Saipem. Italy. 1/Selected List. More growth ahead. Oil Services. 15 October 2007 Estimates upgrade

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1 Italy 1/Selected List Oil Services 15 October 2007 Estimates upgrade Closing Price (12/10/07) EUR30.69 Target price +17% EUR36 Market capitalisation EUR13 547m MIB To 31/12 (EUR) - IFRS E 2008E 2009E Sales (m) Net att. profit, rest. (m) Free Cash Flow (m) 84.0 (465.2) (70.4) EBITDA margin (%) Clean EPS Reported EPS P/E (x) Attrib. FCF yield (%) 1.0 NS NS 1.6 EV/EBITDA (x) EV/EBIT (x) ROCE (%) ROE (%) P/BV (x) Net debt/ebitda (x) Net dividend Yield (%) Next event: Q3 results on 29 October /01 01/02 10/02 09/03 07/04 04/05 02/06 12/06 Price Price/ M IB30 52-week range EUR16.98-EUR30.79 Free Float EUR7 694m No. of shares, adjusted 441.4m Daily volume EUR106.54m Reuters/Bloomberg SPMI.MI/SPM IM 1 month 3 months 12 months Absolute perf. 10.6% 9.9% 81.2% Relative perf. 4.4% 12.5% 72.0% More growth ahead We stick to our positive stance on, raising our estimates and target price to EUR36 (from EUR31). Our more bullish stance on the outlook in is based on: 1) superior organic growth of the oil services industry; 2) contribution of new vessels in drilling and offshore construction, which will become very evident in 2009 and 2010; and 3) gradual increase of margins on the back of more favourable conditions embedded in the order backlog. With very aggressive investments planned for the next two years (over EUR2bn in growth capex, well above its competitors) with very high return, we do not believe that will engage in large-scale acquisitions. A take-over of Technip would lead to an undisputed leader in the industry (with increased financial strength), but according to our preliminary forecasts, the value creation would likely not exceed EUR1.5 per share. Based on our new forecasts, has another three-year cycle of over 20% EBIT CAGR ahead, thanks to investments well in excess of its peers. For this reason, we are upgrading our 2009 forecasts by 10%. In 2010, with the full impact of the new vessel, we now expect very sound EBIT growth of 15%. Given such an upbeat outlook, the positive news flow from new large contracts and the leadership of, we feel that the current multiples are well justified. Using a midcycle EV/EBIT of 14x as the terminal value and assuming a long-lasting positive cycle for the oil services business, we easily derive a fair value in excess of EUR35 per share. Marco BACCAGLIO, CFA Research Analyst mbaccaglio@cheuvreux.com (39) Shareholders: ENI 43.2%, Free Float 56.8% Please see important disclosures at the end of this document

2 CONTENTS Investment recommendation I Valuation approach...page 06 II Double-digit growth for another three years...page 08 Organic growth in excess of 20%, what's next?... P.08 III Business fundamentals remain strong...page 11 IV Simulating an acquisition of Technip...Page 14 CHEUVREUX'S OIL & GAS TEAM Dominique Patry (coord.) France (33) ( Direct ) dpatry@cheuvreux.com Marco Baccaglio Italy (39) mbaccaglio@cheuvreux.com Julien Bourdier France (33) ( Direct ) jbourdier@cheuvreux.com David Halldén Nordic (46) ( Direct ) dhallden@cheuvreux.com Jean Charles Lacoste France (33) ( Direct ) jlacoste@cheuvreux.com José Ramón Ocina Spain (34) ( Direct ) jocina@cheuvreux.com Geoffroy Stern France (33) ( Direct ) gstern@cheuvreux.com 2

3 Company profile Valuation is one of the leading oil services players, with an order backlog of over EUR13bn at the end of H1-07 and more than EUR9bn in sales expected for the current year. The company's core business is offshore construction, where it can rely on 26 vessels and over 3,500 employees: this division generates roughly 45% of the consolidated operating profit. In 2006, expanded its footprint in onshore construction business, thanks to the acquisition of Snamprogetti from the parent company ENI. In 2007, the onshore construction business is expected to represent roughly 30% of the operating profit, while the remaining 25% should be generated by drilling. has a very aggressive investment policy based on organic growth: it plans to invest in five new vessels with over EUR2bn of growth capex over the next three years, in order to maintain leadership in the oil service business and to expand its presence in the drilling division with long-term contracts. Net debt is expected to peak at EUR1.7bn in is 43% controlled by ENI. We are raising our target price from EUR31 to EUR36 per share based on DCF and on the back of the upgrade of our forecasts. DCF valuation. We used a WACC of 7.7% based on a 3.5% market risk premium, 1.0x beta and a 4.7% riskfree rate. As a terminal value, we took an EV/EBIT multiple of 14.3x, which is broadly in line with the 2008 multiple (15x) and the x historical valuation of the company. Our valuation delivers a EUR15.9bn equity value (EUR36 per share): moving our terminal valuation to 12x (i.e. the low end of the range at which has been trading over the last 10 years) we would derive a valuation of EUR30-31 per share, while moving our EBIT growth to 3% (vs. our assumption of 7%) we would derive a fair value of EUR is trading at a double-digit premium to its peers in the European oil services sector, similar to its premium over the past few years. We feel that this valuation gap is fully justified by: 1) the leadership position; 2) the strong management; 3) the superior profitability; and 4) the aggressive investment plan which the company is putting in place. Investment case SWOT analysis We stick to our positive stance, raising our estimates and target price to EUR35.3. Our more bullish stance on the outlook in is based on: 1) superior organic growth of the oil services industry; 2) contribution of new vessels in drilling and offshore construction, which will become very evident in 2009 and 2010; and 3) gradual increase of margins on the back of more favourable conditions embedded in the order backlog. With very aggressive investments planned for the next two years, we do not believe that will engage in large-scale acquisitions. A take-over of Technip would lead to an undisputed leader in the industry (with increased financial strength), but according to our preliminary forecasts, the value creation would likely not exceed EUR2-3 per share. has another three-year cycle of over 20% EBIT CAGR ahead. We are upgrading our 2009 forecasts by 10%. In 2010, with the full impact of the new vessel, we now expect very sound EBIT growth of 15%. Given such an upbeat outlook, the positive news flow from new large contracts, we feel that the current multiples are well justified. Strengths Combination of execution and engineering capabilities Diversification among oil services business areas Large backlog Weaknesses Key growth areas are in high risk countries Still limited size in the drilling business Higher capacity needed to grow further Opportunities Renegotiation of drilling contracts Integration with Snamprogetti Large order intake potential in H2-07 Threats Oil price volatility impact on oil companies' capex plans USD weakness may impair margins Large and complex contracts may have volatile margins 3

4 2006 revenues by business 2006 revenues by region Onshore drilling 6% Onshore constr. 31% Offshore constr. 41% America 13% Europe 15% Africa 32% Offshore drilling 22% Asia 40% Sales and ROCE (%) Margins (%) Sales (m) ROCE after tax (%), right-hand scale EBITDA margin Net margin EBITA m argin Gearing and restated ROE (%) SRI Issues The board is composed by 9 members, of which 4 are independent and 3 have been named by institutional investors. The company has an internal code of conduct, with explicit mentions to issues such as business ethics, labour protection and equal opportunities, diversity, human rights and environmental protection. Gearing Restated RoE, right-hand scale : Peer comparison (x, %) P/E EPS gr. EV/EBIT Margin CAGR 2007E 2008E E 2007E 2008E 2008E E ACERGY % % 32.2% CGG VERITAS % % 36.8% FUGRO % % 25.1% PGS % % 29.9% SAIPEM % % 27.2% SBM OFFSHORE % % 18.0% TECHNIP % % 19.1% TECNICAS REUNIDAS % % 53.3% Weighted Average % % 28.6% Median % % 28.5% 4

5 INVESTMENT RECOMMENDATION We reiterate our positive stance on, which is included in our Italian Selected List. In this report, we are upgrading our forecasts for 2009 and 2010 (by 10% and 15% respectively) in the light of the new EUR2bn investment plan, aimed at expanding s capacity in the offshore drilling and construction businesses. As a result, we are also upgrading our target price from EUR31 to EUR36. New investments are expected to boost organic growth beyond The key reasons for our earnings upgrade are related to the new investments. In detail, has decided to build two new drilling vessels (which should enter into operation between 2009 and 2010), two new FPSOs (2007 and 2008) and one new construction vessel (a pipe layer, most likely to be used in the North Stream construction project). These investments should provide over EUR200m of additional EBIT by , on top of organic growth that we expect for the oil services sector. In addition, should continue to benefit from the increase in drilling rates, which for some of its vessels will be implemented over 2008 and All in all, we see room for an EBIT CAGR of over 20% in (i.e. a growth profile comparable to that delivered between 2004 and 2007), vs. our previous assumption of 12%. We are therefore upgrading our forecasts, with a particular focus on 2009 (+10%) and 2010 (+17%). Still very positive sector outlook. The strength of oil prices, combined with shrinking oil reserves, is proving a significant catalyst for oil companies' investments. In this scenario, the oil services sector is still characterised by a lack of supply vs. the current demand. is operating in the high end of the market, thus enjoying even lower competition and massive pricing power at this stage. This situation is likely to enable: 1) a further increase in the order backlog; 2) rising profitability on new contracts, which enjoy an unprecedented level of contingency provisions which might be reversed into higher profits; and 3) growing return on capital for (which is already in excess of 20%). To leverage on such positive sector trends, is investing a cumulative 24-25% of its enterprise value over the next three years, vs % of EV of its key peers. Acquisition risk is, in our view, unfounded. We run a simulation of a possible tie-up with Technip, as such a deal is mentioned from time to time as being under consideration by the two companies (which, however, they have denied). The deal would allow the creation of an undisputed leader, particularly in some markets (West Africa) and would provide the combined entity with very strong financial muscle to sustain the next challenging project. However, we see several critical points, which in our view make it extremely unlikely that the deal will take place: 1) Technip s market value of EUR7bn makes it very difficult for to carry out a 100% cash deal; 2) a paper deal would not be affordable, as it would imply the reduction of ENI's stake in below the threshold of 30% set by the takeover law; 3) a mixed cash-paper deal would be the optimal solution, but it would reduce value creation for shareholders; and 4) the deal would not provide with any significant technological upgrade (apart from small niches); 5) the combined entity might lose market share in West Africa. Our estimate of synergies, coupled with a premium which should pay to Technip shareholders, implies that value creation for shareholders is not likely to exceed EUR1.5-2 per share (5% of the current share price). That said, we also feel that the deal might encounter some political issues given the presence of the Italian State in 's control structure (through ENI). Valuation. Our target price increase is backed by a DCF valuation, which we run through We assume 7% EBIT growth in , and we use a terminal EV/EBIT multiple of 14x, in line with 's historical average of x and with a 2008 multiple of 15x. Our fair value of EUR36 would become EUR30-31 assuming a terminal value aligned to the low-end of the company's multiple range (12x). Using a more cautious growth outlook (+3% vs. +7%) would reduce our valuation to EUR31-32 per share. In terms of multiples, remains quite an expensive stock in the European oil services sector, although we feel that this is justified by: 1) the superior growth profile; 2) the leadership position; and 3) management's strong track record in recent years. : New estimates (EUR m, %) New Old 2005A 2006A 2007E 2008E 2009E 2007E 2008E 2009E Sales EBIT Net profit

6 I VALUATION APPROACH We are raising our target price on from EUR31 to EUR36, on the back of the upgrade of our forecasts, and maintaining the same assumptions in terms of cost of capital. DCF fair value of EUR36 EUR15.9bn equity value Our DCF delivers a fair value of EUR15.9bn (EUR36 per share), corresponding to an enterprise value of EUR17.6bn from which we deduct EUR1.4bn in net debt and EUR0.4bn of provisions. The terminal value (beyond 2013) represents 85% of our fair value. DCF summary Historical EV/EBIT (EUR m, EUR, %) Total Per share (%) FCF % FCF % Terminal value % Total % Provisions (347) (0.8) Debt (1 419) (3.2) Equity Key assumptions The key assumptions of our DCF model are the following: 1) 3.5% market risk premium and a 4.7% risk-free rate; 2) 4.5% gross cost of debt; 3) unlevered beta of 0.93x and beta of 1x (vs. Datastream beta of 0.83x); and 4) our terminal value corresponds to an EV/EBIT multiple of 14.3x for the last year vs. an EV/EBIT for 2008 of around 15x. These assumption lead to a WACC in the region of 7.7%. In terms of operating assumptions, we are factoring in 7% EBIT growth beyond 2010 (vs. 21% in ) and Capex/Sales of a 4% (vs. 8.5% in ). We use a stable tax rate of 27%. WACC calculation (%) 2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E WACC 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% Cost of equity 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% Cost of debt 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% D/E 10.5% 10.5% 12.3% 12.4% 9.6% 10.3% 9.6% 9.2% Unlevered beta Beta Risk free 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% Risk premium 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Market value Debt

7 Sensitivity to terminal value and assumptions The valuation of is highly dependent on the assumptions on terminal value. Our valuation uses roughly the same multiple (14.3x) at which the company is trading on 2008 (15x), which is a somewhat cautious assumption when compared to the average level of 15.8x. The latter, however, is affected by the unusually high valuation of (EV/EBIT over 20x): excluding these two years from our calculation we would derive an average multiple ("mid-cycle") of roughly x. Moving to a terminal EV/EBIT of 12x (in the low end of the range of historical multiples), we would derive a fair value of EUR30-31 (in line with the current share price). On the other hand, assuming from 2011 (to 2013) an EBIT CAGR of just a 3% (vs. our 7% assumption), our valuation would move from EUR36 to EUR31-32 per share. DCF detail (EUR m) 2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E Terminal EBIT Depreciation Tax on EBIT (136) (230) (273) (333) (383) (424) (458) (478) (478) Capex (605) (1 323) (1 103) (1 020) (745) (665) (465) (455) Working capital & other FCF (426) (19) Discount Discounted FCF (395) (17) Comparison of multiples trades on multiples at a 10-20% premium to the European oil services sector. This premium is, in our view, justified by: 1) the company's superior asset base and return on capital; 2) the strong commitment to new investments, which should result in above-average growth beyond 2008 as well; 3) the exposure of the drilling fleet to longterm contracts. Restricting the comparison to Technip, trades on a very similar P/E (although Technip has a net cash position that would justify a higher multiple) and at a significant premium on EV multiples. : Peer comparison (x, %) P/E EPS gr. EV/EBIT Margin CAGR 2007E 2008E E 2007E 2008E 2008E E ACERGY % % 32.2% CGG VERITAS % % 36.8% FUGRO % % 25.1% PGS % % 29.9% SAIPEM % % 27.2% SBM OFFSHORE % % 18.0% TECHNIP % % 19.1% TECNICAS REUNIDAS % % 53.3% Weighted Average % % 28.6% Median % % 28.5% 7

8 II DOUBLE-DIGIT GROWTH FOR ANOTHER THREE YEARS An outstanding track record Organic growth in excess of 20%, what's next? has been an extremely successful growth story over the past thee years. All the key P&L indicators showed impressive growth, backed by an unusually high flow of new orders, a significant increase in the daily rates of the drilling fleet and, last but not least, the acquisition of Snamprogetti in the onshore engineering segment. Based on our calculation, between 2004 and 2007, showed 25-30% organic growth at the EBIT and net profit level, driven by the combination of a 6% CAGR of capital employed and a significant jump in the return on capital employed (from 13% to 23% in three years). Moreover, when adjusting for the 5-6% negative impact of the depreciation of the dollar (moving from EUR1=USD1.25 to USD1.35 over the years), the organic growth would be 2% higher. growth, (EUR m, %) E CAGR Organic External Sales % 17% 12% EBIT % 29% 5% Net profit % 27% 3% Order backlog % 20% 19% Capital employed % 6% 6% ROCE 12.9% 23.4% Organic growth and new investments 's outlook for the next five years is shaped by two key items: 1) the roll-out of an aggressive investment plan, which is likely to boost margins in ; 2) the evolution of the return on capital employed and the organic growth of the business based on its current fleet. Our conclusion is that given the enviable competitive position of the company, the trend in the order backlog and the completion of a EUR2bn capex plan focusing on new vessels, is facing a new growth period of at least another 3-4 years. For this reason, while we are just fine-tuning our 2008 forecasts (+4-5%), we take a more positive stance on , upgrading EPS and EBIT by 10% and 17% respectively. We now expect an EBIT (and EPS) CAGR of 20-21% over vs. 12% previously. : New estimates (EUR m, %) New Old 2005A 2006A 2007E 2008E 2009E 2007E 2008E 2009E Sales EBITDA EBITDA margin (%) 12.5% 11.0% 11.6% 13.2% 14.5% 11.6% 12.7% 13.3% EBIT Net profit New vessels will concentrate their contribution in With this track record and such high return on capital, has clearly chosen to bet on a heavy expansion of its offshore fleet, both in terms of new capacity in drilling business and in an expansion in the construction segment. The key investments will be completed in 2009, and based on our estimates could contribute a 7-9% yearly EBIT growth (on top of organic growth) in 2009 and In more details: 8

9 The expansion of the drilling fleet, with two new vessels (Scarabeo 8 and 12000), which will enter in operation in 2009 and 2010 respectively with ENI and Total based on long-term contracts. Based on our estimates, the investment could top EUR1bn and could provide over EUR120m additional EBIT as from 2010 (EUR60m already in 2009), with most of the investment to be depreciated during the first contract (IRR could exceed 20%). A new pipe layer and two FPSOs. In the construction segment, the new investments are focused on the new pipe layer, which will be utilised in the North Stream project and on two FPSOs (one of which just started operation). The growth capex are in the region of EUR1bn for these three units and should provide additional EBIT of at least. EUR90m-100m (of which EUR25-30m already in ). New vessels (EUR m) Segment Start Yearly sales Additional EBIT contribution Contract duration (years) FPSO Golfinho Construction Q FPSO Gimboa Construction Q Pipe Layer Construction Q Scarabeo 8 Drilling Q Drilling Q EBIT growth of 7-9% guaranteed for All in all, based on our forecasts, the new vessels should concentrate their contribution from 2009: we estimate that in 2008 the additional EBIT could be EUR23m, mainly coming from the new FPSO projects and providing a 3% increase on 2007 consolidated EBIT. Most of the benefit is instead concentrated in 2009 and 2010: for 2009, we expect the contribution of Scarabeo 8, while in 2010 we estimate that could deliver most of its contribution and that the pipe-layer might contribute for part of the year. We forecast that in 2009 the new vessels should provide growth of 7% (EUR69m) and that in 2010, the peak year, the contribution in terms of new EBIT could reach EUR110m (up 9% on 2009). Additional contribution (EBIT) of new vessels (%) 2008E 2009E 2010E 2011E FPSO Goklfinho 15 FPSO Gimboa 8 8 Scarabeo 8 61 Pipe layer "New EBIT" % on EBIT of former year 3% 7% 9% 1% 9

10 Construction business: 10-11% organic growth On top of these growth investments, we believe that it is fair to assume organic growth at an operating level driven by: 1) the increase in the order backlog; and 2) the gradually better conditions embedded in the contracts executed. One of the key drivers for could be the release of provisions. In the latest contracts, has been able to take several provisions to ensure a good profitability even assuming one-off negative events. If the company continues to operate as in the past years (i.e. with no major accident or execution problem), we would assume that 's margins in the construction business would continue to increase. In more detail, we expect a gradual improvement in the profitability of the construction business. For offshore we expect that margins could move from 10% to 12% in the next 2-3 years, while for onshore our forecasts point to 6% from the current 5%. In our view, the improvement in profitability is one of the key growth drivers over the next 2-3 years, and represents around twothirds of the 10-11% organic growth, which we estimate for Organic growth assumptions for the construction business (%) 2008E 2009E 2010E % CAGR Offshore 18.0% 14.0% 7.0% 12.9% Onshore 11.0% 10.0% 5.5% 8.8% With these new assumptions and factoring in the impact of new vessels, we have room to increase our forecasts quite significantly beyond In short, the new EBIT estimate points to a CAGR of 21%in (vs. previous 12%), backed by: Room for significant growth well beyond 2008 better-than-expected organic growth, in the double-digit range on average in , representing slightly more than one-third of the increase for the next three years (EUR250m out of a cumulative increase of EUR620m in the operating profit); the entry into operation of the new vessels (EUR200m additional EBIT contribution by 2010); the improvement of the rates of the current drilling fleet (offshore and onshore), which we estimate will contribute another EUR170m (27% of the total), most of which in 2008 and Breakdown of EBIT forecast increase over (EUR m, %) 2008E 2009E 2010E CAGR (contribution) Increase of drilling rates % Contribution of new vessels % Organic growth offshore % Organic growth onshore Additional EBIT Previous year's EBIT EBIT forecast % Growth (%) 27% 22% 15% 10

11 III BUSINESS FUNDAMENTALS REMAIN STRONG In our view, fundamentals remain extremely strong and supported by very convincing sector trends and company specific advantages. E&P spending expected to grow by 18-20% in the period, supported by the further increase of oil prices in recent months, which might lead to a new wave of projects. The level of oil reserves and discoveries compared to the expected consumption level still suggests that the oil industry will have problems in coping with the growing demand. Drilling activity is extremely high, thus ensuring a significant flow of business for oil services companies active in the drilling and construction business, although there are some signs of stabilisation (y-o-y comparison is now flat) in the new rigs and in the drilling rates (as a result of the sharp increase of capacity). The construction business appears to enjoy a very long cycle, provided that the long-term contracts (lasting until ) signed by 's drilling division will then develop into the construction phase. As far as is concerned, the company has an ideal positioning in the construction business (particularly after the integration of Snamprogetti) and has launched a timely aggressive business plan to preserve its competitive advantage. 's strategy of investing in local regions with specific structures and using the local workforce is proving to be an advantage in very difficult markets such as West Africa and Kazakhstan, reducing the risk of cost inflation and adding visibility to the operations. E&P investments and oil price E&P investments (USDbn) E Oil price (previous year) 2007E Source: IFP 11

12 Yearly E&P spending growth of 17-18% over the next two years E&P spending is the key driver of 's business. After several years of depressed investments, starting from 2001 the market recovered and is now hitting new highs. According to IFC, E&P investments in 2006 grew by 20%, while another 17-18% is expected for These estimates factor in an oil price of USD50 in oil companies' investment decisions. However, such an outlook might be significantly affected only if the oil price falls materially below this level. On the other hand, an oil price persistently level above USD80, would probably trigger a further upgrade of investments beyond The increase of the depletion rate of current fields is also adding further pressure to oil companies to develop new fields and to increase the works in the current ones. Total drilling rigs (N. Am. plus international) Change in drilling rigs, y-o-y Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Jan % Jan-04 Jan-05 Jan-06 Jan-07 Source: Baker Hughes Source: Baker Hughes More exploration investments Drilling rigs are at an extremely high level An extremely aggressive investment plan In addition, within E&P, exploration investments are increasing their weight. Based on our forecast built on the major oil companies, we estimate that in 2006 the 10 major independent oil companies invested USD14bn in exploration (25% of their total E&P investments), twice as much as the average USD7-8bn recorded in These booming investments are providing a huge flow of orders and business opportunities for the oil services industry, which has in turn under-invested for several years on the back of the poor outlook for oil companies capex. Drilling rigs are stabilising at around 3,000, following a sharp increase between 2003 and The growth rate of rigs is currently slowing on a yearly basis, although it should be noted that the jump over a two-year time span is in the region of 10% (+30% in three years). could further strengthen over the next two to three years, once the aggressive investment plan is carried out. Leveraging on a quite limited multiple (Debt/EBITDA of 1.7x) and on a line-up of disposals (EUR bn cash inflow expected this year), the company could invest a cumulative 24-25% of its enterprise value over the next three years. This is the most important investment plan in the industry for offshore construction (although half of it is concentrated in the drilling business): Technip and Acergy are planning investments of 11-13% of their EV, or half of what is planning. 12

13 Capex plan and weight in enterprise value (%) 2007E 2008E 2009E % of EV 9.2% 7.7% 7.1% Technip % of EV 3.6% 4.5% 4.5% Acergy % of EV 4.4% 3.4% 2.8% Supported by higher returns We like 's strategy, as: 1) the investment plan is very significant compared to the company's capital employed; and 2) the return on capital is rising rapidly, thus ensuring significant value creation. Based on quarterly results, 's return on capital employed for the current year moved from the 12-14% range in 2005 to the current 22-23% level (measured on yearly EBIT over Q2-07 capital employed). The pace of new investments is already visible now: is currently investing at a pace of nearly 30% of its capital employed on a yearly basis. We expect that when capex reaches its peak, this ratio might hit 40%. Capex over capital employed Return on capital (EBIT/CE) 35% 25% 30% 25% 20% 20% 15% 15% 10% 5% 10% 5% 0% Q3-05 Q1-06 Q3-06 Q1-07 0% Q3-05 Q1-06 Q3-06 Q

14 IV SIMULATING AN ACQUISITION OF TECHNIP A rumour that pops up from time to time One of the possible threats for 's investment case is the acquisition risk. The company is mentioned from time to time as being close to a takeover its main peer Technip. While has carried out some acquisitions in the past (Bouygues Offshore, Snamprogetti) we do not believe that a takeover of Technip would be a massively value creating deal and therefore we feel that the deal is highly unlikely. Our conclusion is based on: Several drawbacks The absence of significant technological fit between the two companies, apart from some minor areas (flexible pipe production and SPAR platforms). The combination of and Technip would generate a dominant position in West Africa with the risk of losing some market share. In addition, the merger might imply the loss of some key employees in the companies; The significant commitment of such a deal (EUR7-8bn vs. EUR13bn market value of ), which would require at least a partial recourse to new shares; Compared to the size of the deal, a relatively minor benefit in terms of valuation (we estimate EUR2-3 per share) coupled with 10-15% EPS accretion, assuming synergies of EUR150m/year and a 10% premium to be paid to Technip shareholders. A potential problem deriving from the controlling chain of : 1) is indirectly controlled by the Italian government, with potential issues between Italian and French governments; and 2) ENI might be diluted in the acquisition. With a couple of positive points On the other hand, the integration of the two companies in the offshore construction market would result in a dominant position in several markets with enhanced pricing power, and, with respect to the increasingly challenging projects to be carried out, a combined entity would benefit from increased cash generation and scale. Based on our simulation, a combination between Technip and might provide room for EPS accretion (10-12%in our base case scenario), but would not generate more than 5-10% value accretion for. In this light, we believe that the investment in new vessels and organic growth is still providing a superior return. Running through the number of a possible combinations Operating profit: 50% increase In terms of operating figures, would increase its profits by 50% reaching roughly EUR2bn of EBITDA and EUR bn of EBIT on a pro-forma basis in Margins would be diluted by the lower profitability of Technip, which is partly due to the different business mix, given the stronger contribution of drilling business in 's P&L (with a margin in excess of 30%). Operating figures of -Technip combination (no synergies) (EUR m, %) 2008E 2009E Technip Combined Technip Combined Revenues EBITDA EBITDA margin (%) 13.2% 8.6% 11.2% 14.5% 8.8% 12.0% EBIT EBIT margin (%) 9.8% 6.7% 8.4% 11.0% 7.0% 9.2% 14

15 What is the room for synergies? Despite the different business mix, we would not rule out the chance of achieving some synergies. 's margins by business area are much higher than those of Technip: in onshore, is expected to deliver an EBIT margin of 5.8% next year vs. 3.2% for Technip, while in offshore margin is close to 15% vs. 12% of Technip. However, stripping out the drilling business from, the profitability of 11% is very similar to that of Technip, meaning that the improvement in the offshore segment might be more difficult to achieve. All in all, we would expect synergies to reach at least EUR m based on the following: EUR m in synergies in a bottom-up approach Assuming that the profitability in offshore is upgraded from 3% to 5% (vs. nearly 6% of standalone), we would derive room for EUR90m in synergies. In the offshore business, Technip generates a 14% margin in Surf business and just 5% in facilities. Assuming that the facilities business margin is upgraded from 5% to 7%, we would derive another EUR20m in synergies. Margins (2008E) (%) Technip EBIT margin 9.8% 6.7% Offshore 14.8% 11.9% Onshore 6.3% 3.2% Past acquisitions We tried in a second approach to address the synergies issue by looking at the acquisitions carried out by over the past years (Bouygues Offshore and Snamprogetti) and trying to assess the weight of synergies vs. the price paid (which however could be misleading given the very high price reached by the assets) and the key operating figures of the companies. We feel that this approach could be quite meaningful, as the Snamprogetti deal was focused on onshore and Bouygues was specialised in offshore. On average, announced synergies (on a yearly basis and after two to three years) equal to roughly 4% of the price paid and to 2% of the sales acquired (50-55% of the EBIT). acquisitions (EUR m) Target Price EBIT Synergies 2006 Snamprogetti Bouygues offshore EUR m in potential synergy, when looking at past deals Applying these synergy levels to a potential takeover of Technip we derive a EUR m synergy range. In more detail, the upper range of EUR300m is obtained when applying the synergies to the price (which might be too aggressive), while the lower range (which we feel is more consistent) is achieved when assuming the sales of the acquired companies. In any case, synergies are above our rough and cautious forecast of EUR110m. Potential synergies (EUR m, %) (%) Technip Potential synergies Synergies on EBIT 51.7% Synergies on Sales 2.2% Synergies on Price 3.9% Average

16 Technip's size imposes some constraints Financial sustainability is a key issue The size of the acquisition would be very significant, with a EUR7bn market value for Technip vs. EUR13bn for. Even considering the EUR1.5bn net cash of the French company, we find an all-cash deal for virtulally unsustainable. The net debt would jump to EUR8bn, corresponding to a Debt/EBITDA of 3.5-4x (3-3.5x for 2009). This is particularly high for an operator like which is engaged in works that are gradually becoming more complex and which require significant financial strength. On the other hand, an all share deal would imply significant dilution both in terms of earnings and on ENI's stake which would fall largely below 30% (vs. current 43%). ENI stake after a potential -Technip tie-up (15% premium) Structure of the deal % Stake All cash 43% 50/50 cash/shares 33% All shares 27% A 50/50 cash/shares deal looks like the most sustainable option Having analysed the two extremes (all cash and all shares), we feel that a combined solution would be the most suitable for such a deal: 1) it would keep the Debt/EBITDA multiple within a decent level of 1.5-2x; 2) it would avoid the dilution of ENI interest in below the 30% threshold of the public tender offer; and 3) it would still provide decent upside for 's shareholders. As a result, we run our following simulations based on this scenario, which would imply the issue of 130m new shares assuming a 10% premium (143m with 20%) and the payment of EUR3.8bn (EUR4.1bn with 20%) in cash. Net profit and net debt assumptions (EUR150m in synergies, 10% premium) (EUR m, EUR) All cash All shares 50/50 All cash All shares 50/50 EBIT Financial charges (571) (114) (343) (575) (118) (347) Pre-Tax Tax (262) (408) (335) (331) (477) (404) Net profit EPS EPS standalone Accretion/(Dilution) 4% -6% -2% 28% 3% 13% Net debt Debt/EBITDA (x)

17 EUR1-2 potential benefit for the share price Double-digit EPS growth potential We run our simulation of the EPS (2009E) and valuation impact of a deal with Technip using three sets of assumptions regarding: 1) the premium for Technip shareholders (from no premium to a 20% premium on the market capitalisation) and synergies, assuming a worst-case scenario of EUR50m/year and a best-case scenario of EUR250m per year. Our analysis is just a theoretical calculation and clearly does not factor in any commercial impact in terms of new contracts or, on the other hand, a negative reaction of clients faced with the concentration on the supply side. Our conclusions are the following: 1) the deal would hardly be very dilutive in 2009, even assuming a 30% premium for Technip shareholders and a very low level of synergies; and 2) if the premium for Technip shareholders does not exceed 15%, it is rather easy to get to double-digit EPS growth potential in EPS accretion/(dilution) Synergies -->(EUR m) Worst case Base case Best case Premium on Technip 0% 8% 17% 27% 15% 3% 12% 21% 30% -2% 7% 15% EUR1-2 potential benefit per share Moving to valuation aspects, we have carried out a very simple exercise: we have valued the synergies at an EV/EBIT of 12x and we have deducted the premium paid to Technip shareholders, then sharing the balance over the new number of shares. This exercise gives a more mixed outcome than the EPS simulation (which does not consider the possible de-rating of the multiple based on the higher leverage): if synergies are not significant, the deal would be most likely negative for shareholders, unless no premium is given to Technip. In a base-case scenario of EUR150m synergies and 15% premium, we derive an immediate benefit for shareholders of EUR1.5 per share (5% of the current stock price), which could rise to EUR3.6 per share (12% benefit) if synergies and premium are upgraded. Benefit to fair value (EUR) Synergies -->(EUR m) Worst case Base case Best case Premium on Technip 0% % (0.7) % (2.4) (0.3)

18 CHEUVREUX IFRS FY to 31/12 (Euro m) E 2008E 2009E Profit & Loss Account Sales % Change 63.5% 34.0% 1.5% 0.0% 5.2% 66.0% 23.6% 10.7% 8.9% Staff costs (621.0) (713.0) (740.0) (739.0) (819.0) (913.0) (938.0) (963.0) (978.0) Other costs ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) EBITDA % Change 24.6% 0.7% -5.5% 7.0% 47.0% 29.9% 26.0% 19.3% Depreciation (234.0) (216.0) (198.0) (199.0) (199.0) (230.0) (280.0) (345.0) (385.0) EBITA % Change 26.2% 6.8% -3.8% 10.6% 64.1% 33.3% 27.0% 22.0% Goodwill amortisation before OP (21.0) (42.0) (42.0) Goodwill amortisation [impairment test] Non recurring operational items EBIT Net financial items (43.0) (37.0) (23.0) (23.0) (30.0) (55.0) (70.0) (66.0) (70.0) Non recurring financial items Other exceptional items (3.0) (3.0) Tax (62.0) (67.0) (67.0) (67.0) (76.0) (157.0) (196.3) (255.4) (314.2) Associates [contribution] Discontinuing activities Goodwill amortisation Net profit [loss] before minorities Dividend to preferred shares Minorities (3.0) 0.0 (3.0) (3.0) (4.0) (3.0) (3.0) (3.0) (3.0) Net attributable profit [loss] Restatement [impairment test] Adj. for exceptional items Net attrib. profit [loss], restated % Change 25.8% 12.1% -0.5% 9.0% 50.6% 37.5% 30.3% 23.1% Cash Flow Statement Cash flow % Change 25.1% 1.1% -3.7% 3.9% 35.2% 31.6% 27.8% 19.3% Change in WCR Capex ( ) (272.0) (200.0) (200.0) (355.0) (605.0) ( ) ( ) ( ) o/w Growth capex (409.0) ( ) (850.0) (750.0) Net cash flow (678.0) (465.2) (70.4) Financial investments (382.0) Net buyback of treasury shares (35.0) (36.0) Disposals Dividend paid (55.9) (63.4) (65.0) (82.0) (128.0) (174.2) (226.9) Capital increase Other cash flow (150.0) Dec. [inc.] in net debt (600.0) (140.0) (407.0) 6.9 (244.6) (15.4) Balance Sheet Shareholders' equity [group share] Minority interests Pension provisions Other provisions Net debt [cash] Gearing [%] Capital invested Goodwill Intangible assets Tangible assets Financial assets Associates Working capital requirement 80.0 (92.0) (104.0) (179.0) (229.0) (229.0) (229.0) WCR as a % of sales 2.5 (2.2) (2.3) (2.4) (2.5) (2.2) (2.0) Capital employed

19 CHEUVREUX IFRS FY to 31/12 (Euro) E 2008E 2009E Per Share Data (at 12/10/2007) EPS before goodwill % Change 25.8% 12.1% -0.7% 9.1% 50.5% 37.5% 30.3% 23.1% EPS, reported % Change 13.6% 2.5% 0.4% 8.4% 50.5% 37.5% 30.3% 23.1% Goodwill per share (0.00) Dividend per share Cash flow per share % Change 25.2% 1.1% -4.0% 3.9% 35.2% 31.6% 27.8% 19.3% Book value per share No. of shares, adjusted Av. number of shares, adjusted Treasury stock, adjusted Share Price [Adjusted] Latest price High Low Average price Market capitalisation Enterprise value Valuation P/E P/E before goodwill P/CF Attrib. FCF yield [%] NS NS NS 1.6 P/BV Enterprise value / Op CE Yield [%] EV/EBITDA, restated EV/EBITA, restated EV/Sales EV/Debt-adjusted cash flow Financial Ratios Interest cover NS NS NS NS Net debt/cash flow EBITDA margin [%] EBITA margin [%] Net margin [%] Capital turn [Sales/ Op. CE] Gearing [%] Payout ratio [%] Return [%] Pre-tax RoCE RoCE after tax ROE [%] Return on equity, restated

20 Important Disclosures Applicable disclosure clauses Company Closing Price Rating Disclosures EUR /Selected List E A - One or more companies in the Crédit Agricole S.A. group owned more than 1% of the total issued share capital of the Company as of the end of the second most recent month preceding the publication date of this report. B - One or more companies in the Crédit Agricole S.A. group owned more than 5% of the total issued share capital of the Company as of the end of the second most recent month preceding the publication date of this report. C - The Company owned more than 5% of the total issued share capital of Crédit Agricole SA as of the end of the second most recent month preceding the publication date of this report. D - One or more companies in the Crédit Agricole S.A. group held, as of the end of the second most recent trading day, a net sales position higher than 1% of the total issued share capital of the Company. E - The trading portfolio of one or more companies in the Crédit Agricole S.A. group contained shares of the Company as of the end of the second most recent trading day. F - Crédit Agricole Cheuvreux and/or a company in the Crédit Agricole S.A. group is a market maker or a liquidity provider for the financial instruments of the Company. G - Calyon and/or a company in the Crédit Agricole S.A. group has been involved within the last three years in a publicly disclosed offer of or on financial instruments of the Company. H - Calyon and/or a company in the Crédit Agricole S.A. group has concluded or is party to a non confidential agreement relating to the provision of investment banking services (except publicly disclosed offers mentioned under G) to the Company during the past 12 months or that has given rise during the same period to the payment of compensation or to the promise to get a compensation paid. I - This research has been communicated to the Company and following this communication, its conclusions have been amended before its dissemination. J - A director or a board member of the Crédit Agricole S.A. group is an officer, director, or board member of the Company. None. Specific disclosure clauses Cheuvreux's rating and target price system Ratings are built for a 6 to 12 month time horizon. 1/ Selected List Expected to outperform the market and is in our country selected list 2/ Outperform Expected to outperform the market 3/ Underperform Expected to perform at best in line with the market 4/ Sell No Rating or Suspended Target price methodology Quote definitions Expected to underperform the market substantially The investment rating and target price have been suspended. Such suspension is pursuant to Cheuvreux's policy in circumstances when Cheuvreux's parent company, Calyon, is acting in an advisory capacity in a merger or strategic transaction involving this company or when Calyon or Crédit Agricole has a beneficial interest in this company and in certain other circumstances. Cheuvreux's target prices are derived from one or more of the following methodologies : DCF, SOP, peer comparison and EVA. Unless specified, all quotes that appear on Institutional research reports are closing prices the last business day. 20