March 14, 2017 / 5:20 PM / a year ago

Fitch Affirms Tenaris' IDR at 'A-'; Outlook Revised to Positive

(The following statement was released by the rating agency) NEW YORK, March 14 (Fitch) Fitch Ratings has affirmed Tenaris S.A.'s Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A-'. The Rating Outlook is revised to Positive from Stable. The Outlook revision reflects Tenaris' ability to maintain consistently strong credit metrics during the oil and gas (O&G) downturn. The company has been able to keep robust liquidity with over $2 billion of cash, negative net leverage and conservative gross leverage. As revenues and EBITDA fell by 58% and 76% respectively, Tenaris has shown resilience by posting reasonable EBITDA margins and positive cash flow from operations and free cash flows. As the O&G industry begins to rebound, Fitch expects revenue, EBITDA and margins to recover through the forecasted period. KEY RATING DRIVERS Tenaris' rating is driven by its conservative financial profile, geographically diversified revenues and strong business position, which have allowed the company to withstand the downturn in the global oil & gas industry. The company's production facilities, revenues and EBITDA are geographically well diversified, reducing its exposure to any one single market. GEOGRAPHICALLY DIVERSIFIED BUSINESS PROFILE: Tenaris' ratings reflect the company's large geographic diversification, which somewhat mitigates business risk. During 2016, the company's largest markets were North America (including Mexico), which accounted for 31% of revenues, followed by South America with 28% of revenues, the Middle East & Africa with 25%, Europe with 13% of revenues and Asia Pacific with 3%. In 2016, sales experienced a shift away from NA, where sales in 2015 represented 39%, due to the lowest level of rig counts in the U.S. since 1975. NA revenues are projected to increase their share in the short- to medium-term as demand from shale drilling in the U.S. and Canada increases. FINANCIAL PERFORMANCE RESILIENCY: Tenaris was able to successfully adapt its cost and capital structure through the O&G downturn to maintain its low leverage ratios and strong credit profile. Since the downturn in oil & gas prices began in the second half of 2014, net sales of tubular products have declined 58% from 2014, while tubes volumes declined 46% during the same time period. The steeper decline in tubular net sales compared to volumes was due to an implied decrease in gross price per ton of 23% since 2014. Although the company's financial performance suffered from the downturn in the industry, Tenaris was able to maintain some of the highest profitability metrics in the industry and post positive cash flow from operations. Revenue decline was led by lower sales in every geographic segment, with NA experiencing the largest sales drop since 2014 of 72%. The company's EBITDA for 2016 was $603 million, which is down 78% versus 2014 EBITDA of $2.7 billion. Fitch is projecting that the company will rebound during 2017 and generate revenue and EBITDA of approximately $5.2 billion and $880 million in 2017, respectively. STRONG CAPITAL STRUCTURE AND LIQUIDITY: Tenaris' capital structure has remained very strong during the downcycle, which supports the company's ratings. For year-end 2016, the company had total debt to EBITDA of 1.4x and net debt to EBITDA of (2.0x). Last year (2016) saw an unusually high gross leverage due to the significant decline in EBITDA to $608 million from previous years even though total debt saw a decline in 2016 to $841 million from $971 million a year earlier. Fitch expects low leverage levels to continue going forward with the company's total debt to EBITDA remaining slightly above 1x in 2017 as the O&G industry begins to recover and below 1x thereafter through 2020. FFO adjusted leverage currently stands at 1.7x and is expected to decrease through the projected period as financial results improve. Tenaris continues to report a robust liquidity position supported by cash and cash equivalents of $2 billion as of Dec. 31, 2016, which is 2.5x its short-term financial obligations. With its leaner cost structure following its corporate restructuring efforts seen in 2015, Fitch believes the company can maintain a large cash cushion of approximately $2 billion in the forecast period through 2020, meaning that the company should maintain a negative net debt figure. EXPECTED FINANCIAL AND MARGIN RECOVERY: Fitch anticipates a gradual recovery in EBITDA generation beginning in 2017 as hydrocarbon prices recover towards $50/bbl. Fitch's Base Case assumes the company will begin increasing revenue and EBITDA margins. Revenues will begin increasing in 2017 as global oil country tubular goods (OCTG) rebound, led by the NA shale drilling. Tenaris should be able to position itself to capture incremental market share during this recovery as its Bay City facility comes on-line in 2017. EBITDA margins are projected to increase to 17%-18% in 2017, approximately 20% in 2018 and 20%+ thereafter if it can renegotiate contract backlogs at higher prices due to increasing demand and raw material costs. 2017 EXPECTED COMPLETION OF BAY CITY: The new Bay City facility, a $1.7 billion investment, is expected to be completed by 2H17 with first seamless pipe deliveries in September 2017. By December 2017, Bay City is expected to be producing around 10,000 tons per month, well below the 600,000 ton annual capacity, and ramping up to full capacity will take time. This incremental unused capacity will allow for further margin expansion down the line and will limit the amount of capital expenditure needed during the projected period. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Tenaris include: --Fitch's Base Case oil & gas price projections are for West Texas Intermediate (WTI) average prices of $50/bbl in 2017, $52.50/bbl in 2018, $57.50/bbl in 2019 and $62.50/bbl in the long-term time horizon starting in 2020; --Increase in price per ton correlated with WTI Fitch projected prices; --EBITDA margins of 17%-20% during 2017-2018, increasing to the low-20% level beginning in 2019 and thereafter; --Decrease in capex investment to $600 million, consistent with company guidance, and further decreases through the projected periods as investment in Bay City is completed in 2H17; --The company maintains cash cushions of at around $2 billion over forecasted time horizon; --Total adjusted leverage decreases below 1x in 2018 and maintains negative net debt during this same time period. RATING SENSITIVITIES A positive rating action for Tenaris is possible as demand for oil and gas services recover and the company continues to report consistently robust credit metrics. 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 on a sustained basis, or deviation from its conservative financial strategy could lead to a rating downgrade. LIQUIDITY The company has a strong cash position. Tenaris held respective cash and cash equivalents of $2 billion and $840 million of debt as of December 2016. Short-term debt of $808 million is expected to be successfully refinanced with bank debt, although cash and marketable securities exceed short-term debt. Tenaris follows a conservative financial/balance sheet strategy. For the last four years, the company has averaged negative net debt. As evidenced by these metrics, 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. The company has this conservative approach regarding the management of its liquidity, which consists mainly of cash and cash equivalents, comprising cash in banks, short-term money market funds and highly liquid short-term securities with a maturity of less than 90 days at the date of purchase. Tenaris currently does not have any outstanding bonds, with most of its debt-funding consisting of syndicated bank loans at its operating subsidiaries. There are no barriers apparent that prevent Tenaris from accessing the capital markets should it choose to do so given the company's historical track record, international diversification and conservative capital structure. The company has plenty of leverage capacity and its partner banks offer substantial amounts of financing at short notice. Ten different banks supply all of the company's syndicated loan facilities. Some of the most significant borrowings as of year-end 2016, which account for 94% of total debt, include: --US$391 million bank loans with Tamsa due 2017; --US$200 million bank loan with TuboCaribe due Jan-2017; --US$198 million bank loans with Siderca due 2017. FULL LIST OF RATING ACTIONS Fitch has affirmed and revised the Outlook for the following rating: --Long-Term Foreign Currency IDR affirmed at 'A-', Outlook revised to Positive from Stable. Contact: Primary Analyst Fabio Rabinovich Analyst +1-212-908-0556 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Cinthya Ortega Director +1-312-606-2373 Committee Chairperson Lucas Aristizabal Senior Director +1-312-368-3260 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Date of Relevant Rating Committee: March 10, 2017. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020546 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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