Tenaris S.A. 2016 Fourth Quarter and Annual Results Summary
Business Context and Reporting Period
Tenaris S.A., a global manufacturer of tubular products for the oil and gas industry, reported its audited consolidated financial results for the fourth quarter and full year ended December 31, 2016. The filing, submitted on February 24, 2017, covers a period marked by adverse market conditions, including lower drilling activity and selling prices, though the company noted a sequential recovery in sales volume in Q4 2016. The North American electric conduit business was reclassified as a discontinued operation following its sale to Nucor, which closed in January 2017.
Key Financial Metrics
| Metric | Q4 2016 | Q4 2015 | FY 2016 | FY 2015 |
|---|---|---|---|---|
| Net Sales ($ million) | 1,046 | 1,373 | 4,294 | 6,903 |
| Operating Income ($ million) | 6 | 16 | (59) | 166 |
| Net Income ($ million) | 24 | (45) | 59 | (74) |
| EBITDA ($ million) | 172 | 213 | 598 | 1,219 |
| EBITDA Margin | 16.5% | 15.5% | 13.9% | 17.7% |
| Free Cash Flow ($ million) | (237) | (105) | 77 | 1,083 |
| Net Cash Position ($ million) | 1,441 | 1,849 | 1,441 | 1,849 |
Notes: FY 2015 results included a $400 million impairment charge. Q4 2016 EBITDA includes $8 million in severance charges; FY 2016 includes $74 million. Net cash position is calculated as cash, current investments, and fixed income investments less borrowings.
Material Changes vs. Prior Period
- Revenue Decline: Full-year 2016 net sales fell 38% year-over-year to $4.29 billion, driven by a 24% drop in volumes and an 18% decrease in average selling prices. However, Q4 2016 sales rose 6% sequentially, ending two years of consecutive quarterly declines.
- Profitability Turnaround: Despite an operating loss of $59 million for the full year 2016 (compared to $166 million profit in 2015), the company reported a net income of $59 million in 2016 versus a $74 million loss in 2015. This improvement was largely due to the absence of the $400 million impairment charge recorded in 2015.
- Regional Performance: North American sales dropped 50% in 2016 but showed recovery in Q4 due to increased shale drilling activity. South American sales declined 44% annually due to reduced activity in Argentina and Colombia.
- Discontinued Operations: The conduit business generated $41 million in net income for 2016 and $8 million in Q4 2016 before its sale to Nucor.
Guidance, Outlook, and Risks
Outlook: Management expects sales to rise steadily in 2017, supported by a rapid recovery in shale drilling activity in the USA and Canada, and a strong backlog of orders in the Eastern Hemisphere. EBITDA is projected to rise steadily, with margins expected to improve in the second half of the year due to better absorption of fixed costs.
Dividend Proposal: The Board proposes an annual dividend of $0.41 per share ($0.82 per ADS), totaling approximately $484 million. This includes an interim dividend of $0.13 per share paid in November 2016. The remaining balance of $0.28 per share is proposed for payment in May 2017, subject to shareholder approval.
Risks and Contingencies:
- Market Volatility: Future results depend heavily on oil and gas prices and the investment programs of oil and gas companies.
- Price Pressure: While prices are rising in North America, average selling prices may be held back by fixed prices in the Eastern Hemisphere backlog.
- Offshore Spending: Global offshore exploration and production spending is expected to decline for a third consecutive year.
Investor Verification Checklist
- Impairment Charges: Verify the impact of the $400 million impairment charge in 2015 on the year-over-year comparison of operating income.
- Discontinued Operations: Confirm the treatment of the $332 million gain from the sale of the conduit business to Nucor, which is expected to be recorded in Q1 2017.
- Working Capital: Review the $211 million increase in working capital in Q4 2016, which turned operating cash flow negative for the quarter.
- Severance Costs: Note the $74 million in severance charges included in 2016 EBITDA and assess their impact on future cost structures.
- Dividend Approval: Monitor the outcome of the annual general shareholders' meeting on May 3, 2017, regarding the proposed dividend.