Maker of premium oil drilling pipes is one to watch
Boring can be good. Tenaris, which makes premium oil drilling pipe, has certainly been dull – the shares have gone sideways for four years as the energy sector has lagged behind the market and oil companies have been cautious on capital spending. But it would be a mistake to doze off here.
Shale oil and gas drilling is nearly a quarter of premium pipe demand. The natural gas price has quietly doubled to $5 per million cubic feet, and more drilling should follow.
Mexico, in particular, needs gas for energy and to make petrochemicals. It currently imports much of its needs from the US, but Mexico sits on a lot, too: the sixth largest gas reserve globally, according to the US Energy Information Agency. Pemex, the state oil company, needs to spend more developing its resources. Last month’s changes to the Mexican constitution should allow the company to partner with private companies and do just that. Good news for Tenaris, which supplies Pemex with most of its pipe. New Pemex Chief Executive Emilio Lozoya says Pemex could lift its investment budget from 2016 by at least $5bn per annum – 20 per cent – with almost all of that going to exploration and development.
Tenaris has healthy 13 per cent return on equity, free cash flow for dividend increases or investment, and $800m in net cash. Tenaris’ main competitor Vallourec, which counts Petrobras as its key customer, has half the return on equity, net debt of 2.7 times earnings before interest taxes depreciation and amortisation, and no free cash flow. Yet the two trade at roughly the same valuation.
Meanwhile, Mr Boring is about to get a love letter. The US government should announce on Valentine’s day anti-dumping duties against some of Tenaris’ offshore competitors. It derives half of its sales in the US, so the news should boost business. That should get the blood pumping.