NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the foreign currency Issuer Default Rating (IDR) of Tenaris S.A. (Tenaris) at 'A-'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Tenaris' rating is driven by its conservative financial profile, geographically diversified revenues and strong business position. The company's production facilities, revenues and EBITDA are geographically well diversified, reducing its exposure to any one single market. For the first nine months of 2013, the company's largest markets for its welded and seamless tubes were North America (including Mexico) which accounted for 42% of tubes revenues, followed by South America (24%), the Middle East / Africa (20%), Europe (9%) and the Far East and Oceania (5%).
STRONG HISTORICALLY CONSERVATIVE TRACK RECORD: The company has a strong track record for maintaining a conservative capital structure. Between 2006 and the latest 12 months (LTM) ended Sept. 30, 2013, Tenaris' total debt to EBITDA ratio averaged 0.7x, while its net debt to EBITDA ratio averaged just 0.2x. Tenaris plans its liquidity and capital resources to provide adequate flexibility to manage its planned capital spending programs, to service its debt and to address short-term changes in business conditions.
LOW LEVERAGE LEVELS: For the LTM ending Sept. 30, 2013, the company had a total debt to EBITDA ratio of 0.5x and net debt to EBITDA ratio of negative 0.3x. Fitch expects low leverage levels to continue going forward with the company's total debt to EBITDA ratio remaining under 1.0x through 2017. Funds from operations (FFO) adjusted leverage has been below 1.0x since 2010 and currently stands at 0.5x. Tenaris held cash and cash equivalents of almost USD2 billion as of Sept. 30, 2013, an increase on USD1.5 billion as of year-end 2012 (YE12) and 2x its short-term financial obligations.
SOLID FINANCIAL PERFORMANCE IN FACE OF CHALLENGES: Tenaris was able to successfully adapt its capital structure when Oil Country Tubular Goods (OCTG) demand fell in 2009 and 2010 to maintain its low leverage ratios and strong credit profile. After a strong performance in 2012, 2013 can be best described as a year of transition for the company. This year has seen slower premium OCTG demand, fierce competition in the low-end market segment, and project delays at major customers. Despite these challenges, the company's financial performance has remained solid. For the LTM ended Sept. 30, 2013, the company's EBITDA was USD2.8 billion which is slightly below USD2.9 billion in 2012 yet above USD2.5 billion in 2011. Fitch's Base Case projects a moderate recovery in 2014, forecasting EBITDA in the region of USD3 billion with a 26% EBITDA margin.
FCF GENERATION SHOULD REMAIN POSITIVE DESPITE MAJOR U.S. PROJECT: Fitch expects the company to report positive free cash flow (FCF) in the region of USD1.4 billion in 2013 just two years removed from negative FCF results in 2010-2011. For the LTM September 2013, the company's actual FCF was robust at USD1 billion. Despite an ambitious USD1.7 billion capex program scheduled for 2014-2016 to expand U.S. operations, FCF generation is forecast to remain above US$1 billion for this period. The capex program will lead to the installation of a strategically located state-of-the-art seamless pipe mill, heat treatment and premium threading facilities with annual production capacity of 650,000 tonnes of seamless pipes.
INDUSTRY GROWTH SLOWS DOWN IN 2013: After demonstrating steady increases in 2009-2012, worldwide rig counts in 2013 will at best end the year flat versus the prior year. During 2009-2012, according to Baker Hughes, rig counts had grown from 2,300 in 2009 to 3,500 in 2012 (15% compound growth), which had benefited Tenaris' volume growth. As of November 2013, the worldwide rig count stands at 3,452 which is essentially flat YoY. Positively, with Brent prices at USD$100/bboe, oil production should continue to be strong in 2013 as the price level should remain high enough to incentivize producers to invest in projects and yet is not so high that oil demand declines.
FAVORABLE PEER COMPARISON: Tenaris compares favorably to its similarly rated peers on metrics such as leverage, profitability, and liquidity. The company possesses among the highest EBITDA margins and the lowest leverage levels versus its peers.
Tenaris' ratings could be negatively affected if its capital structure deteriorates and its conservative financial policies change following a prolonged downturn in the oil and gas industry. A change in its capital structure with net debt to EBITDA exceeding 1.5x or deviation from its conservative financial strategy could lead to a rating downgrade. The company also retains substantial production capacity in Argentina with approximately 25% of production originating from that country. These specific operations could be subject to negative government interference.
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 programs. Volatile raw material costs remain an issue, and Tenaris faces competitive challenges within the global OCTG industry.
A positive ratings action could follow from a substantial increase in the company's market share, size and global positioning in the premium OTCG market segment. In addition, an increasing diversification of the company's revenue/production base which would dilute the Argentine mix would be seen positively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage