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Subsea 7 Takes Q1 Margin Hit, Upbeat Outlook

11 May 2011

Norwegian oilfield engineering group Subsea 7said an expected surge in North Sea activity should lift profitability later this year, when reporting low vessel utilisation hit first-quarter margins.

Oilfield services providers have been recovering from weaker order intakes in 2009 and 2010, when low oil prices and then the Gulf of Mexico oil spill curbed oil company investment.

Subsea 7 shares were down 0.7 percent at 0800 GMT on Wednesday, while the Oslo Stock Exchange benchmark index was up 0.3 percent.

Its adjusted first-quarter EBITDA margin fell to 14.7 percent, down from 23.5 percent in the comparison period and compared with a forecast for 17.4 percent in a Reuters poll.

The company said the lower margins were due to low project activity in Asia Pacific, short-term margin pressure in the North Sea and lower vessel utilisation.

"We see activity levels rising in the coming quarters and the adjusted EBITDA margin improving over the remainder of the financial year," chief executive Jean Cahuzac said. "Continued robust oil price and high levels of tendering activities around the world underpins strong order book momentum."

Pareto analyst Steffen Rodsjo said the lower margin was a disappointment. "They say they will see higher margins for the rest of the financial year, but now with this level of 14.7 percent... the base level has been lowered," he said.

Core earnings before interest, tax, depreciation and amortisation (EBITDA) rose 71 percent to $190 million, compared with a $194 million forecast in a Reuters poll.

Fondsfinans analyst Petter Narvestad said the long-term prospects for Subsea 7 were good.

"The margins are weak but it represents the tougher market, with lower utilisation and execution on contracts, but the company is pretty clear on that this will improve and that is also in the estimates," Narvestad said.

The company saw record levels of tendering in the North Sea, and signs of impoving prices. It said while activity levels in the Gulf of Mexico were seen rising, visibility was limited.

The Oslo-listed company, the result of a merger between Subsea 7 and Acergy in January, used comparison numbers for the Acergy unit only.

Due to the merger, the results covered the period from Dec. 1 2010 to end-March. The comparison period for the results was the three months to Feb. 28, 2010, for Acergy only.