Tenaris S.A.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Tenaris S.A. is a global manufacturer and supplier of steel pipes and related services for the energy industry and other industrial applications, known for its vertically integrated operations and production of high-quality products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Tenaris operates within the global energy industry, focusing primarily on the production and supply of seamless and welded steel pipes. These products are essential for oil and gas exploration, production, and transmission, as well as other industrial applications. The company’s operations are vertically integrated, meaning it has control over various stages of the supply chain, from raw material sourcing to the manufacturing and distribution of finished pipes.

  • Revenue Distribution: Tenaris divides its business into four segments:
    1. Tubes (OCTG/Line Pipe): These are the core products, mainly used in oil and gas exploration and production.
    2. Industrial: This segment includes pipes for various industrial and mechanical applications.
    3. Others: This includes power generation.
    4. Services: This segment, includes operations for transportation of the pipes, coating and other related services.

The majority of its revenue comes from the sale of its tube products for the oil and gas industry (OCTG) segment, while the other segments contribute a smaller but relevant part to total revenue.

  • Industry Trends:
    • The oil and gas industry, a major market for Tenaris, is highly cyclical. This means that demand for Tenaris’s products is influenced by fluctuating oil and gas prices and the level of exploration and drilling activity.
    • The industry is also experiencing a transition towards renewable energy sources, prompting companies like Tenaris to invest in technology and solutions for renewable energy projects, including carbon capture.
    • Increased geopolitical risk and sanctions may also affect the companies supply chain and sales.
  • Competitive Landscape: The steel pipe industry is competitive with numerous regional and international players. Competitors often include both larger players in this space, such as Vallourec and smaller manufacturers. Tenaris differentiates itself from other companies by emphasizing quality, technology, and its vertically integrated operations.

Tenaris distinguishes itself by its geographically diversified production facilities, located in major oil and gas markets. This enables it to promptly respond to regional demand while maintaining competitive costs and leveraging its manufacturing expertise.

  • Financial Performance and Margins:
    • Tenaris’s performance is closely linked to the cyclical nature of the oil and gas industry. During periods of high oil prices and high exploration activity, the company has tended to report better performance and profits.
    • The company’s gross profit margins are usually fairly high due to their cost leadership and quality products. However, operating margins can fluctuate based on market conditions, capacity utilization, and pricing strategies. In 2023, the net sales were $14.1 billion, and the net income attributable to the parent company was $3 billion.
    • Operating margin improved to 19.5% in 2022 (from 15.2%) and 2023.
    • Net income was reported at $2.4b in 2022, but increased to $3b in 2023, indicating a turnaround.
    • The company’s inventory level at the end of 2023 was $4.6 billion (2022 : $5.5b), a substantial decline that shows their control on expenses and inventories.
  • Other Relevant Information
  • The company’s business is directly affected by prices of raw material. In 2023, their expenses for raw materials, energy and other consumables was 46% of sales.
  • The Russian-Ukraine war has caused an effect on operations, particularly in relation to energy purchases and prices.
  • Inflation and changes to the labor market are having a major effect on the costs.

Moat Analysis:

Based on the information at hand, Tenaris possesses a moderate moat, rating 3 out of 5, primarily stemming from:

  1. Scale and Cost Advantages: Tenaris’s large scale of operations and manufacturing footprint enable it to achieve economies of scale, leading to reduced costs compared to smaller competitors. Its diverse manufacturing bases also allow them to take advantage of global economies of scale.
  2. Technological Expertise: The company’s emphasis on R&D and the production of high-grade steel pipes for complex operations provides an edge in the market. They also own propriety technology and patents.
  3. Customer Relationships: The company has a long-standing client base, having established long-term relationships in different regions of the world that provide a degree of stability and customer lock-in. They also work closely with their customers, including big names, to design specialized, high-performance, and cost-effective pipes.

However, the company’s moat is somewhat limited by:

  • Industry Cyclicality: The cyclical nature of the oil and gas industry exposes Tenaris to volatile demand, and lower operating income can have a massive impact on their performance. The low barriers to entry for other manufacturers of pipes also makes the market highly competitive. * Commodity Nature of Products: Steel pipes, although varying in specifications, are still in many ways a commodity product. This means that the market can be heavily affected by pricing and commodification rather than solely on the company’s own operational strength.

Risks to the Moat and Business Resilience:

  1. Geopolitical Risks: Because of its global operations and exposure to geopolitical issues, trade restrictions, embargos, import and export regulations that are constantly changing, and global conflict, and political instability may affect the company operations.
  2. Cyclicality: The nature of the energy industry also brings risks, as demand and therefore revenue is heavily reliant on the exploration activity and oil prices. This makes the company’s performance vulnerable to downturns in the energy market.
  3. Competition: Despite its operational strengths, the steel pipe industry is very competitive. Competitors might reduce prices and try to undercut the advantages of the company. New and disruptive technologies could threaten the dominance of the company.
  4. Raw Material Costs: Higher costs for steel, scrap, energy, and transportation can significantly affect the company’s production costs and reduce its profit margins.
  5. Technological Changes: If new technologies make their process and production methods obsolete, it might hamper the profitability and growth. This especially matters as a few industries are working on more sustainable products and the move to renewable energy.

Resilience: Tenaris has significant geographical diversity and customer concentration that helps to withstand the shocks better. Their financial stability and ability to adjust operating costs to demand swings also provide a level of buffer against industry downturns.

Understandability: 2 / 5 While the basic business model of manufacturing and selling steel pipes is relatively easy to grasp, the complexities arise from the intricacies of global trade, geopolitical risks, commodity prices, specialized product offerings, and the different accounting methods used, specifically in foreign currencies and acquisitions. They are also heavily reliant on the financial health and decisions of major oil and gas players. This requires a deep understanding of not only the company, but the external forces that impact it.

Balance Sheet Health: 4 / 5

  • Tenaris has a history of sound fiscal management, and high profitability, which reflects positively on the balance sheet.
  • Cash and cash equivalents are also at good levels and have been increasing, indicating solid liquidity and good cash reserves, which give a certain level of protection against any economic headwinds.
  • The company’s debt to equity ratio has also been decreasing in the last couple of years, and the company has managed to reduce its debt in general.
  • One noteworthy weakness on the balance sheet is that a huge part of it is in intangible assets, which are difficult to price and evaluate.

Despite all this, it has a good balance sheet that gives it the ability to pursue its growth plans and withstand economic crises.