Tenaris S.A. 2020 Third Quarter Results Summary
Business Context and Reporting Period
Tenaris S.A., a global manufacturer of tubular products for the oil and gas industry, reported unaudited consolidated results for the quarter and nine months ended September 30, 2020. The filing, submitted on November 4, 2020, details the impact of the COVID-19 pandemic, which caused a significant decline in global drilling activity and oil demand, leading to reduced sales volumes and pricing pressure.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net Sales ($ million) | 1,013 | 1,764 | 4,016 | 5,554 |
| Operating Income ($ million) | (70) | 187 | (670) | 681 |
| Net Income ($ million) | (36) | 101 | (752) | 583 |
| EBITDA ($ million) | 107 | 322 | 446 | 1,082 |
| Free Cash Flow ($ million) | 376 | 287 | 1,226 | 994 |
| Net Cash Position ($ million) | 1,100 | 964 | 1,100 | 964 |
Notes: EBITDA includes severance charges of $28 million in Q3 2020 and $105 million for the nine-month period. Excluding these charges, Q3 2020 EBITDA would have been $135 million. The company maintained a net cash position of $1.1 billion ($1.8 billion liquid assets less $0.7 billion debt) as of September 30, 2020.
Material Changes vs. Prior Period
- Sales Decline: Net sales fell 43% year-over-year in Q3 2020 and 28% for the nine-month period. This was driven by a 39% drop in tubular sales volumes in Q3 and a 24% drop for the nine months, alongside a 9% decrease in average selling prices in Q3.
- Profitability Shift: The company swung from an operating profit of $187 million in Q3 2019 to a loss of $70 million in Q3 2020. For the nine months, the operating loss was $670 million compared to a profit of $681 million in the prior year.
- Impairment Charges: The nine-month 2020 results included a significant impairment charge of $622 million, primarily reflecting the difficult business conditions and the decision to close the Prudential facility in Canada.
- Cost Reduction: Despite lower sales, SG&A expenses decreased sequentially. Excluding one-off severance charges and depreciation adjustments, industrial performance improved sequentially.
Guidance, Outlook, and Risks
Outlook: Management anticipates a gradual recovery in sales and margins (excluding severance charges) through Q4 2020 and into 2021. They expect to maintain positive free cash flow. Drilling activity is showing signs of picking up in North America and slowly returning in Latin America, though recovery in the rest of the world may take longer.
Dividend: The Board approved an interim dividend of $0.07 per share ($0.14 per ADS), totaling approximately $83 million, payable on November 25, 2020.
Risks and Contingencies:
- Pandemic Impact: Rising COVID-19 cases globally are slowing economic recovery and delaying the rebalancing of oil inventories.
- Oil Prices: Future investment programs by oil and gas companies remain uncertain due to volatile oil and gas prices.
- FX Exposure: The company recorded a $13 million FX charge in Q3 2020 due to Euro appreciation and a $38 million FX loss for the nine months due to Brazilian Real depreciation.
Investor Verification Checklist
- Verify the sustainability of the $1.1 billion net cash position given the ongoing decline in drilling activity.
- Confirm the timeline for the full closure of the Prudential facility and the associated accelerated depreciation impacts.
- Monitor the recovery of drilling rig counts in North America and Latin America as primary drivers for future volume growth.
- Assess the impact of the $622 million impairment charge on future asset valuations and depreciation schedules.
- Review the specific mix of products sold in Q4 to determine if average selling prices can stabilize or improve.