* Saipem market value hit by profit warnings, graft probe
* New Eni management set to revive sale plans
* High Saipem debt levels may slow sale
* Saipem break up could avoid need for new equity
By Stephen Jewkes, Pamela Barbaglia and Sophie Sassard
MILAN/LONDON, July 25 (Reuters) - The new management of Italy's Eni plans to press on with the sale of a controlling stake in oil services subsidiary Saipem so it can focus on the more lucrative business of finding oil and gas, sources said.
Former ENI CEO Paolo Scaroni had inked in plans to dispose of Saipem but they were put on hold when Italian Prime Minister Matteo Renzi drafted in new management to run the state-controlled oil giant.
Saipem became a liability for Eni last year when half its market value was wiped out by two profit warnings and a damaging investigation into alleged corruption in Algeria, which also engulfed Scaroni.
With oil and gas production compromised by conflict in Libya and unrest in Nigeria, along with project delays in Kashagan and Angola, Eni also needs to sell assets to fund increasingly costly upstream investments and maintain its dividend.
"Eni's new management is indeed ready to resume the sale of Saipem, though it first needs to cut its debt either via asset disposals or raising equity," a source close to the matter said.
Eni has a 43 percent stake in Saipem and fully consolidates it on its balance sheet, including 5.5 billion euros of debt. But it keeps it at arm's length and has no day-to-day influence over management because Saipem also works on some contracts awarded by Eni.
Claudio Descalzi, who took over the top spot at Eni in May, has yet to pronounce on plans for Saipem but is expected to flag his intentions at a strategy meeting next Thursday.
Descalzi was head of exploration and production (E&P) at Eni under Scaroni and nurtured in-house engineering skills that would go some way to make up for the loss of similar expertise if Saipem is sold off.
Saipem supplies engineering services, project management and construction services to oil and gas companies for both onshore and offshore projects and carries out drilling worldwide.
"Saipem has been under strategic review for a long while and Eni's new management is willing to go ahead," a second source familiar with the matter said.
"Options under review include a break-up of Saipem's distribution, production and transformation operations," the source said, adding that decisions about this might be taken in the second half of the year.
Eni declined to comment.
In May, Descalzi announced a new structure at Eni to help focus minds on growing the more lucrative exploration and production business, while turning round or downsizing other less profitable businesses such as refining.
In a recent report, HSBC said a sale of Saipem was likely but it might not be in the short term because of low valuations after last year's profit warnings and high debt levels.
"Saipem has historically benefitted from debt guarantees from Eni. We believe Saipem would need to be refinanced if it were to be floated as a stand-alone entity," HSBC said.
Saipem, whose debt-to-equity ratio stands at a hefty 60 percent or so, borrows through Eni, whose A rating is higher than Italy's. But people close to the matter said Eni was taking steps to get Saipem on an independent footing.
A banker who works on funding with Saipem told Reuters that Eni was already calling on lenders to negotiate debt guarantees directly with Saipem.
"They're slowly weaning Saipem off Eni's milk," he said.
A breakup of Saipem would allow the firm to cut its debt pile without tapping the market for new equity, which some bankers say would have to be in the order of 2 billion euros to make the company appetising.
"Previously there was discussion about selling the onshore drilling business which could be worth around 1 billion euros and could find buyers because it's a steady cash generator," a banker who had been privy to Scaroni's plans said.
He said another option the former CEO had been toying with was the issuance of a convertible bond by Saipem.
Saipem's onshore and offshore drilling business accounts for some 15 percent of the company's revenues which in 2013 stood at about 12 billion euros.
The company is feeling the pinch from lower investment by oil majors. This is making life harder for equipment and service suppliers worldwide.
Reports earlier this year said Norway's Seadrill was interested in buying Saipem's offshore drilling business while Subsea 7 was interested in a stake in Saipem. (Editing by David Clarke)