EUR 850.00 For Business Accounts Only

Morningstar | Increasing Tenaris' FVE Slightly on Revised U.S. Trade Outlook; Still Looking Very Overvalued

We’re increasing our fair value estimate for Tenaris to $27 (EUR 11.50) per share from $26 (EUR 10.50) owing chiefly to an updated outlook on U.S. trade policy. Our no-moat rating remains in place. Despite the revision, we reiterate our view that Tenaris looks very overvalued, with shares currently trading about 40% above our fair value estimate. We think investors are still overrating the long-term benefit Tenaris will derive from U.S. steel products trade restrictions as well as the ongoing global recovery in oil country tubular goods, or OCTG, markets.

Since the initial announcement in March of 25% tariffs on U.S. steel product imports, we have been surprised by the stringency of the implementation of the tariffs. Initially, we had expected that NAFTA members Mexico and Canada as well as European Union countries would be granted nearly full exemptions, while other key U.S. allies would only see moderate impact. Instead, the U.S. has now essentially removed all exemptions to the tariffs, with the exception of a handful of countries which have negotiated new import quotas. These negotiated quotas have been generally highly punitive--South Korea, for example, accounting for about one third of 2017 U.S. OCTG imports, will be restricted to annual shipments of just 70% of average 2015-17 import volumes. Given that OCTG shipments were depressed in much of 2015 and 2016 by the oil and gas downturn, the quota actually represents about a 50% cut from average 2017-18 levels.

We think that subsequent deals are likely to resemble the highly restrictive South Korea quota, and as such we’ve lowered our expectations for U.S. OCTG imports, and slightly increased our expectations for U.S. OCTG pricing, particularly in the near term (before U.S. producers are able to respond by adding capacity). The positive impact of this on Tenaris will be limited, however. About one fourth of Tenaris’ 2017 OCTG sales volumes were actually U.S. imports from Mexico and Argentina. These import sales have been quite lucrative for Tenaris over the past decade, but we think trade restrictions are likely to cut deeply into Tenaris’ U.S. imports--we think by as much as 25% versus current levels. This downside seems to be missed by the market, as the company’s share price has soared over the last year on expectations of heightened U.S. trade restrictions.