Tenaris has announced its results for the quarter and nine months ended September 30, 2008 with comparison to its results for the quarter and nine months ended September 30, 2007.
Our operating results in the third quarter reached a quarterly high with operating income up 39% year on year and 13% sequentially. Sales rose strongly in North America where the market environment remained favourable and we continue to advance our alliance business model. Operating margins, after falling in the first half of the year as costs increased rapidly, recovered to the levels recorded in 2007.
Our net financial debt (total financial debt less cash and other current investments) amounted to US $1,488 million, broadly in line with the previous quarter as our cash flow generation has been negatively affected by the timing of tax payments and by an increase in working capital mainly due to the increase in inventories.
Market Background and Outlook
Since September the world economy has undergone a major financial crisis whose consequences are spreading to the real economy throughout the world. Business conditions have changed so rapidly that at this point it is not clear how deep and long the impact on the real economy and consequently on the demand for energy will be. We are expecting a gradual reduction in exploration and production budgets and, consequently, drilling activity and demand for OCTG and other pipe products in 2009 and 2010, both in North America and globally. However, we believe that the energy sector will be impacted less than most other sectors of the economy mainly due to the constraints on the supply base which is characterized by ever increasing depletion rates, difficulties in replacing reserves and the long lead times to develop new reserves.
Global oil prices, after peaking in July in excess of US $140 per barrel, have retreated rapidly to the current level of US $60-70 per barrel in the expectation of reduced global demand in the current recessionary environment. North American gas prices also rose rapidly during the first half of this year and have fallen even more sharply since then to their current levels of US $6-7 per million BTU as increased investment in US gas production resulted in significantly higher production levels for the first time in many years.
During the third quarter, the international count of active drilling rigs, as published by Baker Hughes, continued to rise and averaged 1,096, an increase of 1% over the previous quarter and one of 7% compared to the same quarter of the previous year. The U.S. rig count increased 6% compared to the second quarter of 2008 and was up 11% compared to the third quarter of 2007. In Canada, activity has risen from last year’s low levels, with the rig count registering a 24% increase in the third quarter of 2008 compared to the same quarter of 2007, and is now up 9% for the first nine months of 2008 compared to the same period of 2007.
Demand for OCTG and other pipe products from the oil and gas industry has increased so far this year, particularly in North America, following last year’s distributor destocking activities and increased drilling activity. In the rest of the world, however, apparent demand for OCTG products has lagged operative consumption due to inventory adjustment activity in the larger Middle East markets. Demand for high-end pipe products has also increased in the year to date reflecting the increasing complexity of drilling activity in most regions worldwide.
Steelmaking raw material costs for our seamless pipe products and steel costs for our welded pipe products rose steeply in the first half of the year but, more recently, have fallen as the global financial crisis and the recessionary environment has had an almost immediate impact on global steelmaking activity. Pipe prices, which had been adjusting to the rising cost environment at different paces across markets, have been showing resilience as demand remains firm but are likely to come under pressure if demand weakens. We expect to maintain a good level of net sales and operating income for our tubular products going into 2009.
Cash Flow and Liquidity
Net cash provided by operations during the third quarter of 2008 was US $242.8 million (US $1,085.7 million in the first nine months), compared to US $889.8 million in the third quarter of 2007 (US $1,789.1 million in the first nine months). Cash flow in the third quarter was affected by the tax payment on earnings from the sale of Hydril pressure control business and the postponement from the second to the third quarter of tax payments in Italy. Working capital increased by US $257.5 million during the third quarter driven primarily by an increase in inventories which rose US $342.2 million.
Capital expenditures amounted to US $131.8 million in the third quarter of 2008 ($337.1 million in the first nine months), compared to US $105.4 million in the third quarter of 2007 (US $334.6 million in the first nine months).
During the first nine months of 2008, total financial debt decreased by US $1,015.3 million to US $3,004.9 million at September 30, 2008 from US $4,020.2 million at December 31, 2007. Net financial debt during the first nine months of 2008 decreased by US $1,482.0 million to US $1,488.2 million at September 30, 2008 following the collection of Hydril’s pressure control business sale for US $1,114 million and the payment of the balance of the annual dividend, amounting to approximately US $295 million in June 2008. As of September 30, we had US $1.5 billion of liquidity in cash and cash equivalents.
Analysis of 2008 First Nine Months Results
Net income attributable to equity holders in the company during the first nine months of 2008 was US $2,031.1 million, or US $1.72 per share (US $3.44 per ADS), which compares with net income attributable to equity holders in the company during the first nine months of 2007 of US $1,377.2 million, or US$1.17 per share (US $2.33 per ADS). Net income for the first nine months of 2008 includes the result for the sale of Hydril's pressure control business of US $394.3 million, or US $0.33 per share (US $0.67 per ADS). Operating income was US $2,468.6 million, or 28% of net sales, compared to US $2,200.5 million, or 30% of net sales. Operating income plus depreciation and amortization was US $2,872.3 million, or 32% of net sales, compared to US $2,558.4 million, or 35% of net sales.
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