Optimizing Supply Chain Efficiency Is Key for Tenaris

Strategist

Travis Miller

Associate Equity Analyst

Jivyaa Vaidya

Tenaris is the largest provider of oil country tubular goods, the steel tubing used to construct oil and gas wells. It controls nearly half the global OCTG market, providing premium and nonpremium solutions for offshore and onshore applications.

The firm manages low-cost, high-quality manufacturing operations on nearly every continent, enabling it to reap the benefits of a globalized supply chain while maintaining a localized presence. It continues pursuing capacity expansions in North America and the Middle East. 

Tenaris aims to optimize its supply chain through the expansion of Rig Direct, a just-in-time inventory-management program that maximizes production efficiency through improved demand planning. Tenaris can manage the entirety of well operators’ tubular supply chains, from steel procurement to well installation.

Rig Direct helps Tenaris maintain customer relationships through collaborative product development and, to a broader extent, customers’ production plans moving forward. Better demand visibility leads to a more agile supply chain, as Tenaris can more easily optimize its inventory on hand, reducing raw material costs and storage costs. As of November 2023, 85% of Tenaris' North American customers use Rig Direct in some capacity. 

The OCTG industry at large remains oversupplied and highly competitive. Generalist steel manufacturers now produce nonpremium OCTG products, since these don’t require specialization. The premium market, where Tenaris maintains substantial share, focuses on more-complex projects, such as offshore deep-water production. Premium products require more specialized manufacturing processes that, while not impossible to replicate, would require substantial investment by a new competitor to enter.

Brand reputation and customer trust are factors too, as complex projects typically involve a higher cost of failure. However, the premium space has seen new entrants over time, and we expect heightened competition in this once-concentrated market will persist, especially as revitalized offshore investment pushes the industry toward a multiyear upcycle.

Business Strategy & Outlook

We do not think Tenaris possesses an economic moat. We believe it’s unlikely the firm will generate material returns on invested capital greater than its cost of capital during the next decade.

Tenaris' intangible assets related to its premium connections and other higher-end OCTG products are a competitive advantage. This includes patents, brand reputation, and other technical capabilities. Increased competition (especially in the lower-end OCTG markets) and limited product differentiation (through efficiency gains and/or cost reduction) continue to exacerbate challenges associated with the ever-present industry overcapacity. 

During the U.S. shale boom (2007-14), Tenaris and Vallourec lost about 10% of their combined share of the premium market, falling to about 60% by the end of the period. Nonpremium competitors like TMK and U.S. Steel entered the market in pursuit of the then-high profit margins enjoyed by existing OCTG providers. The premium OCTG connection market historically represents a little under one third of global OCTG demand, so Tenaris is operating in a smaller end market than its nonpremium peers. Competition remains heightened and fragmented on a global scale, as specialty OCTG and generalist steel producers alike seek to address demand for tubing in the oil and gas industry. 

Advancements in production processes also present challenges, as end markets that previously relied on Tenaris’ premium products have since developed methods for achieving comparable efficiency with less complex, lower-cost products. This ultimately reduces Tenaris’ ability to benefit from its higher-priced premium products while exposing the firm to increased competition from nonpremium producers.

This is especially true in the U.S., where shale operators’ widespread adoption of semipremium OCTG products exacerbates competition in an already oversaturated market. Tenaris itself initially worked with shale producers to develop these semipremium solutions to achieve sufficient productivity at a reduced cost. Well operators continuously seek opportunities for cost reduction, so while this solution likely benefited Tenaris initially, competitors acted quickly.

Semipremium products, while still more complex than nonpremium products (such as API connections), don’t require as much expertise to produce, allowing less sophisticated competitors to service the U.S. shale market. Now, semipremium and premium products each represent about one fourth of total U.S. OCTG demand, with API connections constituting the remaining half. 

Opportunities for premium OCTG products remain in markets characterized by more specialized and complex drilling projects, namely offshore. These are also spaces where brand reputation and technological know-how are more applicable due to a higher cost of failure. Nearly 20% of Tenaris' tubes revenue comes from offshore contracts. 

The exposure to offshore also helps partially protect Tenaris from industrywide pressures like input cost volatility. The harsh nature of these environments requires corrosion-resistant alloy OCTG. Generally speaking, the cost of raw materials drives about one fourth of CRA OCTG costs, compared with over half for other OCTG grades. This means that changes in steel prices have a comparatively lower impact on CRA OCTG. Contracts with customers have a far greater impact, driving about half of CRA OCTG costs.

Although contracts vary, they usually allow for Tenaris’ prices to adjust in line with changes in input costs over time. Tenaris can therefore partially protect its margins when costs rise, as they did when iron ore prices increased approximately 40% during the first half of 2021. This is not unique to Tenaris, however, as competitors operating in similar end markets experience the same impacts, so we don’t consider it to be a competitive advantage. 

Profitability for all OCTG producers fell markedly in the 2010-14 oil and gas cycle versus 2005-08 owing to global OCTG overcapacity. In 2020, Tenaris and its peers posted negative operating profits as well production reached a near standstill. Heightened trade restrictions in Tenaris’ largest market, the U.S., could protect pricing in that market, but any volume diverted from the U.S. only worsens the overcapacity in the rest of the world.

None

Economic Moat

Tenaris S.A.

Tenaris SA manufactures and supplies steel pipe products. It operates through the Tubes and Other segments. The Tubes segment consists of the production and sale of both seamless and welded steel tubular products and related services mainly for the oil and gas industry, particularly oil country tubular goods used in drilling operations, and for other industrial applications with production processes that consist in the transformation of steel into tubular products. The Other segment deals with all other business activities and operating segments, including the production and selling of sucker rods, industrial equipment, coiled tubing, heat exchangers, and utility conduits for buildings and the sale of energy and raw materials that exceed internal requirements. Its principal finished products are seamless and welded steel casing and tubing, line pipe and other mechanical and structural steel pipes for different uses. The company was founded in 1909 and is headquartered in Luxembourg.

Earnings data Q2 2021

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Earnings data Q2 2024

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Tenaris SA engages in the manufacture and supply of steel pipe products. Its products include steel casing, steel tubing, line pipe, mechanical and structural pipes, cold-drawn pipe, premium joints and couplings, coiled tubing, and sucker rods. It operates through the Tubes and Others segments. The Tubes segment consists of the production and sale of both seamless and welded steel tubular products and related services mainly for the oil and gas industry, particularly oil country tubular goods used in drilling operations, and for other industrial applications with production processes that consist in the transformation of steel into tubular products. The Other segment deals with all other business activities and operating segments, including the production and selling of sucker rods, industrial equipment, coiled tubing, heat exchangers, and utility conduits for buildings and the sale of energy and raw materials that exceed internal requirements. The company was founded in 1909 and is headquartered in Luxembourg.

Tenaris S.A. (NYSE:TS ) Q1 2024 Earnings Conference Call April 26, 2024 8:00 AM ET Company Participants Giovanni Sardagna - Director of Investor Relations Paolo Rocca - Chief Executive Officer Luca Zanotti - President, U.S. Operations Gabriel Podskubka - Chief Operating Officer Conference Call Participants Arun Jayaram - J.P.

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The financial and operational information contained in this press release is based on unaudited consolidated condensed interim financial statements presented in U.S. dollars and prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board and adopted by the European Union, or IFRS. Additionally, this press release includes non-IFRS alternative performance measures i.e., EBITDA, Net cash / debt, Free Cash Flow and Operating working capital days. See exhibit I for more details on these alternative performance measures.

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LUXEMBOURG, March 28, 2024 (GLOBE NEWSWIRE) -- Tenaris S.A. (NYSE and Mexico: TS and EXM Italy: TEN) announces that it has filed today its Annual Report on Form 20-F for the year ended December 31, 2023, with the U.S. Securities and Exchange Commission (SEC). The annual report can be downloaded from the SEC's website at www.sec.gov, and is available on Tenaris's website at ir.tenaris.com.

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LUXEMBOURG, March 22, 2024 (GLOBE NEWSWIRE) -- Tenaris S.A. (NYSE and Mexico: TS and EXM Italy: TEN) filed today its 2023 Annual Report and its 2023 Sustainability Report with the Luxembourg Stock Exchange, with the U.S. Securities and Exchange Commission (SEC), and with the other securities regulators of the markets where its securities are listed. These reports (which contain the financial and non-financial information required by applicable Luxembourg law for the year ended December 31, 2023, including Tenaris's consolidated financial statements as of and for the year ended December 31, 2023, Tenaris's annual accounts as at December 31, 2023, and their related external auditors' reports and consolidated management report and certifications) is available on the Luxembourg Stock Exchange's website at www.bourse.lu/regulated-information-oam, the SEC's website at www.sec.gov, and Tenaris's website at ir.tenaris.com.

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LUXEMBOURG, Feb. 25, 2024 (GLOBE NEWSWIRE) -- Tenaris S.A. (NYSE and Mexico: TS and EXM Italy: TEN) (“Tenaris”) announced today that pursuant to its Share Buyback Program (the “Program”) announced on November 1, 2023, covering up to $1.2 billion to be executed in the open market with the intent to cancel the ordinary shares acquired through the Program, Tenaris has entered into a non-discretionary buyback agreement with a primary financial institution (the “Bank”).

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The financial and operational information contained in this press release is based on audited consolidated financial statements presented in U.S. dollars and prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board and adopted by the European Union, or IFRS Accounting Standards. Additionally, this press release includes non-IFRS alternative performance measures i.e., EBITDA, Free Cash Flow, Net cash / debt and Operating working capital days. See exhibit I for more details on these alternative performance measures.

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Tenaris S.A. (NYSE:TS ) Q3 2023 Earnings Call Transcript November 2, 2023 8:00 AM ET Company Participants Giovanni Sardagna - Head of IR Paolo Rocca - Chairman and CEO Luca Zanotti - President, US Operations Gabriel Podskubka - COO Conference Call Participants Alessandro Pozzi - Mediobanca Arun Jayaram - JPMorgan Securities Marc Bianchi - TD Cowen Luke Lemoine - Piper Sandler David Anderson - Barclays Jamie Franklin - Jefferies Operator Good day, and thank you for standing by.

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The financial and operational information contained in this press release is based on unaudited consolidated condensed interim financial statements presented in U.S. dollars and prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board and adopted by the European Union, or IFRS. Additionally, this press release includes non-IFRS alternative performance measures i.e., EBITDA, Free Cash Flow, Net cash / debt and Operating working capital days. See exhibit I for more details on these alternative performance measures.

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LUXEMBOURG, Oct. 23, 2023 (GLOBE NEWSWIRE) -- Tenaris S.A. (NYSE and Mexico: TS and EXM Italy: TEN) (“Tenaris”) announced a change from a global depository structure to LuxCSD S.A. (“LuxCSD”) as issuer central securities depository (“CSD”), and the appointment of Banque Internationale à Luxembourg S.A. (“BIL”), as LuxCSD principal agent (replacing BNP as common depositary) from October 31, 2023. BIL will also continue to act as Tenaris's paying agent and registrar for its registered shares.

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