EUR 850.00 For Business Accounts Only

Morningstar | TS Updated Forecasts and Estimates from 19 Jul 2019

With a disciplined pursuit over two decades, Tenaris has established itself as the premier provider of oil country tubular goods, or OCTGs, the steel tubing used to construct oil and gas wells. The company has ably positioned itself to become the overall market share leader. Low-cost yet high-quality production facilities, such as in Tenaris’ Mexico operations, enable the company to profitably supply OCTG in most world markets, including the crucial United States market. Furthermore, Tenaris has carved out a leading position (matched only by rival Vallourec) in the high-end portion of the OCTG market. Investors should take care not to forget, however, that global OCTG markets remain in a state of oversupply. Industry utilization was already tepid in 2014, before the oil and gas downturn. Although we expect global demand to recover to near 2014 peak levels, belated capacity additions (of perhaps over 15% of global supply), which were completed after the downturn began, mean global OCTG utilization--and hence overall pricing--is unlikely to return to prior levels.Two key developments have led some investors to think Tenaris might be immune to the industry woes. First, increases in U.S. tariffs on OCTG imports will certainly mean higher profitability for U.S. OCTG producers. We caution, however, that volumes diverted away from the U.S. will only exacerbate non-U.S. oversupply, hurting the half of Tenaris’ sales that come from outside the U.S. Second, the company’s focus on high-end OCTG has indeed allowed Tenaris to maintain a margin advantage over lower-quality peers. We emphasize, however, our no-moat rating, which means we expect this advantage to progressively erode, as new entrants crowd the once-concentrated high-end OCTG market. We expect Tenaris to earn only a sliver of economic profits at midcycle (2023), solidly below prior-cycle (2012-14) levels.