Overweight Ticking all the right boxes July 2007 Price Target: 30.50

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1 25 y 20 Saipem Overweight Ticking all the right boxes y 20 Price Target: Saipem s 2Q EPS was 26% ahead of consensus, backlog hit a record 13.3bn and FY guidance for YoY net income growth was increased from 20% to 30%. The new guidance includes 27m of -ve currency effects vs. FY EBIT (70% of revenues USD denominated) and excludes proceeds from the 700m divestment programme. Luke-warm reaction from the market. There was arguably a degree of profit-taking following the results. Saipem is the top performer in our coverage universe YTD (+41%) and the share closed down 2.2% on the back of results, in line with the Euro oils (Bloomberg: E3OILG index). We still see positive share price momentum from contract awards and estimate a minimum $4bn potential from Usan (Total, deepwater Nigeria, FPSO and SURF), the lump-sum turnkey part of Khurais (Saudi Aramco), the cantilever drilling barges on Kashagan (ENI, Caspian), and the rump of the Kashagan hookup job. Backlog can increase from here. Key project concerns have been addressed, in our view. Sakhalin II onshore and Escravos GTL will be charged on a cost-plus basis going forward, Rio Polimeros is all but closed-out, and the Golfinho II FPSO is now sailing to Brazil. At present, management is reassure that there are no execution problems on the Burullus contract in Egypt. We remain Overweight and continue to view Saipem as the best way to maintain exposure to the strength of industry spend on deepwater and LNG liquefaction. The 3.5% increase in FY EPS estimate reflects guidance whilst our new year-end price target ( 25 to 30.5) reflects our view that the share merits a premium rating. SPM s 2008 P/E of 19.5x looks favourable vs. closest benchmark Technip on 19.3x. Oil Services & Equipment, Mid- Cap Gordon Gray AC Tao Ly (44-20) tao.sp.ly@jpmorgan.com Jeneiv Shah, CFA (44-20) jeneiv.a.shah@jpmorgan.com Kim Fustier (44-20) kim.a.fustier@jpmorgan.com Saipem (SPMI.MI;SPM IM) 20A 20A 20E 2008E 2009E Adj. EPS FY ( ) Dividend (Gross) FY ( ) Revenue FY ( mn) 4,528 7,517 9,002 10,7 11,315 EBITDA FY ( mn) ,010 1,2 1,337 EBIT FY ( mn) ,032 EBIT margin FY 8.1% 8.0% 8.4% 9.2% 9.1% Net Attributable Income FY ( mn) Adj P/E FY Tax rate FY 22.7% 28.9% 29.3% 29.0% 29.0% FCF FY ( mn) Source: Company data, Reuters, JPMorgan estimates. Company Data Price ( ) Date Of Price week Range ( ) Mkt Cap ( bn) 12.3 Fiscal Year End Dec Shares O/S (mn) J.P. Morgan Securities Ltd. See page 5 for analyst certification and important disclosures, including investment banking relationships. JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of JPMorgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at or can call toll free to request a copy of this research. The analysts listed above are employees of either J.P. Morgan Securities Ltd. or another non-us affiliate of JPMSI, and are not registered/qualified as research analysts under NYSE/NASD rules, unless otherwise noted.

2 25 y 20 Investment view Saipem is the top performer in our coverage universe YTD (+41%), and remains our top pick among the European Oil Services. We view Saipem as the quality, liquid way to maintain exposure to the continued strength of industry spend on deepwater developments and LNG liquefaction. Saipem posted a record backlog of 13.3bn in 2Q, has a solid record in project execution and is investing for future growth. Table 1: Saipem, investing for growth million Investment Capex est Delivery Comments Yard expansions 80m figure only. Angola and Kazakhstan Tender assisted drilling barge 60m 4Q 20 5 year contract signed with ENI Gimboa FPSO 320m 1H 2008 $570m lease secured, Norsk Hydro and Sonangol Scarabeo 8 drilling rig 490m 3Q year contract signed with ENI for $840m High-spec pipelay vessel 530m 2Q 2010 Coldwater pipelayer, potentially for Nordstream New yard in Asia 180m 2009 Intended for Asia Saipem drillship 660m 1Q 2010 Dynamically positioned, 3600m water depth Source: JPMorgan estimates, Company data. Table 2: changes to FY guidance Previous Current Revenues 9bn+ 9bn+ NI growth y/y +20% +30% Capex 1.2bn 1.3bn Backlog Increase Increase Source: Company reports. FY guidance raised, divestment programme started FY guidance for YoY net income growth was increased from 20% to 30%. The new guidance includes 27m of negative currency effects vs FY EBIT (70% of revenues are denominated in dollars) and excludes an anticipated 350m in pre-tax capital gains from the company s divestment program (which is expected to bring in 700m). Saipem has already sold its interest in French company Camom for 47m. 2Q margins boosted by Offshore contingencies Saipem s 2Q EPS was 26% ahead of consensus, reflecting high utilisation across all divisions. The only one-off in the results was the release of 20m of contingencies into Offshore Construction EBIT, which boosted the divisional EBIT margin to 12.8%. These came from conservative profit booking on contracts that management are now confident will be executed without problems. We do not view the 20m as an exceptional item (rather a result of prior prudence), but even if we did, the resulting 10.6% EBIT margin still represents a QoQ and YoY improvement. Table 3: Saipem, summary of 2Q results in millions 2Q 1Q 2QE % y-o-y % q-o-q JPMe Cons. Revenues 2,2 2,190 2,545 24% 16% 2,310 2,300 EBIT % 28% Offshore Construction % 35% 88 - Onshore Construction % 31% 61 - Offshore Drilling % 10% 31 - Onshore Drilling % 20% 10 - EBIT margin 7.4% 8.2% 9.0% % 8.4% Offshore Construction 8.2% 10.0% 12.8% % - Onshore Construction 5.2% 4.6% 4.8% % - Offshore Drilling 28.4% 31.6% 32.4% % - Onshore Drilling 10.5% 14.1% 16.2% % - Reported Net Income % 33% Adjusted Net Income % 33% Reported EPS % 33% Adjusted EPS % 33% New Orders 4,636 2,314 2,579 (44%) 11% - - Backlog 12,333 13,268 13,302 8% 0% - - Source: JPMorgan estimates, Company data. 2

3 25 y 20 Table 4: Saipem's offshore drilling fleet schedule and dayrates Leverage from the drilling market Profitability is set to improve from the offshore drilling division. Recent negotiations for the Scarabeos 3 and 4 were renegotiated at rates higher than previously anticipated. In addition, Saipem s newbuild drilling units are already signed-up: the Scarabeo 8 by ENI (5 years on a $460k dayrate) and the Saipem drillship by Total (5 years with 2 years of options, undisclosed dayrate). Saipem has historically come under criticism for its inability to leverage from the strength in the drilling market. Many of Saipem s rigs had been locked into longer term contracts of 2-3 years in duration on day rates that were negotiated before the ramp-up in dayrates began. In particular, the company's flagship drilling unit, the Saipem drillship, remains locked into a $250k dayrate until y 2009 (assuming Total exercises its options). $ '000/day Estimated contracted day rates Current Future % Increase Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Perro Negro 2 (90m WD) % Perro Negro 3 (90m WD) % Perro Negro 4 (45m WD) % Perro Negro 5 (90m WD) % Scarabeo 3 (II generation) % Scarabeo 4 (II generation) % Scarabeo 5 (IV generation) % Scarabeo 6 (III generation) % Scarabeo 7 (IV generation) % Saipem % Scarabeo year contract signed with ENI Saipem Drillship contracted to Total for 5 years with 2 year options from 1Q 2010 Total % Firm future rate Estimated future rate Option period Current contract period Source: JPMorgan estimates, Company data. Building backlog contract momentum in 2H CEO Pietro Franco Tali stated last quarter that he expects few but large contracts in 2H. We still see positive share price momentum from contract awards in 20. The most visible potential contract wins in the near term are likely to come from deepwater West Africa (Usan), the Middle East (Khurais) and ENI s flagship Kashagan development. We estimate their contract potential at $4bn net to Saipem. Kashagan The recent award of the preliminary stage of the Kashagan hookup job was positive news in that there are now tangible signs that progress is being made on ENI s $19bn flagship oil development. Saipem (along with Aker Kvaerner) is very likely to win the rump of the contract when it is awarded (est. $700m net to Saipem). Past this, Saipem remains in a strong position as it is the only foreign oil service company with a construction yard in the Caspian area (Kuryk). We think Saipem is likely to win at least one of the 4-5 contracts for cantilever drilling barges required on the project (est. $1bn each). 3

4 25 y 20 West Africa Press reports speculate that Saipem is out of the running for Total s Pazflor development in Angola. Hugh O Donnell confirmed that Saipem is in a better position for Total s other West African project, Usan. Saipem is in contention for both the FPSO (in conjunction with Technip and Saipem) and the SURF contract (est. $350m and $800m net to Saipem respectively). Khurais CEO Franco-Tali confirmed that Saipem is still awaiting conversion of the Khurais contract to a lump-sum turnkey contract (est. $1bn). Engineering and procurement have largely been completed and discussions are under way for an EPIC contract. The staged contracting method allows Saudi Aramco to minimise the risk of changes in scope and cost prior to entering the construction phase. Key contract concerns addressed Key project concerns have been addressed, in our view. Sakhalin II onshore and Escravos GTL will be charged on a cost-plus basis going forward, Rio Polimeros is all but closed-out, and the Golfinho II FPSO is now sailing to Brazil. At present, management reassures that there are no execution problems on the Burullus contract in Egypt. Table 5: Saipem, adjusted EPS changes, 20-08E ( ) 20E 2008E Adj. EPS Current Previous Change 3.2% 0.8% Source: JPMorgan estimates. EPS changes; price target raised to 30.50/sh We have increased our EPS by 3.5% in 20 to reflect the upgrade in earnings guidance given. Our changes for 2008 (up 0.7%) and 2009 (8.23%) have been driven by improved visibility on drilling schedules and rates. We have raised our year end 20 target price to 30.50/share from 25/share. Our price target is now based on a 2008E P/E multiple, which puts Saipem at a 10% premium relative to closest benchmark Technip. We justify this in light of Saipem s continued backlog growth (vs. stabilisation for Technip), the greater degree of confidence that we have in Saipem s ability to execute (superior record of project delivery) and diversification of company earnings (30% of Technip s backlog is exposed to LNG projects in Qatar). Valuation, price target and risks On our estimates, Saipem trades at a 2008 P/E of 19.5x, which appears favourable vs closest benchmark Technip on 19.3x. The share s P/CF ratio of 13.0x 08E is only slightly above the sector and Technip on 12.2x, but Saipem is more expensive than Technip on EV/CF (14.1x vs 10.1x) due to its much higher balance sheet leverage. Risks to our rating and target price: In our view, the main generic risks are from a general downturn in capital expenditure in the oil and gas industry, and political instability in key areas of operations such as the Middle East or West Africa. Specific risks could come from larger than anticipated losses on Escravos GTL, or a more general slow-down in the backlog trend. Please see the most recent company-specific research published by JPMorgan for an analysis of valuation methodology and risks on Technip. Research is available at or you can contact the analyst named on the front of this note or your JPMorgan representative. 4

5 25 y 20 Other Companies Recommended in This Report (all prices in this report as of market close on 24 y 20) Technip (TECF.PA/ 59.20/Overweight), Technip (TKP/$81.10/Overweight) Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Saipem, Technip. Client of the Firm: Saipem is or was in the past 12 months a client of JPMSI. Technip is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-securities-related services. Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Technip. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Technip. Non-Investment Banking Compensation: An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Technip. Saipem (SPMI.MI) Price Chart Price( ) N 9 OW 22 OW 9 N 12.5 OW 20.5 OW 25 OW UW 9 UW 12.5 N 18 N 20.5 OW 23 Date Rating Share Price ( ) Price Target ( ) 12-Aug- OW Sep- OW Nov- N Feb- UW Nov- UW Nov- N Mar- N N OW Nov- OW Feb- OW May- OW Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight. 5

6 25 y 20 Technip (TECF.PA) Price Chart Price( ) OW OW OW N OW 50 N 56 OW 57 N 30 OW 48N 55 OW 49 OW 54 Date Rating Share Price ( ) Price Target ( ) -Sep- N N Nov- OW Nov- OW Nov- OW OW N Mar- N Mar- OW May- OW Feb- OW May- OW Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight. Technip (TKP) Price Chart 140 Date Rating Share Price ($) Price Target ($) OW N OW 29-Nov- OW N Mar- OW Price($) Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] The analyst or analyst s team s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Gordon Gray: BG Group (BG.L), BP (BP.L), CEPSA (CEP.MC), ENI (ENI.MI), ERG (ERG.MI), John Wood Group (WG.L), Neste Oil (NES1V.HE), Norsk Hydro (NHY.OL), OMV (OMVV.VI), Repsol-YPF (REP.MC), Royal Dutch Shell A (RDSa.L), Royal Dutch Shell B (RDSb.L), SBM Offshore (SBMO.AS), Saipem (SPMI.MI), Saras Spa (SRS.MI), Statoil (STL.OL), Technip (TECF.PA), Total (TOTF.PA) 6

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9 25 y 20 Saipem: Summary of Financials Profit and Loss statement Ratio Analysis millions, year-end Dec FY FY FYE FY08E FY09E millions, year-end Dec FY FY FYE FY08E FY09E Revenues 4,528 7,517 9,436 10,624 11,867 Valuation % change Y/Y - 66% 26% 13% 12% Mkt cap ($ mn) 12,298 EBIT ,130 Shares in Issue (mn) % change Y/Y 64% 34% 20% 18% P/E adjusted Offshore P/CF Onshore P/FCF (49.1) Offshore Drilling EV/DACF (Static EV) Onshore Drilling EV/DACF (Dynamic EV) Corporate EV/Sales (Dynamic EV) Unallocated EV/EBIT (Dynamic EV) EBIT Margin (%) 8.1% 8.0% 8.5% 9.0% 9.5% CF yield 4.7% 7.0% 8.5% 10.1% 11.9% Offshore 8.6% 9.4% 10.8% 11.3% 11.7% FCF yield 1.7% 1.8% 0.8% 2.0% 3.8% Onshore 4.0% 4.4% 4.7% 5.0% 5.3% FCF yield ex-w/c (0.4%) (0.3%) 0.4% 1.6% 3.3% Offshore Drilling 17.9% 28.2% 32.2% 33.0% 34.0% Dividend yield 0.7% 1.0% 1.4% 1.4% 1.4% Onshore Drilling 10.0% 12.3% 15.6% 16.0% 16.2% Buyback yield Net financial items (54) (100) (121) (123) (122) Combined yield 0.7% 1.0% 1.4% 1.4% 1.4% Earnings before tax ,6 Tax (76) (157) (216) (259) (309) Dividends declared as % of EBT 23% 29% 29% 29% 29% DPS (cents) Net Income (Reported) Net Income (adjusted) ROE 16% 24% 26% 26% 25% % change Y/Y 51% 35% 22% 19% EPS (reported) (cents) EPS (adjusted, diluted) (cents) % change Y/Y 51% 35% 22% 19% Balance sheet Cash flow statement millions, year-end Dec FY FY FYE FY08E FY09E millions, year-end Dec FY FY FYE FY08E FY09E Net Income Total non-current assets 2,867 3,447 4,120 4,802 5,441 Income tax paid Goodwill Net interest paid PPE 1,903 2,345 3,018 3,700 4,339 Depreciation and amortisation Other non-current assets Other CFO 12 (77) (87) (87) (87) Total Current Assets 3,101 6,084 8,855 12,4 15,820 Cash Earnings ,0 1,247 1,462 Cash and cash equivalents 877 1,322 1,248 1,268 1,476 Increase (-) other net operating assets (178) (33) (46) (52) (58) Other 2,224 4,762 7,6 10,796 14,344 Cash flow from Operations ,0 1,195 1,4 Total Assets 5,968 9,531 12,974 16,866 21,261 Capex (362) (614) (1,300) (1,000) (1,000) Current liabilities 3,633 6,630 9,679 13,112 16,947 Other CFI (9) (22) Non-current liabilities 692 1,316 1,316 1,314 1,291 Cash flow from Investing Activities (371) (636) (950) (1,000) (1,000) Total liabilities 4,325 7,946 10,995 14,426 18,237 Equity raised (+) repaid (-) Shareholders' equity 1,630 1,581 1,973 2,430 3,011 Debt raised (+) repaid (-) (2) (23) Minority Interests Dividends paid (65) (82) (128) (173) (173) Total Liabilities & SE 5,968 9,531 12,974 16,866 21,261 Other CFF Cash flow from FInancing Activities (128) (175) (196) Net Debt (cash) 799 1,428 1,502 1,480 1,248 Net change in Cash (74) Net Debt/Equity 49% 90% 76% 61% 41% DACF 692 1,281 1,312 1,551 1,817 Capital Employed 2,442 3,013 3,481 3,921 4,272 FCF (ex-wk) (250) CFPS (based on DACF) CFPS (based on Cash Earnings) CFPS (based on FCF) (0.6) Source: Company reports, JPMorgan estimates