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Morningstar | Tenaris Has Strong Results Again in 4Q Owing to Higher Tube Volume

Continuing the trend of the past several quarters, Tenaris had a strong fourth quarter, with revenue increasing 11% sequentially and adjusted operating margin improving to 13.7% from 13.6% previously (after accounting for a one-time amortization charge). Our fair value estimate and no-moat rating are unchanged. We think that Tenaris is already near its long-term profitability plateau. After a steep share price decline since mid-2018, the market now agrees with our view, and the shares appear fairly valued.

In the tube segment (about 95% of company revenue), revenue increased 10% sequentially owing to 11% higher volume. Volume increased as a result of stronger North American activity as well as high-specification line pipe sales for the Zohr project in the eastern Mediterranean. Adjusted operating margin per ton increased slightly to $278 per ton from $273, as pricing was essentially flat.

In the past two months, Tenaris has completed the acquisition of a 48% stake in Saudi Steel Pipe and announced a joint venture to build a new welded pipe plant in Russia. Combined, the two transactions will increase Tenaris' global tube capacity by about 5% (net of ownership share). Neither transaction will have a significant effect on our valuation. Both are focused on markets with a strong outlook for oil country tubular goods demand, but we are wary of capacity expansion in an international market that  we expect to remain oversupplied in the long run. The SSP acquisition occurred at about a 20% premium to the company's predeal share price, although there is room for adding value to the predeal company, given that it operated in 2018 at only about a 50% utilization level.