OAO TMK, the world’s largest maker of oil and gas pipes by output, may spend as much as $3 billion this decade on projects in Russia, Romania and the U.S. as rising profit drives technology upgrades and growth.
“We’ve spent about $2.5 billion on modernization so far and about $2 billion more on acquiring new assets to expand the business,” billionaire owner Dmitry Pumpyansky said in an interview. TMK plans to invest about $300 million a year by 2020 to maintain those assets and develop new pipe products, he said.
The new spending proposal coincides with the completion of TMK’s $2.5 billion investment program, begun six years ago, and follows a fourfold jump in first-half profit. TMK and European competitors including France’s Vallourec SA (VK) are investing in more-advanced products as oil and gas companies explore in remoter and deeper fields to counter declining output elsewhere.
TMK must keep spending to remain the “industry leader,” boost earnings and increase its market value, while expanding into “advanced-quality” pipes, Pumpyansky said in Moscow on Sept. 22. The company, which has plants in Russia, Romania, Kazakhstan and North America, will spend 25 percent to 30 percent of annual investment in the U.S., he said.
The Moscow-based pipemaker bought 10 U.S. factories previously held by Ipsco Inc. in 2008 for $1.2 billion. TMK Ipsco is now the U.S.’s No. 3 pipe producer, and counts Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) among its clients, Pumpyansky said. TMK Ipsco got a $260 million credit line from Wells Fargo & Co. this year.
The move “opened the door to cheap American financing,” the billionaire said, adding that U.S. interest rates are 200 to 300 basis points lower than in Russia. TMK will “seriously expand” in North America and invest in producing “premium connection” pipes and tubes for offshore drilling, he said.
A shift into the offshore drilling market would pit TMK against Vallourec and Luxembourg-based Tenaris SA (TEN), according to Olga Danilenko, a Moscow-based analyst at VTB Capital.
“Only Tenaris and Vallourec are able to supply pipes for offshore oil and gas drilling so far,” Danilenko said by telephone on Sept. 23. “If TMK succeed in it, it will be a sort of revolution.”
Premium-connection seamless pipes command higher prices because they enable oil and gas producers to drill deep and at pressure, Danilenko said, adding that the U.S. market is particularly lucrative. Even ordinary seamless pipes sell for 25 percent more in the U.S. than in Russia, she said.
Pipe demand isn’t suffering from the global market turmoil, according to Pumpyansky, who said financial market instability “isn’t based on fundamentals” and demand in Russia has gained 30 percent this year. In the U.S., active oil rigs totaled a record 1,886 as of July 1, Baker Hughes Inc.’s Rig Count shows.
“We conservatively expect the U.S. market to increase by 5 to 10 percent next year,” Pumpyansky said. Pipe stockpiles in the country will last only five months, compared with as long as 10 months in 2008, before the economic crisis sapped production, he said.
Goldman Sachs Group Inc. said in April that gas consumption in the U.S. may surge by as much as 20 billion cubic feet a day in the next 20 years because of demand from the power generation and transport industries. The U.S. has become the world’s largest gas producer, largely as a result of a boom in shale gas development, whose extraction methods have sparked concern among groups including the Environmental Protection Agency.
“We don’t see any real intention of the U.S. government to ban shale gas drilling, which could have an effect on us,” Pumpyansky said, adding that high-quality pipes can remove the risk of environmental pollution from shale extraction, which uses water, sand and chemicals to fracture gas-trapping rocks.
TMK expects to raise the share of its U.S. and other foreign units in total sales. While Russia currently accounts for 60 percent of revenue, TMK is seeking to get about half from overseas assets in the “near future,” Pumpyansky said.
The company reported a fourfold increase in first-half net income on Sept. 2, beating analyst estimates, and confirmed previous guidance on growth in sales volumes.
Full-year earnings before interest, tax, depreciation and amortization will exceed levels in 2007 to 2008, Pumpyansky said, adding that TMK’s Ebitda margin is closing the gap on Vallourec. Ebitda reached $996 million in 2008, and analysts expect 2011 earnings of $1.2 billion, according to the average of 15 estimates compiled by Bloomberg.
TMK hopes to increase dividend payments and won’t need to sell shares to pay down debt, Pumpyansky said. Debt was $3.84 billion at the end of March, which implies a ratio of net debt to Ebitda of 3.3. TMK targets a ratio of 1.5 to 2, he said.
“The average interest rate we pay on our debt now is 7.33 percent, and we plan to improve our debt profile further.”
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