Tenaris S.A. Q3 2015 Financial 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 third quarter and nine months ended September 30, 2015. The filing (Form 6-K) was submitted on November 5, 2015. The company operates in a challenging environment characterized by declining oil prices, reduced drilling activity, and customer inventory adjustments.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net Sales ($ million) | 1,559 | 2,421 | 5,681 | 7,661 |
| Operating Income ($ million) | (319) | 434 | 171 | 1,549 |
| Net Income ($ million) | (356) | 87 | (29) | 935 |
| EBITDA ($ million) | 240 | 587 | 1,032 | 2,008 |
| EBITDA Margin | 15.4% | 24.3% | 18.2% | 26.2% |
| Operating Cash Flow ($ million) | 586 | 659 | 2,012 | 1,838 |
| Free Cash Flow ($ million) | 285 | N/A | N/A | N/A |
| Net Cash Position ($ billion) | 2.1 | N/A | 2.1 | 1.3 (Jan 2015) |
Notes: Q3 2014 results were restated following a re-evaluation of the Usiminas investment. EBITDA includes severance charges of $38 million in Q3 2015. Excluding these charges, Q3 2015 EBITDA would have been $278 million (17.8% margin).
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 36% year-over-year in Q3 2015, driven by a 57% drop in North American tube sales and a 16% decline in the rest of the world. Volumes fell 32% year-over-year.
- Profitability Impact: The company reported a net loss of $356 million in Q3 2015 compared to a profit of $87 million in Q3 2014. This was primarily due to a $400 million goodwill impairment charge on the North American welded pipe business.
- Regional Performance: North America sales dropped 57% year-over-year. Middle East & Africa sales fell 31%. South America sales were relatively flat sequentially but down 4% year-over-year.
- Cash Flow Resilience: Despite the operating loss, operating cash flow remained strong at $586 million in Q3 2015, supported by a $438 million decrease in working capital (mainly lower trade receivables).
Guidance, Outlook, and Risks
- Market Outlook: Management expects global demand for OCTG products to fall 36% in 2015 to 11.3 million tons. A recovery in demand is anticipated in 2016 as inventory reductions conclude and oil production declines create conditions for higher prices.
- Q4 Expectations: Revenues and EBITDA margins are expected to remain weak in Q4 2015 due to downward price adjustments and low utilization of production capacity.
- Restructuring: The company is proceeding with further restructuring to reduce costs and strengthen market position.
- Dividend: The board approved an interim dividend of $0.15 per share ($0.30 per ADS), totaling approximately $177 million, payable November 25, 2015.
- Risks: Key risks include uncertainties in future oil and gas prices, continued reductions in operator capital expenditure, and currency devaluation impacts on tax bases.
Investor Verification Checklist
- Goodwill Impairment: Verify the details and tax implications of the $400 million impairment charge on the North American business.
- Cash Position: Confirm the net cash position of $2.1 billion and the sustainability of the dividend payout given the current operating loss.
- Bay City Mill: Assess the progress and capital expenditure requirements ($301 million in Q3) for the new greenfield seamless mill in Bay City, Texas.
- Usiminas Investment: Review the impact of losses in the Usiminas investment on equity earnings and the restatement of prior period results.
- Inventory Levels: Monitor the trend in customer inventory adjustments and the timeline for the expected 2016 demand recovery.