UPDATE 3-Technip cuts margin goal citing Russia sanctions risk

Thu Jul 24, 2014 8:44am EDT

* Cuts operating margin in onshore/offshore to 5-6 pct

* Says continuing with Yamal LNG at this stage

* Raises 2014 sales goal for two units

* Shares down more than 8 pct (Adds shares, comments from call, analyst, background)

By Michel Rose

PARIS, July 24 (Reuters) - Oil services firm Technip on Thursday cut operating margin targets for its onshore/offshore unit for this year and next, citing the possible impact of sanctions on Russia and tighter spending budgets among its clients.

The French company's stock plunged more than 8 percent in morning trade, making it the biggest loser on the European oil and gas index and weighing on the shares of fellow oil and gas suppliers CGG of France, Dutch group Fugro and Norway's PGS.

Technip said its onshore/offshore unit, which builds oil rigs, refineries and liquefied natural gas (LNG) plants and accounts for more than half its revenue, was now targeting an operating margin of about 5-6 percent for the next two years, down from 6-7 percent.

Chief Executive Thierry Pilenko said the risk that sanctions against Russia could interrupt income flows from Yamal LNG in Siberia was among the potential political risks it faces.

"If our assumptions on these issues were to prove insufficiently cautious, we estimate our margin to be about a percentage point less this year," he said in a statement.

Technip won the engineering, procurement and construction contract for Yamal in May. The giant liquefied natural gas export project in Siberia is owned by Russia's Novatek , French oil company Total and China's CNPC.

The deal boosted the group's order backlog to 19.9 billion euros ($27 billion) at end-June, from 14.9 billion a year earlier. The project is also so large it has sapped the company's ability to dedicate engineering resources elsewhere, Technip has said.

"Yamal LNG may be affected by the geopolitical crisis," said Natixis analyst Alain Parent, who has a "neutral" recommendation on the stock. "The cannibalistic Yamal project is monopolising engineering resources that are no longer available for other contracts."

The European Commission said on Wednesday that the European Union should not give Russia technical help to develop Arctic oil and gas fields if Moscow fails to help defuse the Ukraine crisis.

EU foreign ministers asked officials to present proposals on Thursday for restricting Russia's access to sensitive technologies, including in the energy sector.

"If the new sanctions do prohibit Technip's involvement, this could dent their revenue further, as Russia is one the biggest contractors along with China and the UK," Naeem Aslman, an analyst at AvaTrade said.

OIL MAJOR PRESSURE

The Paris-based company said it expected revenue of 5.55-5.8 billion euros at the onshore/offshore unit this year, up from 5.4-5.7 billion previously, and around 6 billion euros next year.

At its more profitable subsea division, which provides pipelines, umbilicals and riser systems for the offshore industry, the group stuck to its operating margin target of at least 12 percent for this year and 15-17 percent for 2015.

Both divisions are feeling the effect of slowing investment by oil majors which is making life harder for equipment and service suppliers worldwide.

"Some of our customers are taking a more combative approach to changes on current projects," Pilenko said.

Big oil companies, pressured by shareholders demanding bigger cash returns after years of large capital investments, have started to scale back investments.

Technip's CEO said he was also seeing some "irrational" behaviour from competitors cutting prices when bidding for new contracts, citing Asian rivals and new entrants, in particular.

Technip also raised its subsea full-year sales goal to 4.6-4.9 billion euros from 4.35-4.75 billion, and still expects revenue "well above" 5 billion euros in subsea for 2015. The group was awarded a subsea contract for the Kaombo project in Angola, which Total launched last April.

In the second quarter, the group's net profit fell 2.9 percent to 157.7 million euros on revenue of 2.615 billion euros, up 9 percent.

Analysts had expected on average a net profit of 155.7 million euros and revenue of 2.57 billion, according to Thomson Reuters I/B/E/S.

Its operating margin was 15.3 percent in subsea and 5.3 percent in the onshore/offshore division.

($1 = 0.7438 Euros) (Additional reporting by Alexandre Boksenbaum-Granier; Editing by Andrew Callus)

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