Vallourec questions for the call
All,
From Tomas:
Vallourec are due to release results next week, Wednesday after the Close of market, with call later that evening.
Main questions for the call:
=> Can they compensate for the US decline with growth in other markets - which and why - increasingly confident or less so?
=> How are discussions with banks progressing on the refinancing of their undrawn facilities. Those begin to expire in 2020 - except the E400m private placement. Will they layer the bonds?
=> Will they pay down the private placement with cash or are negotiations under way to refinance them - and therefore possibly layer the bonds?
=> Any insight in relation to Petrobras investing again from late 2020 onwards?
=> Update on the sale of the Power Generation business.
=> Discussion on the effects of the cost savings (redundancies in Germany) of c. 600 people.
Background:
Investors have been fretting about the decline in the OCTG market (oil pipes) and overall rig numbers in the US. But this has been highlighted already and is baked into our numbers. According to our model this will likely cost the company 5% of US Sales and only E2mm of EBITDA for the quarter.
The below graph is from Tenaris' presentation in April, in which they forecast the US market to drop by 7%, but the overall global market expected to increase by 2.6%. This equates to non-US growth of 9% for 2019. This compares to our assumptions of 10% for Europe, only 3% in Brazil this year and flat in Asia - as far as Vallourec is concerned.
The second graph shows the number of oil rigs in operation in the US, which is a key driver for the US OCTG market. This has fallen 11% since beginning of the year supporting the above observations. The US Oil Rig Count measures the number of oil rigs functioning in the United States. This indicator is important to track because it can give an idea of how much oil production is occurring.
Historically, the number of US Oil Rigs peaked in late 2014. The total number of oil rigs reached as high as 1609 before being cut to just 325 within 2 years as a result of the Oil price decline. In 2018 the US Oil Rig Count has recovered to an average level of 860 and its is now at 784, down from 788 last week. This is a change of -0.51% from last week and -9.15% from one year ago. So the index has lost another 1% since the end of June - Vallourec’s Q2 cut off date. While the index is likely not accurate, the trend remains undoubtedly negative.
Vallourec are exposed to the US market with approx 33% of sales. So the larger part of their business is in areas expected to grow. Recovery in these non-US markets is essential in the further recovery of EBITDA for Vallourec. We are expecting EBITDA c. $70m in Q2 2019, substantially up on Q2 2018 but below the $90m recorded in Q4 2018. This is inline with our discussions with management.
Tomas is your analyst.
Wolfgang