Fitch Affirms Tenaris' IDR at 'A-'; Outlook Stable
CHICAGO -- December 19, 2012
Fitch Ratings has affirmed Tenaris S.A.'s (Tenaris) Issuer Default Rating
(IDR) as follows:
--Foreign currency IDR at 'A-'.
The Rating Outlook is Stable.
SUSTAINED HISTORY OF CONSERVATIVE CAPITAL STRUCTURE:
The affirmation of Tenaris' rating reflects the company's historical, current,
and expected conservative financial profile, geographically diversified
operations, and strong business position in the worldwide OCTG market. Between
2006 and 2011, the company's total debt-to- EBITDA ratio averaged just 0.8x,
while its net debt-to-EBITDA ratio averaged just 0.3x. For the
latest-12-months (LTM) to Sept. 30, 2012, Tenaris' total debt-to-EBITDA ratio
was 0.7x with a net debt-to-EBITDA ratio of 0.1x, consistent with its high
Tenaris' credit ratings are also supported by its liquidity. As of Sept. 30,
2012 the company held USD1.7 billion in cash and marketable securities
compared to USD1.3 billion of short term debt. Fitch expects the majority of
consolidated short-term debt portion of USD273 million due by Dec. 31, 2012 to
be refinanced with new bank debt, preserving cash close to its current level.
The company benefits from a manageable debt amortization profile with USD1.2
billion due in 2013, USD230 million due in 2014 and USD159 million due in
STRONG CASH FLOW GENERATION EXPECTED:
Tenaris has a good track record of generating strong free cash flow (FCF)
after capex and dividends. Fitch-calculated FCF for the company is expected to
be positive in 2012 as a result of strong operating cash flow during the
fourth quarter, consistent with strong fourth quarters in previous years. FCF
for 2011 was mildly negative at USD19 million after capex of USD863 million
and dividends of USD424 million. During the first nine months of 2012, Tenaris
generated USD1.5 billion of CFFO compared to USD826 million for the same
period of 2011. FCF generation for the first nine months of 2012 increased to
USD630 million after capital expenditures, investments and acquisitions of
USD1.8 billion, and total dividend payments of USD295.
Tenaris' EBITDA margins are expected to improve in 2012 compared to 2011 as a
result of lower raw material costs and efficiencies achieved following the
completion of the rolling steel mill in Veracruz, Mexico. EBITDA margins
improved to 27% for the first nine months of 2012 compared to 24% for the
first nine months of 2011. This improvement in EBITDA margin was due to an
improved product mix and better industrial efficiencies. EBITDA for the
nine-months to Sept. 30, 2012 of USD2.1 billion compared to USD1.7 billion to
the prior year's nine month period.
US EXPANSION PROGRAM:
Tenaris has a sizeable investment program of USD1.5 billion to build a
seamless pipe mill and related facilities using the latest technology with
heat treatment and premium threading facilities in the USA. The new mill will
have an annual production capacity of 650,000 tonnes of seamless pipes and is
expected to begin operations in 2016. These investments follow the company's
large investment program of USD2 billion spanning 2009 - 2011, mainly relating
to the Tamsa seamless tube production expansion in Veracruz, Mexico.
Fitch expects Tenaris to post annual capex, investments and acquisitions of
around USD2 billion in 2012 and around USD1.5 billion in 2013. The amount
expected for 2012 includes USD697 million relating to the acquisition of the
non-controlling interests in Brazilian subsidiary Confab Industrial S.A.
(Confab) during the second quarter of 2012 resulting in 95.9% ownership, and
the USD505 million paid for a 2.5% total share capital stake in Usinas
Siderurgicas de Minas Gerais S.A. (Usiminas: Long-Term IDR 'BB+' with a Stable
Outlook) at the beginning of 2012.
GLOBALLY DIVERSIFIED OPERATIONS:
Further supporting the credit ratings of Tenaris is its strong business
position as a leading supplier of tubular steel products and related services
for the global energy industry. The company's operations are geographically
well diversified and Tenaris is present in all major oil and gas markets,
reducing its exposure to any one single market. For the first nine months of
2012, the company's largest markets for its welded and seamless tubes were
North America (including Canada and Mexico) accounting for 50% of tubes
revenues, followed by South America (24%), Middle East and Africa (11%),
Europe (10%) and Far East and Oceania (5%).
Fitch's Base Case scenario indicates that Tenaris will generate year-end 2012
revenues of around USD10.5 billion and EBITDA of around USD2.6 billion. These
assumptions follow an increase in the global rig count as of November 2012 to
3,484 compared to 3,463 as published by Baker Hughes during 2011, and
illustrate the expected momentum in shale gas exploration in the USA during
2013 and 2014.
TRANSFER AND CONVERTIBILITY RISK MITIGATED BY DIVERSIFIED OPERATIONS:
Tenaris' revenues are derived from its globally diversified operations,
reducing the company's exposure to any one single market. However, some of its
operations have been subject to sovereign risks, as seen with Matesi in
Venezuela. Fitch also considers recent developments in Argentina relating to a
decree for the repatriation of export revenue for oil and mining exporters as
an indication for possible future sovereign risk for Siderca. Outside of these
two jurisdictions, Fitch considers country risk posed to Tenaris' credit
profile as moderate.
Mitigating transfer and convertibility risk, as of 2011 Tenaris has 74% of its
total production capacity and 76% of higher margin seamless tubes production
capacity located in sizeable operations in sovereigns with country ceilings
rated 'A-' and higher by Fitch, such as Canada, Italy, Japan, Mexico, and the
U.S. Further mitigating this risk, the company's room in its capacity
utilization rates allow for the transfer of production away from any one
single country, should such a need arise.
FAVORABLE INDUSTRY OUTLOOK:
Fitch expects the relatively favorable prices for oil to remain above average
levels in 2013 and 2014. As a result, the agency anticipates increased demand
for Tenaris' products during the next few years, due to oil prices remaining
high enough to incentivize producers to invest in new projects. Other
favorable developments for the OCTG sector include the ongoing reconstruction
of Iraq, increasing gas drilling activity in shales and liquid rich deposits,
offshore drilling reactivation, and new projects in the Middle East, Asia, and
the Far East following increased demand.
Tenaris' ratings could be upgraded following the successful execution of its
US capex program while maintaining strong cash flows and a credit profile
consistent with its last five year averages including a net debt to EBITDA
ratio below 1.0x. Successful completion of the US investment program will
further diversify the company's geographical footprint and provide seamless
production capability to benefit from the expected increase in shale gas
drilling in North America over the next decade.
The ratings could be downgraded should the company's capital structure
deteriorate to over 1.5x net debt to EBITDA, and its conservative financial
policies change following a prolonged decline in the oil and gas industry.
Tenaris' cash generation is indirectly affected by world oil prices, and
demand for its products could suffer from a prolonged downward trend in oil
prices as its main commercial counterparties reduce their capital expenditure
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
--'Evaluating Corporate Governance' (Dec. 13, 2011).
--'Cash Flow Measures in Corporate Analysis' (Aug. 9, 2012).
--'Rating Corporates Above the Country Ceiling' (Jan. 27, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Cash Flow Measures in Corporate Analysis
Rating Corporates Above the Rating Ceiling
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