Giovanni Sardagna - IR
Paolo Rocca - Chairman and CEO
Edgardo Carlos - CFO
Alejandro Lammertyn - Planning Director Gabriel Podskubka - Head of Eastern Hemisphere Operation
Amy Wong - UBS
Henry Tarr - Goldman
Blake Hutchinson - Howard Weil
Alex Brooks - Canaccord
Tenaris S.A. (TS) Investor Presentation October 4, 2013 7:00 AM ET
Good morning, everybody. Welcome to our Investor Presentation here in London for the very few of you who never met me before I am Giovanni Sardagna, Investor Relations Director of Tenaris and I will be your reference contact if you need additional information on the Company in the future.
Before we start I have to remind you that as usual that we will be discussing forward-looking information during this presentation and obviously our results could be different from what we will show you. Just a brief introduction on the program that we might put you today we will start with a very short video on our technical sales services around the world after the short video we will move on with the presentation by our Chairman and CEO, Paolo Rocca and after Paolo’s presentation we will have a Q&A session during which together with Paolo; Edgardo Carlos, our CFO; Alejandro Lammertyn, our Planning Director and Gabriel Podskubka, Head of our Eastern Hemisphere Operation, will be taking your questions and answering your questions.
After the Q&A, for those of you who wish to stay there will be lunch that is going to be served just outside the [theater]. So I think I said what I finished so I will ask you to start with the video. Thanks.
Good morning, everybody. First of all thank you everybody for coming and participating in our Investor Day. This is let’s say the second time we had it in London, last time it was two years ago then we tried to alternate between New York and London, it’s a pleasure to have you here. It is an opportunity to give you a view of where we spend and how Tenaris is doing in this day and the perspective that Tenaris see in front of you. I think Tenaris is a clear leader in this field and there is a key component for many oil companies of their project. I mean is a partner with them and our strategy of product, service, technical development, industrial excellence is the key for the differentiation of the Tenaris. We follow this in many different aspect but we will try to summarize some of this in today’s presentation.
First of all, one first message, how we see the market demand, the market environment in the coming future. Basically, we do not expect major let’s say disruption change on both side. What we see is an oil price that we expect to stable in the range between $100 to $110 for the brand and its ability. And independently from disruption and increased production of oil in North America changes that could happen worldwide depending of instability in the Gulf or in North Africa or in other situations.
My sense is that Saudi Arabia continues to act as regulator of the balance of price and this will go on and assist you in supporting and maintaining the price of oil at present condition. I do not expect major or sudden change. Now, what is changing in this environment is the infrastructural constraint. They are creating distortion in the price of oil especially in North America and also are changing the evaluation of oil in different grades and heavy oil, light oil or these distortions gradually are produced by infrastructural constraint bottleneck that are on the process of being sold. Remember some months ago, we had a big difference between the WTE and the brand Cashing was [flooded with oil]. Gradually, these constraints are getting solved and today brand and now that we’re getting back converging on, it’s more different. The same is happening for the Canadian price of oil a big difference that was there in the end of 2012. Its converging in a more aligned way, still the difference is there, but this is there also includes quality difference and not only logistic difference as it was in 2012.
This is important because we’ve been giving to the producer of shale oil in different reference prices, not irrelevant for instance for shale oil these change in ability in spite of let’s say a more or less stable international environment is making a difference to profitability of the project and I think this helps supporting our view of continuity in this field.
In the case of gas, what we can see that is I mean the big divide that open up in last three to four years between the gas in North America and LNG in gas imported by Asia and other countries. This is something that we expect to stay in the future. I mean this is our view. We are planning and making our plan in an environment in which this difference of oil, a large difference with gas in North America that will move between $3.5 to $5 in the coming 3 to 4 years. We do not expect really a major increase much beyond these numbers in the coming 3 to 4 years.
And the level of price of the LNG that is marketed worldwide will now in our view remained there. This is a big incentive of some energy product, is a big incentive also for some of the pipeline gas that is moving between Europe and [indiscernible] end higher price compared to U.S., is being incentive for some coming back of hydrocarbon transformation industries in North America, it is something that from our point of view is frankly now in gas operation. Our main center of gas operation is the Mexico. U.S. is also important; another important manufacturing today in steel making in this region has a clear advantage in term of cost of energy.
This is not something large and that is important and we have tried to enhance this difference with different project. But if we look at this structure, what we expect that this to basically maintain. Now, in the case of the U.S., today the price 3.5 so it is particularly low, demand in for gas will increase. Some export [indiscernible] will come. Demand for industrial to some extent transportation substitution of power generation also induced by the carbon reduction measure that the United States are taking and the constraints on new power generation only for coal, will all bring additional demand for gas. We expect this to be supplied by additional supplier of gas and so additional drilling for gas. But there is lot of gas in North America, increase in price will be there but it’s difficult to expect stubborn, a large change in the price of gas. But in this environment drilling for gas will increase, will come back to day we are at the very low level. We expect this to increase overtime.
Again on market environment, in this environment the rig count is substantially stable in 2013 in the United States rig count is going down something like an 8% between average 2012 and average of this nine months of 2013 but this reduction in the rig count in the United States is being compensated by increased efficiency in shale drilling average -- the rigs in shale today is drilling more wells and for the time we estimate that the increase compared to the first quarter of 2012 is in the range of 20%, 19% in shale. So this increased wells means increased demand for pipe.
Now considering that the non-shale traditional drilling is not showing a substantial increase in efficiency the end result for the entire system is an increase in efficiency in the range of 99% that compensates for the reduction and/or 8% for the level of rigs in the United States. Unites States is the blue segment international is the green one we could say is slightly above the level of last year but potentially stable. Now, Canada goes ups and down but this year has been the decision that we expect now should be in line with what we’ve seen last year. This is something that we will see in the month of November, October in the sense that how the program will be in Canada for this.
We see in the past that this -- 2013 is a transition year we’re expecting some moment in drilling for gas into United States to come back and also drilling internationally to continue resume a gradual increase in trend. When we look into the market the increase in the sales and the demand for Oil Country Tubular Goods has driven the market the volume in the market to a level up in 2013 16.6 million in our view in line basically with what we had in 2012. Now, we expect this to continue to grow in the future especially in the segment that you see here, the red segment. There is the premium component of the red into it, API may increase in a number between 3%-5% in the future, three, four, five years.
But premium would grow even more in the range of 8 and something more nine, 8% to 9% of increase rate year-on-year in the next three, four year ahead. Why this? Well because the more dynamic segment in the demand are the segment associated with [indiscernible] application, we expect that the driver in premium to be shale gas when the level of drilling for gas will resume in the coming years.
Some part in shale oil, deepwater, HP high pressure high temperature environment and these are the situation in which demand will increase and also conventional gas in the Gulf in Saudi Arabia and in the rest of the Gulf where the countries are looking for substitution of consumption of oil domestically with consumption and supply of gas domestically is -- it has been a very important trend for us in the last five years drilling for gas in Saudi Arabia for instance has been strong and a substitute part of the drilling for oil and there is something that impacted in our mix and in our sale to Saudi market, to Saudi Arabia.
The demand evolution is positive and is particularly strong we expect in premium and this is how -- I mean having in mind this we are working in Tenaris since many year in strengthening our reach to the client in this segment, is not only a question of product is a question of preparing the service combination that better supply and serve the need of the client in this kind of product.
These products are complex, have complex logistic, difficult to demand planning. In some cases product—the choice of product change many times in the preparation, the exploration and development phase and so to respond to this need not only imply development of product but it also imply development of service and sophisticated logistics. This is an important aspect of Tenaris differentiation. It also imply a permanent change of having drafted structure and then the change in the product force as to invest in establishing new capacity either different part of the world or in different segment of the production to prepare for the trend that we see here.
When we look at where the premium are used, Deepwater represent 14% this percentage will increase I mean we are in an environment that is growing 8% per year we expect Deepwater to increase more so that these share to be higher in the future.
Shallow Water is another important destiny for our product. There are many product that are in Shallow Water but has high pressure, high temperature component for instance in the North Sea. The water is not so deep but the complexity of the well is severe. Shale Oil and Shale Gas, this space they today representing almost 25% of the premium is a space that is mostly focused in United States, still the expansion of Shale outside of the United States is very limited. And because of the price of gas and the strength of the production of associated gas in the oil well is still constraining for our point of view daily volume of product that are going into it. But when these growth, when the Shale Gas drilling grows the component of premium at Shale Gas is much higher than the component of premium in Shale Oil. So increase in the drilling for gas will have an in fact more than proportion on these, these will grew.
There are countries in situation like Argentina, China, in which the Shale Gas is under development and on which we expect to perceive demand in the coming year and to coming there are order rational for increased drilling there. It majorly require time but in some of the region like United States, Mexico later on could be a case, China is today the case in which for instance Shale is doing a lot of work, development of Shale. So the share of Shale oil and gas premium in our view is one of the driver of growth.
The high pressure, high temperature obligation represented today 12%. This is also a segment that you can find in the different segment of the sector. The interesting part of this is that the increase of HPHT is driving very sophisticated product in which competition is reducing, in which there are tailor-made product development, all things that we like as a company and that are important for our match.
And this is another way of looking at the demand. The 16.6 million tons of demand in OCTG [indiscernible] and you see here the impact of Shale, Shale represent 4.2 million most of this going into the states but is absolutely impressive, how the development going in and this is one country. Then which other area and China as a case but could Argentina is also relevant for this demand, could develop their resources, the intensity the pipe used in Shale is much higher for instance of [indiscernible] intensity to have in Deepwater or in complex application. The production as you know much lower and declination rate is much stronger. So from our point of view this is very pipe intense development. Tenaris, how our segments increase over time, the first one is Premium; premium between 2010 and 2013, we have been able to double our sales and our production premium. Now this is not only sales effort, behind this there is a huge effort of product development, there are testing machines working in different countries of the world, in the development, certification and core design with companies. I mean there is lot of work of product development.
There is investment, important investment all around the world in the facility and production capability in service and local support, facility for finishing, for producing accessory and all what is needed to support this. I consider this a big achievement, and this is also very important to support the profitability of Tenaris, because in the end there has been a big shift in our mix. They have been very important to support our profitability even in an environment in which the price, if you look at the price indicator in United States in last year went down by 14%. The shift of mix has been important.
The green line is 32% growth is the growth in OCTG as a whole likely above the increase in the market, but not so dynamic as a premium. And then you see two segments in which we’re focusing on the high margin segment in this. From an industrial point of view we suffered [indiscernible] and also deduction of industrial activity in Europe. But if you look at industrial our field to industrial segment you see today much high margin product. I mean we have been able to reduce overall sales but to focus on combination of product and service in segments that are still, that are giving us important margins.
In the case of [indiscernible] this is absolutely true for the complex offshore, the complex offshore the products are very demanding but they also are very high margin. They include coating, different range of service, double joint in different level of complexity in the way of controlling, designing, producing the pipes. And this in spite of the reduction in volume is a segment that we consider with a lot of important component of high-end.
We said in the past in our conference call that we consider 2013 a transition year for us, we see that different year in which we are strong are on the move, Tenaris also is reflecting this in its results. This is not the best year of Tenaris. 2013 is what it is, is a transition year and as we anticipated also in the conference call. This quarter particularly will be particularly weak for all the top projects that we had, and the reason that we mentioned in the past.
Transition year in the key market, in U.S. and Canada today still there are infrastructure constraint, but there is a chain of investment going on that we'll be able to improve the price for the producer and so to stimulate activity over time. There is still a high component of import from different country that we consider are uncertain, we will see later in one slide how important is this and what's the trade case that we’re presenting together with the other players in the U.S. space, and could affect the future of this.
What we see ahead we comment shale gas authorization for export in United States is going on at a different pace. We expect that the application for expert beyond the [indiscernible] and Freeport will continue. And so export will also be one of the driver increase demand of gas. Industrial demand will increase; power generation is I would say will increase because of the stoppage of new coal power generation unit. And some phase out that will be needed in the United States to stick to this CO2 production and that the government is imposing, providing more longer terms, some transportation based on gas results on that. If I look at this, I don’t know; think about the same Tenaris, we are launching a project for producing power in Mexico.
It is a very large project, 900 Mega power generation unit in Monterrey that is using American gas. We had a long-term contract with Ternium, we will bring American gas, feed the meal, produce energy for the entire facility that we have in the region. Like we, other are doing the same. We have and we notice several project in petrochemical, industry DRI production like Nucor or US steel, [indiscernible].
The people perceive that U.S. and North America, we have a competitive advantage for the very long term. So they are taking action. We expect that these would drive additional demand of gas, and additional production of gas. Today the rigs of gas are 307 (ph) and if it goes in this range, in some moment this will start to increase. We expect in 2013 to see a recovery in the level of rigs, in some increase in price, not huge, but this will be.
Mexico; Mexico this year has been, say a year in which Mexico basically suspended all the action in Chicontepec, went down, rigs went down substantially to almost nothing this month, there are 12 rigs, again, but they went down much more in the four to nine months of the year. Also Mexico is in transition this year, from this point of view. They knew energy and fiscal reform that is changing the constitution and will allow involvement of private capital in profit sharing agreement. From our point of view we will drive additional investment.
Mexico has a huge potential on whole of the offshore Perdido and other areas on the gulf, huge opportunities in the northern part of the country for gas, or for oil or for shale oil. The reform is preparing the ground for an expansion over time. Now in Mexico we have very strong position in Tenaris. This will be very important for us. The fiscal reform, I mentioned it is also important because it is leaving Pemex with more resources for increasing the level of investment. This year has been an year of financial constraint for Tenaris, budgetary constraints, so has resulted in a low level of investment. We expect this to change.
Brazil, this year has also been negative year for Brazil. We saw this coming some months ago, Petrobras had difficulties in getting the project on time, compared to the other projects that they were using, either carbon produce offshore are delayed. This is affecting us very much for the line pipe. The line pipe projects are postponed, probably the year, until May or June. We will have very low delivery of line pipe to Petrobras because the big project that are connecting the offshore field with the coast are postponed according to the delays in development of [indiscernible] the refinery onshore.
They are also slowing down in the drilling for new wells. So this year, for budgetary reason the constraint in intervention on the price of gas and in hydrocarbon has been weak and the next year will be probably, the first part would be weak for Petrobras. This will change, because in the end there is certain there, Brazil needs these and we expect these to change.
Argentina is another case that has a strong potential. Imagine, Argentina is importing in winter 30% of the gas need, paying maybe $19, and has provided a second of the first reserve of gas, so there is the demand at a very high price and an underinvested and underdeveloped area with a huge potential. Now gradually this will be – the two ends will be connected, over time, and things are moving, [indiscernible] has been able to sign, as you know we’ve shared [indiscernible] our chemical.
Agreement with the shale recently, that are starting -- what company are doing, the company are dimensioning size of the problem and preparing for the development stage, and negotiating the condition on the go. But in the end Argentina is there. We need gas, is paying gas, the deficit in energy is one of the biggest constraints for the point of view of the government, because it’s also is involving a lot of subsidy to the energy sector to then to consumer. We think that this situation is in a transition and think is that changing. This year we are seeing increased volume and in 2014 we will see additional demand in this area. So if you think all of this area that has huge potential, are very important for Tenaris. Tenaris is very strong player in U.S. and Canada, leading, absolutely leading player here, strong player in Brazil, a leading player in Argentina. We expects on this strong [drive].
Now what does the trade case means for us? The case is that we file in July is against nine countries, the most important which is Korea. If you look at the import in the U.S. space, U.S. space is a market that has the size of around 6 million. You see here the import level of 3.3, so this is a market that has 50% import supply. Now the countries that are the object of the trade case are representing [1.6 million] tons in 2012. They were representing in the first half of 2013 about half of the import.
Now we are very, very convinced that one this importer damaging the local industry and the ITC and is [indiscernible] the solution [in our] is considering that this looks the case. Second that the condition of import are unfair trade based and there is a damping involved which is the time obviously. December there will be a DOC, preliminary determination on the damping issue. Preliminary determination what that is in been favorable saying there are reasons to think that the industry damage and they have to go on now DOC will determine in December if there are reasons to think that there is a preliminary damping conditions and the case will go on. And then between February and April with a possible delay until June of the final decision, the DOC and the ITC should to take the final determination. This is very important. It’s very important and will affect the space in the United States.
We will -- it is very important for us and especially for the welded segment, because in the end this import welded by welded OCTG and they are going to the low end of the market. This is are not import there are getting into the premium component of the market are more focused on the low end but in some of this they are this import are affecting the production level and are directly competing with the production of our [planting] weather. Part of the decline of the [pipe logic] 14% in one year is due to the pressure of the imports here. And we should expect some recovery this month that has been 1% recovery in [pipe logic] in spite of the fact that the steel import has been very strong in [indiscernible].
How are we, which is the strategy of Tenaris in this space? Well, this space is increasingly important, Canada, U.S. and Mexico. The energy sector in North America and there [went] substantial transformation I think in the last five year and is offering today extraordinary opportunity. We decided not today with the acquisition in the middle of 2000, 2006-2007 and with all the action pursued during time to move a center of gravity of Tenaris, a strong center of growth, let’s say, into this space. This is just a render of the new plant but a new plant is a major endeavor will be built in Bay City.
Where will we be? Bay City is here close to Houston. This plant will complement with our other plants in the state, Conroe, close to Houston for weather pipe, McCarty for premium concentrated on premium production. Again in Houston Westwego oil premium production in Louisiana Hickman in Arkansas weather pipe supply is now Bay City will be here and Tamsa is in Mexico and trucking distance for this space and serving rigs by rigs all the Mexican side on the other side of the border. We have service center in Reynosa and we serve [all this]. So there is no other company that is positioned between the Permian, Barnett, Haynesville, Tuscaloosa and Eagle Ford, Fayetteville and Woodford and when we go up to Northern Barnett to the [indiscernible] the northern part of shale, Algoma in our plant for seamless in Sault Ste. Marie will also be closed to the market. Now in this space, in the radius of 350 miles, we have around 60% if we through the gulf or 50% of the premium of the entire United States. So we will be there. Now in the radius of 500 mile, you have basically 50% of the demand of the United States, so 3 million ton are concentrated in this space.
We plan not only to install a substantial investment in the new plant but also to modify the logistic, the service, and the complementation of our production capability for premium. For [indiscernible] and for accessory to server rig by rig all of this space, this what we do in Mexico. We have people so they’re doing this on the other side of Eagle Ford and that’s in an area in which expect action to increase. Action increased in gas on the Mexican side but also with the capability to extend into project this ability to serve our client on the other side, this is an integrated space for us. Different plant, new investment, service, logistic, demand increases all these very important, not easy to from management point of view.
To manage what will come out from here in the next five year, but this is our -- is a very key important part of Tenaris in the future. Which are other areas that are important for us? Middle East it is consuming something like 1.2 million OCTG, but it’s sophisticated as to a large extent. Premium represents 54% of the demand that, it was 43% before. This growth is associated to the growth to the expansion of the gas drilling. This is our space. The mill we established in two years ago will be expanded, we have a program for expansion of our local presence Saudi Arabia, but from the Dubai, Eastern Hemisphere Headquarter, I think we have a big challenge that we are pursuing in Iraq, in Kuwait, in Arab Emirate, in Oman.
I’m we’re following not only the Gulf but also Kurdistan and looking with what is going. We expect from this strong drive for our premium capability. Deepwater is other segment, there is strongly growing 500,000 ton what we expect to 2013, there is mostly premium almost all premium and I think the technology we developed are making this segment and this segment to key component of Tenaris in the future apart from Argentina and what we mentioned.
How are we designing our broader portfolio? First of all let me tell you, I consider Tenaris broader portfolio the most complete and the far reaching portfolio in this space. Tenaris is a clear leader here. Now, the decision we’re taking in the past is being to have not only one technology, but to cover the entire range of users for premium technology. This goes and it is a decision, there is also coherent with the decision we have taken in U.S. covering the entire need of the rig, from welded to [indiscernible] to premium and seamless to get into serve all the need of the rig.
In this case in premium, we develop a portfolio of joint that cover the entire range of need. This year we are having on market the new wedge technology for the Gulf of Mexico. This will be using, is used in shale mass and shale stone in the most demanding project in the Gulf of Mexico. Wedge technology allows column there are that offered high clearance are integrated joint and the water knowledge is unique in this. We think that in the Gulf of Mexico but also outside of the Gulf of Mexico, this is a very important product. We will promote and sell this also in North Sea, in other important project for us.
HP/HT Blue Max, we call it Blue Max and Blue Heavy Wall because we are expanding the blue coupling facility for cabling family to accommodate much heavy walled pipes that are required for the very severe application. We have project of HP/HT in which Blue Max will be used for Merck, in Norway and in other places and these are tested under the most severe condition. These are products that will cross the ISO calfo requirement, either demand or the wedge.
Having different technology means a lot of testing demand. Testing in this moment is bottlenecked because some of these tests require men. So we need to and we are now moving all the frames of our system in the qualification for different projects and have heavy load of activity there.
Large diameter conductor, for Brazil, for the North Sea we developed new joint, the low seal, metal to metal seal in conductor. The conductor part that is more superficial part of the column. Usually these didn’t require a tight connection because in the end we are not supposed to stand pressure but today requirement and the level of complexity of the wells, the sour component are moving the Company in assuring integrity and salability also in this part of the column and where we have the product to accommodate this and we have increasing demand for this.
Dopeless; Dopeless we introduced it several years ago and we invest in the technology and in the facility for producing this. This is a key component and the concept of no discharge; no footprint in drilling wells offshore is a very important concern. Today there are regulations in the North Sea, Norway or in Holland and in UK but gradually are pushing and asking for Dopeless materials. Now Tenaris is the only Company that has a developed product tested, because when we use developed Dopeless we test it into the frame as a separate product in many cases compared to the product that is used, in which we use Dope and have developed the industrial capability to produce pipe and accessories. This is our strong point of differentiation.
Now, on this portfolio, we plan to build increased market share in premium and on the investment in capacity. This goes to the data system. This is something that you know, there are no other companies that has relevant industrial center, all managed under the same standard. Tenaris is very special in the level of centralization and some of you that has used it done so in the Investor Day that we did last year, may have had a perception of the way, the Tenaris way as far as the industrial coordination of the facility is concerned. We are talking about a system that is covering from Japan to U.S. and will be strengthened by the new mill in the United States and by the new premium facility all around the world.
Where are we in terms of financial performance? In this graph the size of the circle is the level of invoicing. So from this point of view you look at the Tenaris. Tenaris has invoicing compared with the service companies because we consider Tenaris really a service company servicing REITs worldwide. We have a level of invoicing that is more than Schlumberger, Holly Barton, Baker Hughes, closed weather for them but if you look at the free cash flow, there is this indication, the level of free cash flow of Tenaris and the level of $1.2 billion is higher than many of them.
And if you look at Tenaris from the point of view EBITDA ratio, the 26 level that we have today, or in this case I think the figure are starting to the last year, last 12 months. Tenaris has been able to focus on the high margin segment. Free cash flow in this case is also considering operating cash flow less capital expenditure is a view. Let’s say is not only the EBITDA, it’s considering the entire, the cash generated by the operation and the investment required. If you do the same exercise comparing with [indiscernible] or with TMK, again in this case the invoicing are really higher, the level of given choice [ph] is much stronger and the level of profitability is also much higher.
Now, we pick up two company but if you have, I don’t know the Chinese company, this year you will have profitability there are, in term of margin in this range, most of the Chinese company are supported by government loans but in the end when you look at the number, they are having negative cash flow and negative profit level of margin and the same is true for other company. So this has been from my point of view big achievement of Tenaris, to be able to position itself in this.
This is the strategic agenda we cross through; expansion in North America, very important and medium term. We expect this to perform between now and 2017. Latin America, Mexico, Columbia, Brazil, Argentina, we are positioned to capture the change in this that are underway in these countries. Technical leadership and global capabilities in complex project, differentiation through product development, industrial excellence and customer solutions, I think this is summarizing the line of action in which we work on.
I would stop here. Thank you for your attention. And I listen to any questions that you may have on Tenaris.
Thank you very much for sharing your views on the Mexican reform. When do you expect the result to translate into effective demand in Mexico and also do you see room for the Mexican government to come up with any local content restriction?
I think, it’s difficult still, before the debate in parliament to have let’s say a solid view on I mean on what and the timing for it but frankly I expect not be in immediate things. What we will see from my point of view in 2014 is increased investment by Pemex. Pemex needs two dimension some of the prospects that they have. They are moving into offshore. They will start moving. So I am optimistic on their investment in the south and their investment in the offshore, not so much on Chicontepec.
Now when you look wherein two, three years, there will be I think, Mexico will arrive and have the ability to analyze the first round of contract under the new condition. For the offshore it would take time but for some of the development or deployment of other field, mature field with private participation, this will come in 2016, this is my sense. The financial reform with some increase in the value added tax can increase in tax on dividend or on mining and so on, will allow from my point of view Pemex to free some of the resources for additional investment. You know Pemex is major component of the budget need of Mexico, 37 or something. So there will be agenda. This is what I could envisage but it is very important that many, many year past before there is constitution could be—a change in constitution would be a proposed.
Any local content restriction that you have heard from the government?
We do not anticipate, let’s say a strong change compared to the present condition but still for instance there will be a drive in this direction. We have been able in the Mexico to explain and to have anti-dumping action against China on all the diameter, recently on different diameter stop on—the government has taken action against that and fair trade in the case of China but are also in the case of Korea and other cases, there has been action by the government, a rational approach to this. I wouldn’t expect anything outside as these or special requirement but we expect rational action ther6e.
Jeff Hurston [ph] speaking from [indiscernible] you have mentioned that you are fairly, let’s say confident on the premium demand going forward. So I was wondering to what extent you, expect your margin to be mostly reason by their mix rather than pricing going forward and do you have any let’s say mid-term or mid-cycle EBITDA margin in mind for the coming years? I think mind this, the proportion of the premium product and the second question related to the trade case in U.S. Again you seem quite confident on let's say the successful, that the trade case will be successful. If you assume that’s indeed significant tariff are applied on imports, how quickly you think you can recoup the price sketch you have to apply since early 2012?
Well on the first one I think we mentioned, you are talking about the impact on margin, on the premium phase is expanding. In the case of shale, as you know there has been in the last two years some substitution of complex premium products with semi premium because the companies are trying to reduce cost on oil shale. Oil shale is semi-premium, in which the margin is lower because there is increased competition.
So this has also been something that has affected margin up to now. I think the room for semi-premium in some application is leveling off. The substitution to semi-premium has happened. We are very present and we develop a very successful semi-premium which is not a pinch, there is a coupling shoulder, it's very metal to metal shoulder, very efficient. We’re strong in this space but still the margin are lower than the other.
From now on most of increase will happen in my view in more demanding premium in which the competitive space will allow us to preserve the margin that we have in that segment, but to expand the volume and we’re prepared to do this. This will have a positive impact.
As I said before, we expect this over time, gradually over time 2013 is what it is. You won't see changes in the short time as mentioned before. As far as the anti-dumping, we are confident that the ITC and the DOC will confirm and evaluate the level of damage and the level of dumping that we see in the reaction of these countries. So we’re very confident on this. Now impact on price will be gradual, there are areas in which the damage has been done but gradually there could be a recovery about this. Timing is very, we will see this within one year, so very close. Yes Frank?
Two questions if I may. One in terms of competition. In the United States there is a significant amount of capacity that seems to be being built currently and we'll come on stream over the next three to four years. How you see that potentially impacting the market. And then secondly the Argentinean potential seems very substantial over time. How quickly do you think that can actually build up and have a material effect on volumes?
On the first question, Hermana, Guerrero they usually participate in our call, today they couldn't participate but they will be the best person to tell you how is the competitive environment in United States and how we expect this to be after investment? Let me tell you that all of the projects that are in the States, one we'll get in gradually. Our field is a complex field. We do not put up a plant and immediately we get plant acceptance and ability to produce at the anticipated volume. So it will take time to increase and it will happen between now and 2018. I mean this is not immediate, it will take time.
Second this plant, in some case come from player that have no experience in OCTG, think about [indiscernible] is very good plant for supplying industrial product, but in all long term experience in OCTG. So premium, semi-premium product, I mean these are not let's say today their area of competence. Some other plant has focused on low end margin or low end part of the market, in which probably the entrance of the new player may substitute part of the import. Import is half of the market.
Now in U.S., with the advantage of gas price, over time will not be logical that you have in high energy intensive product for low end 50% important. Gradually local production, very logically good could pick up this. And you have seen import, we only import under -- anti-dumping $1.7 million but the import are much higher, $3 million. So there is space. If we look at the number, I think this is not something that is creating a dramatic capacity, especially in the more complex market.
As far as Argentina is concerned, old sector are suggesting for a very fast strong move. You are importing 30% of your need, $19, $17. You have the largest reserve accessible and on which you can produce. Infrastructure for gas transportation is there, because in the end we are talking about Vaca Muerta that is in the middle of Neuquén where you have all the infrastructure. Gas production has been declining. So the gas line going to Venezuela is going to the center of Hughes there. So there is no huge infrastructure development need. The problem is under the ground. The problem is above the ground. Once you get there, but the logic is so compelling that would suggest that all even the problem above the ground should be solved by pure commonsense. I don’t know if you agree.
Amy Wong - UBS
It’s Amy Wong from UBS. Couple of questions from me. The first one is in Brazil, your exposure right now is currently line pipe, but you put on your slide that you’ve got some deepwater opportunities there. So can you give us a bit more color in terms where that lies? What part of the field development are you looking for, the opportunities there because some of your competitors claim to have a very large market share in that region? And my second question is can you give us an idea of the capacity utilization on your own system right now and also if you have any idea in terms of the global kind of OCTG capacity utilization.
Well, in fact Brazil, as we would say in the past, it is absolutely true that our competitor has a large market share. We have 20% market share not, let’s say in OCTG, we participate in this market. We are not the leader in Brazil because we do not have seamless facility in Brazil. Even if we have a very sophisticated mill for welded OCTG and oil count that good, premium and for line pipe. The market in which we see the big delay is today in the market of line pipe because a big project is usually where, very important for our industrial [indiscernible] in Brazil are severely delayed.
The drilling is also delayed but to a lesser scale. I would say that in the case of line pipe, this year we will probably almost have no large project offshore. This is what also we said. There is no difference of what we said in the last conference call. Probably what we see today is that there could be even two three amounts of additional delay. We will get the project moving maybe starting from June of 2014. This is what we see today.
In OCTG we have, our five year contract with Petrobras, long-term contract, under which we are delivering a lot of material. This year it’s the one that I mentioned. We are developing new area for inserting the connector. We think we can do and we introduce them, also strengthen our product design there. We are adding services in different way to Petrobras and to the other producer. So this is where we stand. We will not be the most dynamic market. And in the case of line pipe, it would be a low sales year.
Still Brazil is very important. In the long run activity will soon expect also the line pipe activity to begin. The new research and development center in Brazil is entering to operation beginning next year. It is a big lever for us. It is one of the most powerful testing frame in our system installed in the center for now and we actually have all the team working even if the facility physically will be there.
And this is an area in which together with Usiminas produce steel for our welded operation in Petrobras. We are actually developing now our product because the field is complex and even the line with a quite special product. So we have, we are teaming up with Usiminas in development product, qualification for Petrobras. This is very promising but this year will not be the most [indiscernible].
The other question is our level of utilization. Depends from the system and it depends from the level in premium. We have high level of demand but also because we did maintenance stoppage this year in many mills of the Northern Hemisphere. This has been quite extraordinary. This have mentioned before, is putting strain on our production capability for premium product, now also considering some of the stoppages we have to do, and we have capacity in other areas. Worldwide we have a lot of overcapacity in China for low end product. And this is clearly affecting the prices in China. China, today we are focusing with our mill in Qingdao on the very high end Tarmin [ph] in other place in offshore in which we can have our position that is profitable, very profitable, but is focused because there is a high capacity, a low capacity utilization and over capacity in other mill [ph] segment.
Alexander [indiscernible] JPMorgan. Paolo, going back to the potential of Argentina, you say that is expected to pick up soon, this potential resource on the ground. If have to give the kind of potential impact that you might be seeing the next two, three years, if everything starts picking up from the moment in terms of volume what the effect will be? This is the first question in terms of your volume shipment. And the second one, if you can remind me we will be better and will be more called also the infrastructure constraining North America that you were talking about before? Thank you.
Well because of Argentina, when the issue is above the ground is impossible to -- this is my view. I mean there were no issue on the ground but under the ground the potential is huge. You have to look at the plan for right here one company and some billion into development. That strategy that Argentina may have decided, where you are above the ground I think is very difficult to make for [indiscernible] like Venezuela, problem above the ground but is clearly not the problem under the ground.
What could we say? We were a leader in Venezuela although it’s difficult for us sometimes. So it will be difficult to answer your question. Because the potential is really huge. You have the resources not so easy as some of the Eagle Ford, to go. To have a horizontal multistage fracking in Argentina you need to spend $30 million per well, not $8 million like in Eagle Ford. So about the ground problem, maybe something that may delay the appraisal, because in the end for the appraisal you have to invest important amount of money. So the nature of the field has a medium term nature of the investment. This makes the question, the importance of stable rule higher than in other conditions.
Later on the question of Argentina interesting infrastructure, I can only tell you what we see. We see that everybody is actively working on solving the structural bottleneck and this is reflected in the price, is inducing movement in the relative price of heavy oil and light oil product but I don’t think we are, the company that could really get deeper into the side effect of the change in relative price. What we see is that the producers are seeing a higher price. And so they are taking a few more concern in taking decision for oil and for gas it will take longer.
Question on, there is a price increase of OCTG in the U.S. is one of the dollars at home beginning of September. This question is quite unusual that this price increase materializes before the final determination of the trade case. What’s your take on that?
Well, in our product you will never be able to shift from one producer to other in one day. This is a complex environment in which you need to rely on the availability of the product so in many applications. So the case is also driving initial changes in the market. Even before any final determination company needs to prepare themselves, because in some case they may have to change supplier to reposition their purchasing strategy. This there to some extent is also something that is important and will happen before the final termination. The case of price, I think is reversal of something that was overdue; again the margin compression has been very high.
So it is more likely that we’re going to see a potential, further uptick in terms of prices because of repositioning of the supply side?
Overtime, there will be.
Tenaris has a net cash position in the balance sheet and as you show in one of the slides, you’re generating a lot of free cash flow. So the resulting question is what are you going to do with that cash? And are you planning to increase dividends requisitions?
Well, it is true that we are very solid financially positioned company. Also through there we see in this world that I mentioned I present before, a number of on the way from a regional product and even configuration of the business proposition in the different field. So we feel, we will have opportunity in the coming years for expansion, like the case of the U.S., that I think is very important for us or eventual acquisition. We always look at this issue with an open mind, considering how we can best position the company. At the same time we are quite cautious in capital expenditure. So, I think we’re considering keeping our option open.
No need. It is also one of the options like we always have… But we’re quite stable policy this time and we try to preserve stability. It also depends from the shareholders for how they will see this in the future. If there are no opportunity or if we do not perceive opportunity, this is a case in which.
[indiscernible] increase in dividend in the last two years and if you see the dividend yield of our Company per vis-à-vis with oil services, for instance we’re reaching almost 2% which is above the average of the industry. So with this in mind, we should probably keep this trend?
Yes any other question there?
Henry Tarr - Goldman
This is Henry Tarr from Goldman. A couple of quick questions. One, the Middle East clearly has been very strong recently. How do you see that market going forward and is the strength sustainable? And then secondly if you could talk a little bit about the input costs or material cost in the different regions and how you see developments there?
Yes, on the question of Middle East, Gabriel could you?
Good morning, everyone. Thank you Henry for your question. Regarding the Middle East, I think the price start is Saudi. I think this is where the majority of the growth that we have seen this year and next year. There are two components. There is oil and there is gas. As we were saying before Paolo was mentioning the intervention of Saudi in the oil market. We’re losing some important production from Libya, from Iran last year. To some extent this was accommodated by Iraq but Saudi continues to play a key role as a buffer stability of the price in the oil market.
But the most interesting part of Saudi is gas. There is a big drive from the kingdom to industrialize the country. There is a growing population of young that needs to be incorporated into the labor market in the next few years. There are different strategies but between 6 million and 8 million jobs that need to be created, so there is big push. There is going to be a big increase in power generation. There is an installed capacity today in Saudi of 50 gigawatts. That would be taken to 100 gigawatts.
And gas will continue to play a major role, increasing its sharing in the energy metrics in Saudi. So this has driven a big incentive of our Saudi Aramco, increasing rigs finding and producing gas in the kingdom for the first time ever. This year 2013 we’re going to see more rigs drilling for gas than for oil. This is time first ever. We see we have a very close relationship with Saudi Aramco and the plants that we see for next year are talking about 200 rigs. This compares to an average of 150 this year. So this an important increase that is today materializing in our order books in orders of pipes in anticipation of this amount.
So to a large extent the demand of rigs for gas is as it is with premium almost 100%. There is pressure of various premium connection. This is also a sour environment. So there is a special metallurgy. It is our service component. So this makes it also a very complex product and also there is a big kingdom pressure to have local content. You saw we have a manufacturing facility there that we are even considering expansion. So I think we are very well positioned to take advantage of this growth in the Middle East.
We have a leading market share we are number one in all of this space, in terms of premium. Second where I see the raw material, well China is a big driver. The steel industry is perceiving always the level of demand and production of steel industry in China is a driver of the level of price that we can expect in [indiscernible]. Frankly I do not expect if I should say, big changes. The peak of the cycle has passed. We are down and I do not expect this to go up. If I look five years ahead, even there will be additional capacity coming in for iron ore and I expect China to grow in a less steel intensity way if everything goes in the right direction. And so in this sense we may even have some gradual containment or reduction of, I don’t know overtime. This is what we see. We do not see let’s say from that point of view the big push on cost increase. Yes I guess one question there I think yes.
Blake Hutchinson - Howard Weil
Blake Hutchinson, Howard Weil. You talked a lot about your service and logistical content and the differentiation there. Can you help us understand what portion of your tonnage today comes attached to significant service and logistical say value add and where do you envision that going as a percentage again of tonnage over the coming years?
Well, I would say that, and I’m just integrating because there are areas in which we have a very complete service. We arrive to rig, the company just having long term contact and the rig, the tool push coal, send me the column in the center if I have been, I think we will go with these accessory. This [indiscernible] other parts of the world I mean in which we do this. And on the opposite there are areas in which there is a tender in a state owned company that is purchasing and we just deliver pipes. This is reducing to a minimum.
Now in the middle there is all different level of co-design. I mean there are point in which we are the company that co-design the well with the client but in would say today more than probably 80% of our salable [indiscernible] and I don’t know Alejandro [ph] if you are planning, this is something that makes sense, should be the area that has some service or some component of service.
Now in all the case field assistance and technical sale are at least participating in the choice. Now this is how we get. So it is continuum the growth from very high, very relevant support to there are also some pure tender in which we deliver FOB to company that reserves even the pipe. There are cases but I would say 80%. Alejandro, you have technical sales in your team. So maybe you can add something on this.
Yes I agree with your figures Paolo. I think you have to see on the OCTG sector we are mostly dedicated and promoting services. We have technical sales and field service that are people that are helping to run our pipes in all our premium operations. So there we are present in all the operations and service base, we have in many places Argentina, Mexico, in the North Sea, we have also in Africa. We have everywhere where we are established with our main customers, where we have long term contracts, we have our logistic base. Some national oil companies still are going for tenders and that’s where we don’t have this level of service. If you compare this with U.S. we still have some space to go, because some of the service, we don’t provide the services more, the distributors that do the services.
On premium, we always some aspect of this service. Now, the part that is non-premium of it, that is not big for us if it is more. And in some cases, you can consider it an FOB sale.
Alex Brooks - Canaccord
It’s Alex Brooks at Canaccord. I just one question on risk. You painted a scenario of improving demand and in across your American market but obviously preparing for volume imposes costs and my question really is, so how much commitment do you have to make to cope with the higher volume and what’s the flex in the system if the situation turns out either much better or much worse than you are anticipating?
Well, I frankly think that today we are forecasted for our investment in 2013, which would be 750 considering [indiscernible] and so and so forth. I think we will remain in this range until the moment in which we start up the mill in the United States.
Alex Brooks - Canaccord
Which year will be higher?
Next year higher and then the following there we will start to…
Alex Brooks - Canaccord
And the next two years?
In terms of CapEx plan, I mean we will expect this year to end up probably in the range of say 750. Next year with the ramp up of the facility in the U.S. we will probably reach the 1.2 to 1.25 and for the next two years I will say ’14 and ’15 and then in the ’16 will be the last part of our investment in the U.S. We will start coming back to our normal level.
Keep this as a broad estimate. If the plan are going in this direction this should be the logical thing, to take advantage of the perspective that we see in different facility.
[indiscernible]. Given the outlook that you paint by micro region, do you expect these improvements to be already visible in your 2014 numbers or you expect conservative that 2014 might be another transitional year as 2013 should be also considering the positive effect from the anti-dumping measure against the Koreans. And the second question more, that’s the micro, refers to gas prices. You had the slide with the big difference in gas prices between U.S., Europe and far East. Do you expect in the next four or five years with the effects of shale gas in the U.S. and exports, to lead to convergence of gas prices into the free macro areas or do you expect that these differences to remain as they are today?
Well on the first one, frankly I am pretty optimistic about the 2014. I think we should prove that this is a transition year but things are moving, it could be moving between 2013 and 2015. There will be movement in the direction that I mentioned. Now 2015 is a transition year as we have said and I say before, this quarter particularly will be a weak quarter for the reasons that we explained but. This quarter also, Mexico has been affected by two hurricanes, Ingrid and Manuel, which impacted operation of Pemex and to some extent also some of our shipments from there.
But if you look at 2013, you will have—we should be in line or likely below what is our original forecast, what we discussed. 2014 I see that the trade case, the recovery in Argentina should be there. The complex project worldwide should allow us increase the mix of complex products and these should get to our margin. Also we do not talk so much about all the actions that is underway in the industrial and in the system to contain or reduce cost, this is permanent.
Now, one thing that I am worried about is the fiscal pressure that we are seeing. We are operating in countries that are strict for cash. It could be Argentina, Europe, Italy and Mexico. In every place we are clearly perceiving tax pressure. Argentina recently approving increase of 10% on the dividend. Mexico has a fiscal reform that is good because it is free resource of Pemex but it has some component like the tax on dividend that could be also affecting our tax rate. So I would say I am quite positive on the business, but we will feel the pressure of tax from different sides. This is what my feeling for the future is.
And the second on the gas, I really think that U.S. will have a competitive advantage, a long term competitive advantage and there will be a difference. It could be $16 for the LNG or $17 for LNG and $6 or $5 for the gas in U.S. and something in the middle for Europe. But this is there to stay from my point of view. So it's a long term issue, because there is a lot of gas and gradually our view that drilling for the gas will have to resume at higher level compared to today. The number of rigs we will see will be substantially higher if you look at two, three, four years.
I think we have covered our time. Well, thank you to all of you for participating, I hope this has been interesting for you and thank you very much. The lunch will be just outside. Thank you.
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