Vallourec - hard to forecast significant equity value from current levels

Please find our updated analysis here

We are not taking a position in the Vallourec bonds prior to the restructuring. Although the process might provide a technical opportunity for investors, we struggle to project the underlying business to produce positive cash flow in the future.

We have forecasted the business in analogy with 2015/18 oil slump, with some adjustments, and under various scenarios, we are struggling to create a defensible business case for any position we would want to be exposed. Even with a significant debt write off (c. €1.6bn) the Company remains negative Net Cashflow in the coming years.

On the positive side is the current trading levels of a traded peer, Tenaris (11.5x LTM EBITDA), and combined with Vallourec’s favourable regional exposure to South America and in particular, Brazil, should imply strong equity value.

We remain concerned with an expectation of a quick rebound in oil majors CAPEX spend in exploration. Petrobras, one of the most important clients for Vallourec have reduced their CAPEX by 20-30% in the last 12 months, and it is unlikely to recover back to 2014 levels unless oil prices see triple-digit levels. Other oil majors have indicated to the market stable CAPEX levels, however, reducing the focus on exploration CAPEX and moving more towards renewables and alternatives.

We are happy to discuss this name further.

Tomás
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E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk