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Tenaris S.A. Q3 2009 Financial Summary

Business Context and Reporting Period

Tenaris S.A., a global manufacturer of tubular products and pipeline projects, reported unaudited consolidated results for the quarter and nine months ended September 30, 2009. The company operates in the oil and gas sector, providing seamless and welded tubular products, as well as large-diameter pipes for pipeline projects. The reporting period reflects a challenging market environment characterized by weak global demand, declining drilling activity, and significant inventory reductions by customers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales fell 42% year-over-year in Q3 2009 and 29% for the nine-month period. This was driven by a 50% year-over-year drop in tubular product shipments and a 47% decline in total sales volume.
• Profitability Compression: Operating income decreased 61% in Q3 and 40% for the nine months. Earnings per share dropped 60% year-over-year in Q3.
• Segment Performance:
  • Tubes: Sales dropped 47% in Q3, with significant declines in North America (-60%), Europe (-57%), and Far East (-52%). Middle East & Africa was the only region with growth (+5%).
  • Projects: Sales decreased 10% in Q3 due to lower shipments in Brazil and Colombia.
  • Others: Sales fell 34% in Q3, impacted by lower demand for electric conduit and sucker rods.
• Liquidity Improvement: Despite lower earnings, operating cash flow surged to $772.4 million in Q3 (up from $242.8 million in Q3 2008) due to a $359.5 million reduction in working capital. The company moved from a net debt position of $2.98 billion at year-end 2008 to a net cash position of $556.9 million by September 30, 2009.

Outlook, Risks, and Management Commentary

• Market Outlook: Global oil prices recovered to $75-$80 per barrel. While the international rig count declined 12% year-over-year, the US rig count began to rebound in July. Management expects pipe shipments in the Tubes segment to show a moderate increase in Q4 2009 as activity stabilizes and inventories normalize.
• Projects Segment: The order backlog for large-diameter pipes in South America continues to decline, leading to expectations of lower shipments going forward.
• Pricing and Costs: Average selling prices are expected to adjust gradually to lower market levels. Production costs are anticipated to benefit from efficiencies as production levels increase and structural cost reduction actions take effect.
• Dividend: The board approved an interim dividend of $0.13 per share ($0.26 per ADS), totaling approximately $153 million, payable November 26, 2009.
• Risks: Key risks include uncertainties in future oil and gas prices, their impact on customer investment programs, and the ongoing nationalization of Venezuelan operations (recorded as discontinued operations with a $28.1 million loss for the nine months).

Investor Verification Checklist

• Verify the sustainability of the $556.9 million net cash position given the significant reduction in working capital.
• Monitor the US and Canadian rig count trends to validate the forecasted Q4 recovery in Tubes shipments.
• Assess the impact of the declining order backlog in the South American Projects segment on future revenue visibility.
• Review the status of the Venezuelan operations nationalization and potential further impacts on discontinued operations.
• Confirm the effectiveness of structural cost reduction initiatives in maintaining EBITDA margins as selling prices adjust downward.