June 27, 2013 / 7:51 AM / 5 years ago

UPDATE 2-Subsea 7 warns of Brazil costs rising, shares plunge

* Says costs for Guará-Lula project to increase $250-300 mln

* Says project delayed by weather, supply chain problems

* No longer expects FY EBITDA to improve compared with 2012

* Shares drop 19 pct (Adds CEO quotes, detail on Brazil, analysts, updates share)

By Victoria Klesty and Gwladys Fouche

OSLO, June 27 (Reuters) - Offshore engineering group Subsea 7 has taken a hit on one of its biggest projects, blaming difficulties in doing business in Brazil and adding to concerns over an already-shaky oil services sector.

The Oslo-listed firm on Thursday cut its 2013 outlook as it once again ran into cost overruns and delays at a large Petrobras subsea project offshore Brazil, sending its shares down 19 percent.

Profit warnings and troubled projects have dented investors’ confidence in the oil services industry, which has ridden a wave of increased investment by energy firms chasing rising oil prices.

Subsea 7, which had already warned of delays at major projects in Brazil, now no longer expects full-year adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) to improve compared with 2012.

The firm, which provides surface and subsea engineering and construction services for oil firms around the world, said its current results in Brazil were “unacceptable” and that it would not bid for any further EPIC projects (engineering, procurement, installation and commissioning) with similar risk profiles.

The company is concerned over its ability to operate in the South American country, which is rushing to tap its vast new oil wealth while also building an oil services and shipbuilding industry from scratch.

“It is partly due to the project but to a great extent it is due to the Brazilian environment,” Chief Executive Jean Cahuzac said during a conference call.

He said that it was difficult to work in Brazil, given requirement for local content, problems with administration, import restrictions and taxes that goes beyond the terms and conditions of the contract.

Brazil is struggling to live up to its promise to become a major new producer as increased government intervention and new regulations discourage foreign and domestic private investors, and production has stagnated in spite of Petrobras’ ambitious investment plans.

Subsea 7 said costs at its Guará-Lula project, part of ultra-deepwater discoveries in the Santos Basin, would be between $250 million and $300 million higher than its earlier estimate, forcing it to abandon plans to make “progress” in underlying profit this year.

The project, for which Subsea 7 was in 2011 awarded a $1 billion contract, has run into weather-related difficulties as it entered the offshore phase in the second quarter, adding to other woes specific to operating in Brazil.

“Delays have been experienced during the quarter as a result of ongoing problems with the supply chain, the delayed commencement of pipeline fabrication due largely to customs clearance issues, and adverse weather conditions in the winter season,” it said in a statement.

The profit warning adds to concerns over risks in the sector after Italy’s Saipem, Europe’s biggest oil service company, last week issued its second profit warning in less than five months.

“Given this new profit warning ... the market sentiment on the oil services sector is set to remain depressed. However, the Guará-Lula project was already identified as being problematic,” Goldman Sachs said in a note.

“It also further confirmed (if needed), that the lump sum turnkey business is a risky one,” Goldman Sachs added.

Saipem shares have lost more than half their value over the last six months with other leading oil services firms taking a beating. Aker Solutions, which has also taken losses in Brazil, has seen its value shrink by 27 percent this year. (Editing by David Cowell/Ruth Pitchford)

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