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Global Emerging Markets Argentina


Oil & Gas

5 November 2009
Reuters: TS.N Bloomberg: TS UN Exchange: NYS Ticker: TS Buy
Price at 4 Nov 2009 (USD) 39.38

3Q09 results slightly ahead of

Global Markets Research

Target price 41.00

52-week range 40.43 - 15.10

estimates. Recovery in sight.

Price/price relative

Marcus Sequeira
Research Analyst
(+1) 212 250-3255 45
marcus.sequeira@db.com 30
Operating results slightly ahead of estimates
11/07 5/08 11/08 5/09
Net revenues of $1.7bn came in line with our estimates. EBITDA of $488mn was
slightly ahead of our forecasts, but down sharply YoY. Margins came slightly
better QoQ and versus our expectations. Net income of $230mn ($0.39/ADS)
came in slightly below our forecasts on higher financial expenses (which included Performance (%) 1m 3m 12m
a non recurring item). Operating environment is still weak but there are signs of a Absolute 17.5 27.3 65.8
MERVAL INDEX 10.8 26.1 99.7
recovery. Tenaris’ position relative to peers remains favorable and therefore we
maintain our Buy recommendation. Stock data
Prices remain strong and offset a sharp fall in volumes Market cap (USDm) 23,234.2
Average realization prices in the Tubes division came in line with expectations, Shares outstanding (m) 590.0
ADR ratio 0.0
while prices in the Projects segment surprised on the upside. Pricing trends in the Free float (%) 40
Tube division continue to benefit from better product mix. Demand remained Volume (4 Nov 2009) 520,900
weak across the board with the exception of Middle East and West Africa. MERVAL INDEX 2,243
Meanwhile, Tenaris’ margins benefited from the use of lower priced input costs. Exchange rate (USD/USD} 1.00

EBITDA margin in 3Q09 was 28% versus 34% in 3Q08 and 27% in 2Q09. Key indicators (FY1)
Outlook is promising, recovery signs expected for 4Q09 ROE (%) 14.3
Management presented a more optimistic outlook as commodity prices have ROA (%) 8.5
Net debt/equity (%) 5.8
recovered (though NA natural gas prices should remain under pressure for a Book value/share (USD) 15.35
while). NA oil rig counts have stabilized and showed signs of recovery, while Price/book (x) 2.6
inventory levels in NA started to decline gradually. As such, the level of incoming Net interest cover (x) 11.1
orders started to rise, which should result in higher shipments in 4Q09. Moreover, EBIT margin (%) 22.6
margins should benefit from higher utilization rates and a decline in input costs.
Cash flow generation remains strong
Tenaris increased its cash flow generation by reducing its working capital by
$359mn during the quarter. As such, Tenaris turned net cash positive during the
quarter at $557mn.
Our DCF-based $41 PT reflects a WACC at 10.4%. Risks include: (1) acquisition
execution risk; 2) new entrants into this lucrative market; 3) irrational pricing by
Chinese pipe producers; 4) and softening global demand for oil & gas.
Forecasts and ratios
Year End Dec 31 2007A 2008A 2009E 2010E 2011E
Revenue (USDm) 10,181 12,131 8,053 8,943 10,657
EBITDA (USDm) 3,497 4,064 2,321 2,633 3,190
EBITDA margin (%) 34.3 33.5 28.8 29.4 29.9
EBIT (USDm) 2,982 3,531 1,822 2,134 2,689
Net Income (USDm) 1,924 2,125 1,228 1,443 1,852
EPS (USD) 3.26 3.60 2.08 2.45 4.12
P/E (x) 14.6 12.3 18.9 16.1 9.6
EV/EBITDA (x) 8.7 6.8 10.1 8.6 7.0
Source: Deutsche Bank estimates, company data

Deutsche Bank Securities Inc.

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http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
5 November 2009 Oil & Gas Tenaris

Tenaris – 3Q09 review

Operating results slightly ahead of estimates
As expected, operating trends in 3Q09 were weak both YoY, due to the sharp decline in
demand and QoQ due to seasonality factors. Net revenues of $1.7bn came in line with our
estimates, as weaker Tube sales were offset by much stronger performance in the Projects
division. EBITDA of $488mn was slightly ahead of our estimates of $469mn (+5%), but down
54%YoY. Operating margins were in line with our forecasts. Net income of $230mn
($0.39/ADS) came in slightly below our expectations, due to (1) higher financial expenses,
which included $11mn of losses on interest rate swaps, and (2) lower equity income, partially
offset by lower-than-expected effective tax rate.

Figure 1: Tenaris – 3Q09 earnings

US$ million 3Q09A
3Q09A 3Q09E 3Q08A 2Q09A 3Q09E 3Q08A 2Q09A

Sales - Tubes 1,361.0 1,408.3 2,601.0 1,718.7

Sales - Projects 288.7 214.0 319.0 254.4
Sales - Other 121.7 118.8 198.0 123.2
Total net sales 1,771.4 1,741.1 3,118.0 2,096.3 2% -43% -15%

Gross profit - Tubes 571.6 608.7 1,225.1 740.8

Gross profit - Projects 83.7 47.5 86.1 63.6
Gross profit - Other 36.0 17.8 61.4 27.1
Total gross profit 691.3 674.1 1,372.6 831.5 3% -50% -17%
Gross margin 39% 39% 44% 40%

Operating income - Tubes 285.8 311.7 859.5 385.0

Operating income - Projects 59.5 28.7 44.3 45.5
Operating income - Other 15.2 2.4 30.1 6.3
Total operating income 360.5 342.8 933.9 436.8 5% -61% -17%
Operating margin 20% 20% 30% 21%

Depreciation and amortization 127.8 125.9 134.9 126.3

EBITDA 488.3 468.7 1,068.8 563.1 4% -54% -13%
EBITDA margin 28% 27% 34% 27%

Net financial expense (35.9) (32.1) (55.3) (32.2)

Equity income 10.3 25.0 24.3 66.5
Pretax income 334.8 335.7 902.9 471.1 0% -63% -29%
Income taxes (97.6) (100.7) (271.7) (114.5)
Minority interest (7.4) 4.9 (60.5) 6.8

Net Income bf extraordinaries 229.8 239.9 570.6 363.4 -4% -60% -37%
Extraordinaries 0.0 0.0 0.0 (20.2)
Net Income reported 229.8 239.9 570.6 343.3 -4% -60% -33%

EPADS - bf extraordinaries 0.39 0.41 0.97 0.62

EPADS - reported 0.39 0.41 0.97 0.58
Source: Deutsche Bank and company reports.

Page 2 Deutsche Bank Securities Inc.

5 November 2009 Oil & Gas Tenaris

Shipments came in line with

Figure 2: Tenaris – Tubes division
estimates but showed a sharp
deterioration YoY. Improvement
3Q09A 3Q09E 3Q08A 2Q09A 3Q09E 3Q08A 2Q09A
in sales mix resulted in solid
Tubes - seamless 407 423 682 497 -4% -40% -18%
average realization prices.
Tubes - welded 67 63 263 65 6% -75% 3%
COGS started to decline as
Tubes - total volumes 474 486 945 562 -2% -50% -16%
lower cost inventory is used.
Surge in opex per ton reflects
low capacity utilization rates.
Average realization price 2,871 2,898 2,752 3,058 -1% 4% -6%
Demand weakness seen across
COGS per ton 1,665 1,645 1,456 1,740 1% 14% -4%
the board, but Africa continues
Opex per ton 603 611 387 633 -1% 56% -5%
to benefit from deepwater Source: Deutsche Bank and company reports.

activity. Volumes in the Middle

East were also solid. On the
other hand, demand was
sharply lower YoY in NA, SA,
and Europe. Operating margins
were in line with expectations. Figure 3: Tenaris – Projects division
3Q09A 3Q09E 3Q08A 2Q09A 3Q09E 3Q08A 2Q09A
Results in the Projects division
Projects - volumes 97 85 155 90 14% -37% 8%
came in better than our
conservative estimates.
However, shipments to South
Average realization price 2,976 2,511 2,058 2,827 19% 45% 5%
America remain weak.
COGS per ton 2,113 1,953 1,502 2,120 8% 41% 0%
Operating margins came in
Opex per ton 250 221 270 201 13% -7% 24%
better than expected, showing Source: Deutsche Bank and company reports.

YoY and QoQ improvement.

Figure 4: Tenaris – Others division
3Q09A 3Q09E 3Q08A 2Q09A 3Q09E 3Q08A 2Q09A
QoQ improvement but sharp
Net Sales 121.7 118.8 198.0 123.2 2% -39% -1%
YoY deterioration in sales of
COGS (90.1) (101.0) (136.6) (96.1) -11% -34% -6%
industrial equipment and sucker
Gross profit 31.6 17.8 61.4 27.1 78% -48% 17%
rods reflects lower economic
Gross margin 26% 15% 31% 22% 73% -16% 18%
activity in US and EU. Demand
in Brazil remains strong.
Operating expenses (20.8) (15.4) (31.3) (20.8) 34% -34% 0%
Operating income 10.9 2.4 30.1 6.3 358% -64% 73%
Operating margin 9% 2% 15% 5%
Source: Deutsche Bank and company reports.

Figure 5: Tenaris – Balance sheet

Tenaris continues to increase its
US$ million 3Q09A
cash flow generation and
3Q09A 3Q09E 3Q08A 2Q09A 3Q09E 3Q08A 2Q09A
optimizing its working capital.
Cash 1,741.4 1,190.6 1,489.8 1,622.9 46% 17% 7%
As a result, leverage ratios
Short term investments 528.9 273.5 27.0 273.5
continue to improve. Tenaris
Short term debt 868.4 906.0 1,404.1 1,020.0 -4% -38% -15%
turned net cash positive during
Long term debt 844.9 886.7 1,600.9 998.3 -5% -47% -15%
the quarter.
Equity 9,601.5 8,876.9 8,686.2 8,637.0 8% 11% 11%

Net debt -556.9 328.7 1,488.2 121.9 -269% -137% -557%

Net debt to net capital -6% 4% 15% 1%
Source: Deutsche Bank and company reports.

Deutsche Bank Securities Inc. Page 3

5 November 2009 Oil & Gas Tenaris

We derive our $41/ADR price target using DCF analysis. We use the DCF methodology (10-
year horizon) because we consider it a superior indicator of value to multiples, as it relies on
free cash flows generated over a longer period of time rather than the profitability of a single
year. Our assumptions include 7.0% after tax cost-of-debt and 12.5% cost-of-equity that
reflects a 3.0% country risk premium based on the proportionate country risks of each of
Tenaris' geographically diverse production facilities (Argentina, Mexico, Italy, Japan, Canada,
Romania, and the US) and 5% equity risk premium. As a result, we estimate Tenaris' WACC
at 10.4%. We assume a 3.0% long-term growth rate as we believe that the company will
apply its strong free-cash flow generation to foster growth.

Risks to our recommendation include: (1) accelerated competitor success; 2) irrational pricing
by Chinese pipe producers; 3) softening of global demand for oil & gas on a long-term basis;
4) longer than expected weakness in Canada drilling; and 5) volatile oil prices as they affect
stock performance.

Page 4 Deutsche Bank Securities Inc.

5 November 2009 Oil & Gas Tenaris

Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Tenaris TS.N 39.38 (USD) 4 Nov 09 2,6,8
*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See
“Important Disclosures Required by Non-US Regulators” and Explanatory Notes.
2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company
calculated under computational methods required by US law.

8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services
from this company in the next three months.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the “Important Disclosures Required by US Regulators” and the Explanatory Notes.
2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company
calculated under computational methods required by US law.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=TS.N.

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject
issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any
compensation for providing a specific recommendation or view in this report. Marcus Sequeira

Deutsche Bank Securities Inc. Page 5

5 November 2009 Oil & Gas Tenaris

Historical recommendations and target price: Tenaris (TS.N)

(as of 11/4/2009)
80.00 Previous Recommendations

70.00 Strong Buy

1 Market Perform
60.00 Underperform
Not Rated
S ec ur it y P r ic e

50.00 Suspended Rating

Current Recommendations
40.00 Buy
30.00 2 Sell
Not Rated
3 Suspended Rating
*New Recommendation Structure
10.00 as of September 9, 2002

Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09
Da t e

1. 13/5/2008: Buy, Target Price Change USD68.00 3. 6/3/2009: Buy, Target Price Change USD30.00
2. 20/10/2008: Buy, Target Price Change USD44.00 4. 1/10/2009: Buy, Target Price Change USD41.00

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-

holder return (TSR = percentage change in share price 400 45%
from current price to projected target price plus pro- 40%
jected dividend yield ) , we recommend that investors 300
buy the stock.
Sell: Based on a current 12-month view of total share- 15%
holder return, we recommend that investors sell the 100 13% 12%
Hold: We take a neutral view on the stock 12-months 0
out and, based on this time horizon, do not recommend Buy Hold Sell
either a Buy or Sell.
Companies Covered Cos. w/ Banking Relationship
1. Newly issued research recommendations and target
prices always supersede previously published research. Global Universe
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (including dividends)
between -10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -
10% or worse over a 12-month period

Page 6 Deutsche Bank Securities Inc.

5 November 2009 Oil & Gas Tenaris

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or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at

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