Profit warning and cutbacks sink GDF Suez shares

PARIS Thu Dec 6, 2012 7:13am EST

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PARIS (Reuters) - Shares in GDF Suez (GSZ.PA), Europe's biggest utility, dropped after it warned sluggish demand for electricity and gas in the recession-hit continent would hit profits, leading it to slash costs and investment.

The stock fell as much as 16 percent on Thursday to levels not seen since its 2005 flotation, as the French group detailed to investors news it announced late on Wednesday.

"The European energy market is going through a transformation. We can really say it is in a crisis," chief executive Gerard Mestrallet said.

GDF Suez is battling to reduce its 46 billion euros ($60 billion) of debt at a time when weak economies are hitting demand for energy. The debt was boosted earlier this year when the group bought emerging markets-focused generation group International Power in a bid to reduce its exposure to Europe.

"It is clear that the macroeconomic environment is really bearing down on the group's performances at a time when it is still reducing its sensitivity to now mature European markets," Philippe Ourpatian, a Natixis analyst, said in a research note.

Third-quarter data confirmed on Thursday the euro zone is in recession, after two consecutive quarters of economic contraction.

GDF Suez said on Wednesday it expected recurring net profit to drop to 3.1-3.5 billion euros in 2013 and 2014, down from this year's target of 3.7-4.2 billion euros.

That was below analysts' average forecasts of 3.7 billion euros for 2013 and 4 billion for 2014, according to Thomson Reuters I/B/E/S.

The group unveiled a tough cost-cutting plan, hoping to bolster results by 3.5 billion euros a year starting in 2015 by selling assets while in the meantime targeting emerging markets.

It also said it would cut capital investment 20 percent in 2013 and 2014, in a bid to reduce its debt by a third.

But analysts were downbeat.

"Given this weak earnings guidance for 2013 and the lack of visibility beyond 2013 due to additional planned disposals, we think the shares are unlikely to perform," Bank of America Merrill Lynch analysts said.

REGULATIONS AND ACQUISITIONS

At 6:45 a.m. EDT, GDF Suez shares were down 11.7 percent at 15.22 euros, the biggest fall by a European blue-chip stock and wiping about 4.8 billion euros from its market value. The stock has tumbled 68 percent in value in the past four years.

GDF Suez is not alone in suffering from the tough outlook in Europe. Last month, E.ON (EONGn.DE), Germany's biggest utility, cut its 2013 outlook.

Stricter environmental regulations are also weighing energy groups.

"2013 will mark the end of free CO2 emission permits, which will cost us 400 million euros," Isabelle Kocher, GDF Suez's chief financial officer, said during the investor day.

GDF Suez also lost 185 million euros in core earnings in 2012 because of gas tariff freezes imposed by successive governments, Mestrallet said.

France's highest administrative court last month suspended a government decision to cap natural gas tariff increases to 2 percent, directing the ministries involved to come up with a new policy within a month.

GDF Suez said a way to offset weaker European demand would be to target assets in fast-growing emerging markets.

Mestrallet told investors that GDF Suez, which is studying the acquisition of Repsol's (REP.MC) liquefied natural gas (LNG) assets, did not exclude small or medium-sized acquisitions.

(Additional reporting by Blaise Robinson and Alexandre Boksenbaum-Granier; Writing by Michel Rose; Editing by Christian Plumb and Mark Potter)

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