazakhstan and Southern Central America, which were mostly offset by higher volumes registered in North Africa and the Middle East. Adjusted EBITDA for 2017 amounted to €555 million, equal to 15% of revenues, compared to €717 million, equal to 15.4% of revenues, in 2016. The substantial stability of the margins, despite the high fall in revenues, is due to excellent operating efficiency and lower fleet idleness. The Onshore Engineering & Construction sector reported revenues of €3,530 million in 2017. The 24% increase compared to 2016 is due to higher volumes of activity recorded in the Middle and Far East and in Kazakhstan. The adjusted EBITDA for 2017 is negative for €31 million compared to the €43 million in 2016, due to the negative effects mainly tied to the result of LPG arbitration in Algeria. Revenues for the Floaters business line amounted to €674 million, down 34% compared to the same period in 2016, due mainly to lower volumes recorded in West Africa. Adjusted EBITDA for 2017 amounted to €10 million, equal to 1.5% of revenues compared to the negative result of €90 million in 2016. The improvement is due to a project in West Africa which in 2016 had forecasted increased costs resulting from a particularly impactful acceleration programme. The Offshore Drilling business recorded revenues of 2017 for €613 million, a decrease of 32% compared to 2016, mainly due to the lower revenues registered by some drilling vessels. Adjusted EBITDA for 2017 amounted to €321 million, compared to €454 million in 2016, with the margin on revenues equal to 52.4%. Maintaining the margin percentages, despite a significant reduction in activity, is largely attributable to the significant cost optimisation measures that were implemented. In Onshore Drilling revenues for 2017 amounted to €490 million, a 10% decrease compared to 2016, attributable mainly to a further reduction of activity in South America. Adjusted EBITDA of 2017 amounted to €109 million compared to the €142 million of 2016, due to reduced revenues from vessels in South America, as well as start-up costs for new projects in Kuwait and Argentina. The special items relating to the reported result are due to:

- asset write-downs: in Offshore Drilling, a semi-submersible platform with its inventory, has been completely written down as there were no prospects of utilisation in the medium term. In addition, some vessels, mainly semi-submersible platforms, were partially written down following the impairment test. In Onshore Drilling, some drilling rigs, related equipment and inventory have been completely written down, as the prospect of utilisation in the medium term was null or limited;

- reorganisation expenses;

- settlement of tax disputes.

The measures implemented to counteract a negative market context led to a significant containment of capital expenditure, which in 2016 amounted to €262 million (€296 million in 2016), relating mainly to the maintenance and upgrading of the existing asset base. The investments are broken down as follows: Offshore Engineering & Construction €114 million; Onshore Engineering & Construction €8 million; Offshore Drilling €78 million; Onshore Drilling €62 million.

In 2017, the LTIFR accident index (Lost Time Injury Frequency Rate) stood at a value of 0.14, recording a further decrease of about 30% compared to the figure recorded in 2016 of 0.20, thus strengthening a long-term performance trend that is constantly improving. However, three fatal accidents occurred in Brazil, Saudi Arabia and Singapore respectively, involving three workers from the same number of subcontractors, to whom Saipem had entrusted work relating to Offshore and Onshore projects. In-depth investigations were carried out into these events. The causes were identified and relevant improvement measures have been partially implemented or 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. As proof of the soundness of the HSE Management System, in 2017 Saipem obtained confirmation of ISO 14001 and OHSAS 18001 certifications and their extension to the entire Saipem SpA Group (including all the branches of Saipem SpA and its subsidiaries in Italy and abroad).

2018 is expected to be characterised by a market scenario with weak signs of recovery, as the recent growth in the oil price has not, at the moment, determined a decisive acceleration of Oil Companies investment programmes, even though some positive signs in some market segments have been noted. The order backlog at the end of 2017, combined with prospect of commercial tenders under award, allow forecasts of around €8 billion for the financial year 2018, with a margin in terms of adjusted EBITDA in excess of 10%. Technical investments are expected to be approximately €300 million, while the net debt is expected to be around €1.1 billion at the end of 2018.


March 5, 2018

for the Board of Directors

The Chairman
Paolo Andrea Colombo

The Chief Executive Officer (CEO)
Stefano Cao

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