Tenaris. Letting the pipes cool GLOBAL EQUITY RESEARCH. 14 May 2008 GLOBAL ECONOMICS & FI/FX RESEARCH CROSS ASSET RESEARCH GLOBAL CREDIT RESEARCH

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1 14 May 2008 Alessandro Falcioni, Equity Analyst (HVB Milan) Roberto Odierna (HVB Milan) Head of Equity Research Italy Bayerische Hypo- und Vereinsbank AG UniCredit CAIB Group CROSS ASSET RESEARCH GLOBAL EQUITY RESEARCH GLOBAL CREDIT RESEARCH GLOBAL ECONOMICS & FI/FX RESEARCH Letting the pipes cool

2 Bayerische Hypo- und Vereinsbank AG UniCredit CAIB Group page 2

3 Global Equity Research Company Report Energy Equipment & Services Italy 14 May 2008 Letting the pipes cool World market leader with strong fundamentals underpinning sector growth. is the world leader in the market of tubular goods for oil and gas exploration and production. After the de-stocking related slowdown in 2007, sector fundamentals should support an acceleration in demand for these products this year. We expect an increase in secular global demand for oil and gas to underpin sales growth also in the longer term. Absence of positive short-term catalysts. As demonstrated by 1Q08 results, cost inflation should remain strong in the short term and although the group is able to offset this with an increase in product prices, these would benefit the P&L with some timelag, therefore squeezing profitability and EBITDA growth in coming quarters. We believe the following would act as positive catalysts for the stock: i) the potential reversal of the US dollar weakness (75%-80% of group sales and EBITDA are substantially dollar denominated); and ii) a further acquisition spree targeted at consolidating the OCTG sector further or in the oil service industry. Acquisitions could take place relatively soon, given that we expect the group to end 2009 with a net cash position and an average yearly free cash flow generation of USD 2bn. Re-initiating coverage with a Hold rating. We initiate coverage on shares with a Hold rating and a 12M target price of EUR 18. Both in terms of absolute and relative valuation methodologies, we believe shares are fairly valued. is trading substantially in line with the peer group in terms of 2009E EV/EBITDA and P/CF multiples and three absolute valuation methodologies value shares at between EUR 16.9 and EUR Hold (prev. Coverage in Transition) Price on 13 May 2008 EUR Target price EUR 18.0 Upside to TP 1.0% Cost of equity 8.8% High/Low (12M) 19.15/12.15 INVESTMENT HIGHLIGHTS Market leader with global footprint Strong underlying sector fundamentals STOCK TRIGGERS Further acquisitions in OCTG segment or oil services Reversal of US dollar weakness STOCK DATA Reuters/Bloomberg TS.N/TEN IM Average daily volumes ('000) Free float (%) 39.6 Market capitalization (EURbn) 21.0 No. of shares in issue (mn) Shareholders San Faustin (Techint) 60.4% UPCOMING EVENTS 2Q08 results 6 Aug Q08 results 6 Nov EURmn E 2009E 2010E Sales 6, , , , , ,582.5 EBITDA (Adjusted) 2, , , , , ,649.1 Group Net Profit 1, , , , , ,801.8 EPS Reported DPS After tax ROIC 32.1% 28.3% 20.0% 19.4% 21.1% 22.7% P/E 10.5x 13.5x 14.9x 12.4x 13.0x 11.5x P/CF 8.5x 8.6x 9.2x 10.5x 10.0x 9.1x EV/EBITDA (Adjusted) 6.7x 9.9x 9.7x 8.9x 7.6x 6.4x EV/EBIT 7.5x 10.7x 11.4x 8.5x 8.6x 7.2x Free cash flow yield 9.5% 7.5% 8.9% 7.6% 8.5% 9.4% Dividend yield 2.6% 1.3% 1.0% 1.4% 1.7% 1.9% Source:, UniCredit Global Research 11 TENARIS MILAN MIBTEL - PRICE INDEX Source: Thomson Datastream STOCK PERFORMANCE (% CHG.) 1M 3M 6M absolute rel. to MIBTEL rel. to ES Ind. G/S Alessandro Falcioni, Equity Analyst (HVB Milan) alessandro.falcioni@unicreditgroup.de Roberto Odierna (HVB Milan) Head of Equity Research Italy roberto.odierna@unicreditgroup.de Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 3 See last pages for disclaimer. 3

4 Contents Investment Thesis 5 Letting the pipes cool 5 Investment positives 6 Investment risks 7 Shareholder structure Valuation 8 Absolute valuation 11 Valuation relative to peer group Group Overview 14 Brief history and market positioning 15 Business areas 15 Tubes 20 Projects 21 Other sales 22 Competitive strengths Group Reference Market 25 Introduction to the OCTG market 26 On-going growth in demand for oil and gas expected 27 Drilling activity forecast to rise, driving tube consumption 30 OCTG profitability 31 Chinese competition 32. and raw material cost trends Group Strategy Financial Forecasts 41 1Q08 results Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 4

5 Investment Thesis Letting the pipes cool We re-initiate coverage of with a Hold rating and EUR 18.0 target price, which implies little upside from current levels. is world market leader in the production of oil and gas tubular goods, with a strong presence in the high-end segment (50% of volumes sold in 2008E), where entry barriers are high and growth prospects strongest. After de-stocking by distributors caused the market to contract in 2007, we believe sector fundamentals should support growth in demand for tubular products this year. In the longer term, we expect an increase in secular global demand for oil and gas worldwide to underpin the drilling activity and demand for products. In the short term, however, we do not foresee any positive triggers for a stock re-rating from current levels. The group is offsetting the inflation of production costs by a lagged increase in product prices, which could provide a squeeze on profitability and EBITDA growth in the coming quarters. Although we have no visibility on timing, we believe the following would act as positive catalysts for the stock: i) a reversal of the US dollar weakness (75%-80% of revenues and EBITDA are substantially dollardenominated whilst the target price is calculated in euro); and ii) a further wave of acquisitions by, which we believe could be targeted either at further consolidating the seamless and welded tube industry or even at acquisitions in the oil service industry. Acquisition growth could start again soon; we forecast will end 2009 with a net cash position and generate free cash flow to the tune of USD 2bn per year. Investment positives Market leader with a global footprint With an estimated global market share of 19%, has the strongest presence in the industry worldwide, with 23,500 employees at production facilities in 15 countries, research and development centres in five countries and a service and distribution network in 25 countries. The global presence is an important competitive advantage for the group, giving it strong production flexibility on many product categories at times of peak demand for any of these, and also logistically it enables the group to supply any of the main oil fields from any of its sites around the world, reducing logistic and transportation costs. Robust technological leadership With five R&D centers across Italy, Argentina, Mexico, Japan and the US and decades of experience, has raised the entrance barriers in the high-end segment of OCTG (Oil Country Tubular Goods) products. At a time when market conditions oblige the oil and gas industry to drill for oil in more demanding conditions, where special tubes are required, strong ties have subsequently been developed between and oil companies, further raising entry barriers for low-cost products. Strong underlying sector fundamentals Fundamentals appear to support growing demand for OCTG products, with increasing demand for oil & gas worldwide leading to expectations of long-term growth in drilling activity. Furthermore, as new reserves are harder to find drilling activity is growing in complexity and requires technically more tailor-made and specific products, which augurs well for high-value added niche product offering. For seamless tubes, we are forecasting 4% volume growth per year, with a positive price/mix effect of 5% per year. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 5

6 Defendable high profitability and cash generation The group today is highly cash generative, with annual cash earnings of 24-34% of sales between 2004 and 2007, with EBITDA margins fluctuating between 35% and 40% and generating a pre-tax ROCE of 27-45% in the same period. We expect these high levels will be protected by the ongoing shift towards high-end products (45% of total tube production in 2007) and strong demand for OCTG products driven by the high oil price. Good quality, strongly focused management team management has had the foresight and capabilities to invest in a sector at a time when it was not particularly sexy, and build defendable competitive advantages before OCTG products generated such strong demand. Management focus is now to further consolidate the group, extracting further operating efficiencies, and prepare the group for the future wave of sector consolidation when it arrives. Stock s appeal would be boosted by acquisitions and stronger dollar Following the strong rally in the share price since mid-february, now appears to be fairly valued, both on absolute terms and relative to its peer group of oil service companies. Two elements could make us buyers of the shares: a further substantial acquisition spree that would trigger the financial re-leverage of the group (which would otherwise turn net cash positive in 2009, according to our estimates), and a reversal of the US dollar weakening. The timing of both these events is uncertain, however. Investment risks Further weakening of the dollar would put pressure on our valuation On the other hand, a further weakening of the US dollar from current levels would impact negatively on our valuation for, given that 80% of revenues and an estimated 75% of EBITDA are denominated in dollar-related currencies. Pricing pressure from low cost manufacturers Since the middle of the decade, there has been an increasing flow of Chinese-produced exports of seamless tubes, entering the world market at very low prices and somewhat putting pressure on the low-price product segment. Today, Chinese manufacturers represent 20% of the world market in terms of share, reaching much higher proportions in the US and Canadian markets. Nevertheless, longer term the competitive threat from Chinese manufacturers should subdue. Indeed, China, having insufficient local energy supplies, has neither a competitive advantage in steel production nor enough iron ore or scrap steel reserves to satisfy its production needs. Strong rise in raw material costs This industry, like most others involved in the transformation of raw materials, is facing strong increases in costs partly due to the ongoing weakness of the dollar, but principally because of the rise in the principal raw materials and, this being an energy intensive industry, also in the cost of energy. Following the dramatic increase in the oil price, transportation and logistic costs have also risen substantially. Nevertheless, it has to some extent been possible for high-end tube manufacturers to pass on the rise in costs given the higher intensity of value added given by R&D content and ancillary services associated with the product and the stronger pricing power possible on premium products than on mass market ones. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 6

7 Uncertainties tied to exploitation of new oil fields The large number of deliveries of offshore rigs scheduled for 2008 and 2009 should boost demand growth for complex and thus premium products, which will be spurred by a substantial increase in drilling complexity. Risks to this growth being delayed are tied to political risk in Nigeria, delays in big projects in Australia and in the timing of developments in the Gulf of Mexico and Brazil. Nevertheless, the high revenues of these projects assured by the current high levels in the oil price, should act as a strong stimulus for these projects to be carried out. Shareholder structure is controlled through a 60% stake by III Industrial Investments Inc, a wholly-owned subsidiary of San Faustin NV, which is majority owned by Rocca and Partners SA. There are no controlling shareholders of Rocca and Partners. shares are traded in Milan, Buenos Aires, the Mexican Bolsa de Valores and at the NYSE in the form of ADRs. Over 95% of daily trading is concentrated in New York and in Milan, prevalently in the latter stock market. TENARIS GROUP - SHAREHOLDER STRUCTURE Float 39.6% San Faustin N.V. 60.4% Source: Bloomberg Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 7

8 Valuation Summary We initiate coverage on shares with a Hold rating and target price of EUR 18 per share. Both in terms of absolute and relative valuation methodologies, we believe shares are fairly valued. is trading substantially in line with the peer group in terms of 2009E EV/EBITDA and P/CF multiples and our three absolute valuation methodologies all value the shares at between EUR 16.9 and EUR There are two catalysts that could trigger a re-rating of the shares: i) a reversal of the US dollar weakness (75% of revenues and EBITDA are substantially dollardenominated whilst the target price is calculated in euro); ii) a further wave of acquisitions by to further consolidate the OCTG industry or even in the oil service industry. This could happen relatively soon: we forecast should end 2009 with a net cash position and an average annual free cash generation of USD 2bn. VALUATION SUMMARY TARGET PRICES ON THE BASIS OF DIFFERENT METHODOLOGIES (EUR 1 = USD 1.55) USD per share EUR per share Weight FCF yield % REP Ratio % DCF % Average Source: UniCredit Global Research Absolute valuation In terms of absolute valuation tools, we use FCF yield methodology, REP Ratio and the DCF methodologies. TENARIS VALUATION SUMMARY (PRICED AT 17.6 PER SHARE) E 2009E 2010E P/E (Adjusted) Ord P/CE Ord Yield Ord P / BV EV / EBITDA EV / EBIT FCF Yield Fair value ROE (%) 92.1% 39.7% 41.1% 29.1% 29.7% 22.3% 20.7% ROCE (%) 61.4% 45.4% 41.1% 27.7% 33.5% 30.6% 33.2% ROCE post tax (%) 50.7% 32.1% 28.3% 20.0% 19.4% 21.1% 22.7% WACC 6.4% 9.1% 6.5% 7.9% 8.6% 8.8% 8.8% ROCE post tax / WACC EV / CE REP ratio target price (EUR) Source:, UniCredit Global Research Free cash flow yield Free Cash flow yield points to fair value of 16.8 and 17.1 on 2008 and 2009 estimates Based on the adjusted FCF yield methodology, using a hurdle rate of 8.75% (based on a riskfree rate of 4.25% and market risk premium of 4.5%), our 2008 and 2009 forecasts generate fair values respectively of EUR 16.8 and EUR 17.1 for shares. According to this Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 8

9 methodology, stocks trading at a free cash flow yield (free cash flow before dividends and non-maintenance capex and one-off elements; divided by market cap) above the hurdle rate are undervalued, below that rate they are overvalued and at the hurdle rate they are fairly valued. TENARIS - FREE CASH FLOW YIELD VALUATION (PRICED AT 17.6) USDmn E 2009E 2010E Free cash flow Total capex Non-maintenance invest.s (add-back) Total dividend paid (add-back) Other adjustments Adjusted free cash flow Market cap Free cash flow yield -17.4% 9.2% -5.6% -0.8% 8.3% 8.5% 9.4% Perpetuity growth rate FCF Yield Fair value USD FCF Yield Fair value EUR Source:, UniCredit Global Research In adjusting free cash flow, we add back dividend payments and non-maintenance capex, which we estimate in the region of EUR mn per year. Even pre-adjustments, free cash generation for is very strong, in the region of EUR 2000mn per year, 16-17% of annual sales. REP ratio REP ratio valuation points to a fair value of EUR 16.9 Using the REP (Rating of Economic profit) Ratio valuation we obtain a fair value of EUR 16.9 per share on our 2009 forecasts, using a WACC of 8.75% (beta of 1.0x, 4.25% risk-free rate, and 4.5% equity risk premium) based on our 2009 estimates. The REP ratio addresses the relationship between returns over cost of capital and the market value of the enterprise to capital employed, and offers a reasonable indication of the appropriateness of current market valuations, taking the correct relationship between EV/CE and ROCE/WACC to be 1.0x. TENARIS RATING OF ECONOMIC PROFIT RATIO VALUATION USDmn E 2009E 2010E Net capital empl EBIT EBIT margin 30.0% 31.3% 36.1% 29.4% 36.0% 30.0% 30.4% NOPAT Asset rotation ROCE (%) 61.4% 45.4% 41.1% 27.7% 33.5% 30.6% 33.2% ROCE post tax (%) 50.7% 32.1% 28.3% 20.0% 19.4% 21.1% 22.7% ROCE / WACC ROCE post tax / WACC EV / CE REP ratio target (USD) REP ratio target (EUR) Source:, UniCredit Global Research Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 9

10 DCF valuation DCF model points to a fair value of EUR 18.9 The Discounted Cash Flow valuation points to a fair value of EUR 18.9 per share, based on a three-step model, a perpetuity growth of 1.0% and a WACC of 8.8% (the cost of equity given the positive net cash position we estimate from 2009) up until 2017, and perpetuity (using a net cash position) and deducting FY 2007 net debt. To calculate the WACC, we use a riskfree rate of 4.25%, a market risk premium of 4.5% and a beta of 1.0 for the entire forecast period. TENARIS DISCOUNTED CASH FLOW VALUATION (HORIZON YE 2009) Total USD mn USD per share EUR per share % of total PV of cash-flow, , % PV of cash-flow, , % Perpetuity 16, % Non operating assets % Net debt ye % Total 34, % Source: UniCredit Global Research We applied these variables to the DCF model that includes our detailed forecasts to FY2012, and then extended estimates from FY2013 to FY2017 on the basis of a gradually normalising sales growth and margin scenario: sales growth peaking at 9.6% in 2012, then gradually slowing to 4% in ; EBITDA margin slowing to 25%, in line with the average of the oil service sector to which is increasingly similar given the high service content of its products; with the resulting free operating cash flow growing at 2.9% CAGR between 2008 and We then applied the perpetuity growth rate of 1.0% to what we believe to be a plausible ongoing normalized scenario. Our perpetuity calculated in this way corresponds to an exit EV/EBITDA multiple of 6.8x, compared to the group s current 09 EV/EBITDA multiple of 7.5x. TENARIS - DISCOUNTED CASH FLOWS USDmn 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Perpetui ty Sales Sales growth 12.7% 9.6% 9.6% 9.6% 9.6% 7.0% 5.0% 4.0% 4.0% 4.0% EBIT EBIT margin 36.0% 30.0% 30.4% 30.7% 31.2% 29.0% 27.0% 25.0% 25.0% 25.0% Tax Tax rate -29.7% -31.0% -31.5% -32.3% -33.0% -33.0% -33.0% -33.0% -33.0% -33% -32.3% Depreciation Gross operating cash flow Change in wking cap NWC on sales 29.9% 29.9% 29.9% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Investments Total investments Free operating cash flow Present value of free cash flow Source: UniCredit Global Research Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 10

11 Valuation relative to peer group Hold rating confirmed by peer comparison In summary, the valuation relative to the peer group substantially confirms that, at current levels, is fairly valued. is trading in line with the oil service providers and the oil engineering and construction players 2009E EV/EBITDA and CF multiples and at a 10%- 21% discount to oil equipment manufacturers. Although on P/Es, it is trading at a 10%-15% discount to all three groups, we believe s current valuation relative to the peer group to be fair given that we see the equity story prevalently focused on the cash generating capacity of the group. Given hybrid nature, providing oil equipment but with a large and growing contribution of oil services, we have compared to three sets of peers: the oil service providers, the oil equipment players and the oil engineering and construction players. TENARIS COMPARISON OF PEER GROUP AND TENARIS EBITDA MARGINS (% of sales) E 2009E Oil service providers Baker Hughes Inc 26.8% 26.9% 27.4% Bj Services Co 28.3% 21.5% 23.0% Halliburton Co. 26.9% 25.6% 26.7% Input/Output 17.5% 20.1% 20.0% Schlumberger Ltd. 37.1% 35.6% 36.7% Smith International 17.8% 18.1% 18.3% Weatherford Intl Ltd 28.8% 30.0% 30.1% W-H Energy Services 28.3% 28.9% 29.1% Average 26.5% 25.8% 26.4% Equipment manufacturers Cameron International Corp. 18.1% 18.2% 19.0% Dril Quip 31.1% 30.3% 30.9% Fmc Technologies Inc 12.1% 12.4% 12.4% National Oilwell Varco 23.1% 25.6% 26.6% Vallourec SA 28.5% 24.8% 24.4% Average 22.6% 22.3% 22.7% Engineering and Construction service providers Acergy SA 16.5% 17.7% 18.6% John Wood Group 8.5% 9.2% 9.7% Saipem SpA 12.0% 14.1% 15.8% SBM Offshore NV 19.1% 20.7% 23.7% Subsea 7 Inc. 17.9% 19.9% 20.3% Technip SA 5.2% 9.5% 10.4% Average 13.2% 15.2% 16.4% 34.6% 34.1% 34.0% Source: UniCredit Global Research Oil service suppliers The first group is composed of suppliers of oil services such as Halliburton, Schlumberger and Baker Hughes. Average EBITDA margins for the group are in the region of 26% in 2007 in the two forecast years 2008 and 2009 (see table above) compared to margins of 34%. On average this group has a E EPS CAGR of 12.9% and a E EBITDA CAGR of 10.8%, in line with. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 11

12 TENARIS RELATIVE VALUATION VERSUS OIL SERVICE PROVIDERS P/E P/CF EV/EBITDA EPS EBITDA Price E 2009E E 2009E E 2009E CAGR Baker Hughes Inc % 10.2% Bj Services Co % -4.5% Halliburton Co % 11.7% Input/Output % 20.9% Schlumberger Ltd % 13.4% Smith International % 12.6% Weatherford Intl Ltd % 12.6% W-H Energy Services % 9.5% Average % 10.8% % 9.6% (Disc) / Premium -26.4% -16.1% -12.2% -17.5% -4.6% 0.1% -3.9% -23.8% -6.6% CAGR Source: FactSet and UniCredit Global Research is trading at a 16%-24% discount to the group average on 2008 multiples, but substantially in line with peer group on 2009 estimates, with the exception of P/E, where the discount is of 12%. Equipment manufacturers The second group consists of drilling equipment manufacturers and includes tube manufacturer Vallourec, FMC Technologies and Dril-Quip. In this group EBITDA margins are in the region of 22% in 2007 and in the two forecast years 2008 and 2009 (compared to margins of 34%). On average this group has CAGR of 15.1% and an EBITDA CAGR of 13.6%, above forecast growth for. TENARIS RELATIVE VALUATION OIL EQUIPMENT PLAYERS P/E P/CF EV/EBITDA EPS EBITDA Price E 2009E E 2009E E 2009E CAGR Cameron Int l Corp % 14.9% Dril Quip % 12.5% Fmc Technologies Inc % 15.4% National Oilwell Varco % 29.9% Vallourec SA % -4.7% Average % 13.6% % 9.6% (Disc) / Premium -30.4% -17.3% -17.3% -36.3% -24.3% -19.1% -14.7% -28.7% -13.6% CAGR Source: FactSet and UniCredit Global Research is trading at a discount of 13%-20% to this group of comparables on 2009 estimates, where the growth profile is very similar but amongst which is by far the most profitable. The only exception to this is its Vallourec, to which is trading at a 20%-30% premium on 2009 estimates, but where it has an EBITDA margin which is significantly higher (34% versus 28%). Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 12

13 TENARIS RELATIVE VALUATION ENGINEERING & CONSTRUCTION PLAYERS P/E P/CF EV/EBITDA EPS EBITDA Price E 2009E E 2009E E 2009E CAGR Acergy SA % 17.2% John Wood Group % 12.8% Saipem SpA % 21.7% SBM Offshore NV % 12.8% Subsea 7 Inc % 18.1% Technip SA % 45.3% Average % 21.3% % 9.6% (Disc) / Premium -45.7% -17.9% -16.0% -26.3% -6.0% -1.0% -12.8% -25.8% -10.4% CAGR Source: FactSet and UniCredit Global Research Engineering and Construction service providers The third group includes Engineering and Construction service providers and includes Saipem, Technip and SBM offshore. In this group EBITDA margins are in the region of 13%- 16% in the period, compared to margins of 34%. On average this group has a significantly stronger growth profile both in terms of net earnings and EBITDA ( CAGR) of 33.7% and an EBITDA CAGR of 20.9%, compared with 12.5% and 9.6% respectively. On 2009E EV/EBITDA and P/E multiples, is trading at a 10-16% discount to the group average. PEER GROUP FORWARD PE AND 1-YEAR EARNINGS GROWTH P/E EPS Growth Source: UniCredit Global Research The three peer groups appear to be trading at a combined 17.5x 1-year forward P/E, somewhat below the 20x average at which they traded between 2003 and 2005 but the earnings growth outlook has substantially halved from ca. 40% to 20%. For the foreseeable future in our view, this also applies to, whose organic growth we project to be in the region of 13% at bottom line, after a growth rate of 21% in recent years (04-08 CAGR). Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 13

14 Group Overview Brief history and market positioning With sales of EUR 10bn and production capacity of 6mn tons in 2007, is today a leading global manufacturer of tubular products and services, prevalently used in the oil and gas industry but also in a wide range of industrial and automotive applications. TENARIS - CONTRIBUTION TO GROUP ACCOUNTS USD mn Sales Tubes 3, , , ,552.6 Projects Other Total group sales 4, , , ,042.0 EBITDA Tubes , , ,160.0 Projects Other Total group EBITDA 1, , , ,449.3 EBITDA margin Tubes 25.2% 36.8% 42.4% 36.9% Projects 17.5% 24.7% 16.7% 23.3% Other 12.1% 26.5% 17.6% 13.9% Group EBITDA margin 24.1% 34.7% 39.4% 34.3% Source: UniCredit Global Research Strong organic and acquisition-led growth was born in the 1990s and is the result of an intensive acquisition strategy and strong organic growth that began with the consolidation of three main companies, Siderca, Tamsa and Dalmine. The group has played an active role in the consolidation of the steel tube sector that has taken place worldwide. TENARIS GROUP STRONG ACQUISITION-LED GROWTH (TOTAL PRODUCTION CAPACITY OF TUBES) (tons '000) Product type Siderca (Argentina) Seamless tube Siat (Argentina) Welded Tamsa (Mexico) Seamless tube Dalmine (Italy) Seamless tube Tavsa (Venezuela) Seamless tube Confab (Brazil) Welded NKK Tubes (Japan) Seamless tube Algoma Tubes (Canada) Seamless tube Silcotub (Rumania) Seamless tube Maverick (US) Welded ,860 1,860 Hydril (USA) Premium connections Total production capacity 830 1,030 1,900 2,850 2,965 3,465 3,975 4,170 4,200 6,110 6,110 Source: UniCredit Global Research Production capacity spread throughout the world Consequently, today the group has acquired a global footprint with production facilities in Argentina, Brazil, Columbia, Mexico, United States, Canada, Romania, Venezuela, Italy and Japan and with commercial and finishing facilities throughout the world, including Nigeria and China. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 14

15 Business areas business is organized in three reporting areas: Tubes, Projects and Other. The most important of these by far is Tubes, contributing 85% of group sales and 91% of consolidated EBITDA (2007 data), and includes seamless and welded tubular products mainly for the oil & gas exploration and production industry. TENARIS GROUP - SALES BREAKDOWN BY PRODUCT CATEGORY AND BY GEOGRAPHY Sales breakdown by product (2007) Geographical breakdown of group sales (2007) Projects 8.7% Other 6.1% Far East and Oceania 7.0% South America 23.0% North America 32.0% Tubes 85.2% Europe 17.0% Middle East and Africa 21.0% Source:, UniCredit Global Research Tubes With annual manufacturing capacity of 5.3mn tons, produces tubes for a wide range of applications, but where the main distinction is between seamless and welded. The most cash generative area of business of the group, this area has generated strong double-digit sales growth, both organic and acquisition-led, with rising profitability, driven principally by economies of scale but also by growing demand for tubular products. The reduction in EBITDA margin reported in 2007 is mainly due to the consolidation of the Maverick acquisition (October 2006), one of the leading manufacturer of tubes in the US, which prevalently manufactures welded tubes that have structurally lower profitability. TENARIS GROUP - TUBES - OPERATING ACCOUNTS USD mn Net sales 3, , , ,552.6 y-o-y growth % 16.9% 37.8% 33.2% 25.3% Cost of sales -2, , , ,427.9 Gross margin 44.2% 46.9% 52.7% 48.2% EBITDA , , ,160.0 EBITDA margin 25.2% 36.8% 42.4% 36.9% Depreciation EBIT , , ,713.9 EBIT Margin 20.2% 33.2% 39.1% 31.7% Capex % of division sales 4.0% 4.9% 6.0% 4.7% Total assets 4, , , ,453.2 Source: UniCredit Global Research Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 15

16 tube products cater for four main segments: Oilfield services (55%-60% of area sales), where products and services are targeted to oil & gas companies during the exploration and production process. Products include seamless and welded tubes whilst services include technical assistance, string design, just-in-time supply and inventory management. Pipeline services (10%-15% of area sales), catering for the needs of energy companies in the transfer of liquids and gasses from the well (point of extraction) to the refining or processing and distribution facilities. Products include seamless and welded line pipes, bends, and accessories whilst services include tube coating, project management and logistics. Process and power plant services (20% of area sales), where product cater for the needs of oil & gas processing facilities, refineries, petrochemical companies and power generation facilities and where services span from the construction to the maintenance phases. Industrial and automotive services (10% of area sales), where products span from tubes for the automotive industry and other specialized industrial applications such as hollows for gas cylinders, structural tubing and tubes for hydraulic cylinders. 1) Seamless tubes Two thirds of the 5.3mn ton annual tube manufacturing capacity of is concentrated in the production of seamless tubes, whose main application is in exploration and production for the oil and gas industry, which generates an estimated 90% of area sales. Also known as Oil Country Tubular Goods (OCTG), this product category includes premium connections, i.e. the couplings and joints that link individual tubes. Leading world player in OCTG seamless tubes In seamless OCTG tubes is world market leader with a share of 19% (data available for 2005); it is also world market leader in the premium joints segment with a market share of 37% (including Hydril, acquired in 2007). TENARIS GROUP WORLD MARKET LEADER IN OCTG SEAMLESS TUBES AND IN PREMIUM CONNECTIONS World Market share in seamless OCTG tubes production (2005) World market share in premium connections (2007) Other US 4.0% Others 7.0% 19.0% Others 14.0% Other CIS 5.0% JFE 5.0% Hydril 37.0% Other China 16.0% TPCO 9.0% Grant 8.0% Japan 8.0% TMK 11.0% Vam (Sumitomo) 14.0% US Steel 8.0% V&M 13.0% Vam (Vallourec) 22.0% Source:, UniCredit Global Research OCTG tubes consist of casings which sustain the walls of the oil and gas wells during the drilling phase and tubing, used to extract the oil or gas from underground after the drilling is completed. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 16

17 Global Equity Research 14 May 2008 WELL COMPLEXITY DRIVES DEMAND FOR PREMIUM PRODUCTS Land Land Shallow Well Directional Deep Well /8 Offshore Deep Water Deep Well 50 m m Offsh. Shallow Water Directional Deep Well 800 m 18 5/8 850 m 1550 m 13 5/8 5 1/ m 13 5/ m 13 3/ m 3200 m 9 5/8 9 5/8 11 ¾ 9 7/ m 5550 m 5850 m 6100 m 1,350 Tons 100 Tons 3200 m 5 1/ m 3700 m 700 Tons 700 Tons 0% Premium 70% Premium 100% Premium 70% Premium 0% Special Grades 80% Special Grades 50% Special Grades 30% Chrome Source: ; (1) - Strings with premium connections in red/light gray supplies a comprehensive range of seamless and welded casing and tubing, drill pipe, premium connections and accessories for use in even the most demanding oil and gas drilling and well completion activities. Using its network of manufacturing, customer service and R&D facilities, it focuses on reducing costs and risks for its customers through integrating supply chain management and developing industry-leading tubular goods. TENARIS PRODUCTS IN DEEP SEA OCTG Steel Catenary Riser Top Tension Riser Bends Upset SCR TDZ Flowlines Source: Strong vertical integration in seamless production Bayerische Hypo- und Vereinsbank AG In seamless steel tube production is a fully-integrated steel manufacturer, having its own steelmaking, tube rolling, cold-drawing, heat treatments and processing of tubular parts, as well offering the full range of logistic services for these products. This explains the high CA IB International Markets AG page 17

18 profitability of Tubes, and the strong reduction after the consolidation of Maverick, which prevalently manufactures welded tubes but, more importantly, which is much less vertically integrated, acquiring steel coils needed for its production needs from outside. TENARIS GROUP - TUBE PRODUCTION (Metric tons) Seamless tubes 2,162,000 2,673,000 2,283,000 2,278,000 2,646,000 2,870,000 2,919,000 Welded tubes , ,000 Tubes total 2,162,000 2,673,000 2,283,000 2,278,000 2,646,000 3,167,000 3,884,000 y-o-y growth (%) 23.6% -14.6% -0.2% 16.2% 19.7% 22.6% Source: UniCredit Global Research The product range includes many proprietary steel grades for use in special applications and other corrosion resistant alloys from 13Cr to 28Cr. Low alloy and carbon steel grade tubes are produced with outside diameters ranging from 1 1/3'' to 28''. Strong in high-end products The group s product range is particularly strong in the premium segment, where its market share is stronger than in the overall seamless tube sector, where it competes exclusively with Sumitomo and Vallourec. High-end products are characterized by special alloys and finishing, special coatings, premium joints and tailor-made products, that make the casing and tubes more resistant to particularly harsh environmental conditions. The high-end product range is also characterized by a high service content, which extends from R&D for specially-made products, to the logistics involved in just-in-time delivery of the tubes from the mill to the rig and to after sales service. 2) Welded Tubes Maverick acquisition projected to leadership position in the US market In the OCTG segment, started offering welded products with the acquisition of Maverick in October acquisition cost was USD 3.16bn inclusive of debt. With a yearly production capacity of 1.9mn tons, Maverick manufactures OCTG, line pipe and coiled tubing for use in oil and gas exploration and production (tube applications range from shallow onshore shallow to complex deepwater wells) and for miscellaneous industrial applications, as well as welded pipes for electrical ducts. With a manufacturing presence in the US, Canada and Colombia, Maverick is a US company which combined with has about 20% of the North American market, the largest market in the world, representing about 40% of global consumption of OCTG. Although welded products are technically inferior to seamless ones (welding makes the tubes less resistant to torque, heat, pressure and corrosion), for historic reasons penetration of these products in the US market is still high, representing 50% of the market today. Indeed this market has been characterized by shallow wells without particularly harsh drilling conditions, making welded tubes sufficient for this market. Maverick s business being prevalently focused in the North American market, it mostly manufactures welded tubes, whose operating margins are structurally lower than those of seamless tubes for two main reasons. First, welded products are mostly low-end products, and thus more exposed to pricing pressures; and secondly, Maverick s operations are less vertically integrated than those of Maverick does not own steel making facilities and buys steel coil from outside the group. Maverick brought leading position in coiled tubes Maverick has also brought with it the coiled tube technology, with a world leadership position in the segment for these products, which are used in deepwater applications and downhole workovers. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 18

19 With the acquisition of Maverick, the group is now focusing on integrating its North American platform, offering both seamless and welded tubes, premium connections and coiled tubing with related services. Most importantly as mentioned above, the acquisition of Maverick has transformed, giving it local player status also in the North American market. Indeed, through this acquisition the group is now able to sell its full product range in the North American market, something from which it was previously precluded by import barriers. Entry in the North American market has already resulted in alliances with players such as Conoco, Chevron, Dominion, Apache and, more recently, with Noble. 3) Premium Connections In terms of joints and connections, owns the patent to an extensive range of premium connections and holds the rights to manufacture and sell the Atlas Bradford premium connection product range outside the US. Specially designed connections are used to join casing and tubing in particularly harsh environments in terms of temperature, pressure or in terms of corrosion as well as mechanical stress conditions of the ground where the oil is being extracted. These joints are particularly useful in ultra-deep wells, both on land and offshore. Position in premium connections significantly strengthened through the Hydril acquisition With the acquisition in May 2007 of Hydril, the main US manufacturer of premium joints and pressure control products used in oil and gas drilling, significantly strengthened its product offering in the premium connection segment, acquiring the leadership position worldwide with a 37% market share. TENARIS - INTEGRATING PRODUCT RANGE IN PREMIUM JOINTS Coupled joint - Integral joint - Hydril Source: UniCredit Global Research and Hydril products are complementary Hydril s product offering is complementary to : whereas the first is strong in integral joints; the latter is prevalently focused on coupled joints. Both have their advantages coupled joints are stronger but are also more rigid and are wider, making their use less suitable for horizontal drilling; integral joints are slimmer and more flexible but weaker. Integral joints are also quicker to install, as every pipe sunk into the group needs to be screwed in just once instead of twice as in the case of thread and couple joints. paid USD 2.0bn for Hydril, for 2006 revenues of USD 503mn (of which USD 297mn is in premium connections, while the remainder is in pressure control instruments) and EBIT of USD 503mn. In January this year, sold Hydril s Pressure Control Business to GE for USD 1.1bn, as it considered this business not to be synergic with the group s other activities. Very importantly from a strategic point of view, the group has two pipe threading facilities for premium joints, one with a threading capacity of 40,000 tons per year in Nigeria and the other Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 19

20 in China 50,000 tons per year (November 2006), enabling it to supply the West African oil fields and the Chinese premium joint market as a local player. Sales and EBITDA drivers for the Tubes business Growth drivers for the tubes division are the growing demand for oil, and the even faster growing demand for special tubes, as the high oil price is leading to the extraction of oil from areas where it is more costly and difficult, requiring more technical and tailor-made tubing. The shift in sales mix towards higher value added products, should help shelter group margins from low-cost competitors and from rising raw material costs. Projects The Projects business, mainly consisting of two companies CONFAB and SIAT respectively in Brazil and Argentina, manufactures large-diameter tubes used for oil and gas pipelines, with a combined annual production capacity of 850,000 tons. These are the tubes used to transfer oil or gas from one geographical area to another. This area s activity is mainly concentrated in Latin America, where the group works on projects for the construction of gas grids and oil pipelines. Produces tubes, but larger ones A cost-plus business Due to the large diameter of these tubes (4.5 to 100 inches of outside diameter) and also due to the less taxing conditions in which they are utilized, they are mostly welded and made from large flat steel coils. Unlike the tubes division, does not manufacture the steel coils but acquires them from external suppliers. The economics of this division are substantially different from those of the tubes division. Sales and margins fluctuate substantially as individual orders tend to be lumpy and therefore have a large impact on the top line and also on the margins of the division. But this is mostly a cost-plus business, where the selling price of the individual project is calculated on the basis of the purchasing price of all necessary materials, once this has been carried out. TENARIS GROUP - PROJECTS DIVISION - OPERATING ACCOUNTS USD mn Net sales Cost of sales Gross margin 34.0% 35.4% 28.0% 29.2% EBITDA EBITDA margin 17.5% 24.7% 16.7% 23.3% Depreciation EBIT EBIT Margin 13.2% 22.7% 12.4% 21.1% Capex Total assets ,085.3 Average selling price (USD/tonne) 886 1,577 1,614 1,849 Px/mix incr y-o-y n.a. 77.9% 2.3% 14.6% Volumes sold 316, , , ,000 Vols increase y-o-y -11.0% 58.5% -43.9% 68.7% Source: UniCredit Global Research Growth drivers The growth drivers of this division mainly consist of the growth of gasification, specifically in Latin America where the group has strong market recognition built over two decades of presence in this area. Most of the contracts driving sales in 2008, will concern projects in Brazil and in Colombia. Additionally, has been selected as one of the main suppliers for the Bolivia-Argentina gas pipeline although it is not clear what the timing for its construction will be. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 20

21 Other sales Other includes a variety of products including HBI (hot briquetted iron), a semi-finished component used in the production of steel (accounts reflect the part which is not used for group production and is sold outside the group), sucker rods and other auxiliary equipment used in oil fields, welded steel pipes for electric conduits used in the construction industry and miscellaneous industrial equipment. TENARIS GROUP OTHER SALES OPERATING ACCOUNTS USD mn Net sales y-o-y increase 79.4% 52.1% 36.3% Cost of sales Gross margin 28.1% 36.0% 27.5% 23.8% EBITDA EBITDA margin 12.1% 26.5% 17.6% 13.9% Depreciation EBIT EBIT Margin 10.7% 21.9% 14.6% 9.5% Capex Total assets Depreciation on assets -1.09% -3.84% -2.38% -4.85% Source: UniCredit Global Research Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 21

22 Competitive strengths The group today is highly cash generative, with annual cash earnings of 24%-34% of sales between 2004 and 2007, with EBITDA margins fluctuating between 35% and 40% and generating a pre-tax ROCE of 27%-45% in the same period. The decline in 2007 was due to the acquisition of the US activities of Maverick and Hydril, which were strategic acquisitions on a medium- to-long term view and also intended to prevent competitors from acquiring them, but which were somewhat dilutive in the short term. TENARIS GROUP - MAIN OPERATING DATA AND RETURNS USD mn Sales 4, , , ,042.0 y-o-y growth 49.2% 24.5% 29.9% EBITDA 1, , , ,472.0 EBITDA margin 35.0% 34.8% 39.4% 34.6% EBIT 1, , , ,957.2 EBIT margin 30.0% 31.3% 36.1% 29.4% Adj. Cash earnings 1, , , ,438.5 As % of sales 34.4% 24.0% 28.5% 24.3% ROE 92.1% 39.7% 41.1% 29.1% ROCE 30.7% 45.4% 41.1% 27.7% ROCE after tax 25.4% 32.1% 28.3% 20.0% Cash conversion ratio 1.26x 0.51x 0.54x 0.65x Source: UniCredit Global Research Four main competitive strengths Today the group relies on four main competitive strengths: a global production base, strong R&D capabilities that enable it to grow its share in high-end products, valuable service content and a strong local presence in key markets, including the all-important North American market. Global production base has a global footprint, with 23,500 employees at production facilities in 15 countries, research and development centers in five countries and a service and distribution network in 25 countries. The group has 15 rolling mills and four major steel production shops, with 20 heat treatment facilities, with two finishing plants in Nigeria and one in China, giving it probably the strongest global presence in the industry. The global presence is an important competitive advantage for the group as it allows it to have strong production flexibility on many product categories at times of peak demand for any of them, and also logistically it enables the group to supply any of the main oil fields from any of its sites around the world, reducing logistic and transportation costs. Bayerische Hypo- und Vereinsbank AG CA IB International Markets AG page 22