The international credit ratings agency Standard and Poor's has announced that the France based seamless steel tube producer Vallourec will maintain its strong market positions in premium steel pipes and connections for the oil and gas industry, which accounted for about 60% of Vallourec's sales for the first nine months of 2012 and a higher share of profits. Vallourec's credit rating stands at BBB+, while its outlook is negative.
The vertical integration into steel production covering 80% of needs, and full integration in Brazil where the company owns iron ore mines supports Vallourec's business risk profile, while the main constraints on the business risk profile are the volatility of earnings, prompted by industry cyclicality such as swings in supply/demand balance, competition, capital intensity and long lead time to add capacity, and exposure to raw materials price volatility outside Brazil.
According to S&P forecasts, Vallourec's EBITDA margin will recover in 2012 to slightly below 15% from 12.7% in the first quarter. However, the EBITDA margin will still lag behind the Luxembourg-based Tenaris, the largest industry player, which reported a 27 percent EBITDA margin in the first nine months of the current year. The rating agency foresees an uptick in Vallourec's EBITDA in 2013, to slightly above €950 million, as its new Brazilian and US plants ramp up in line with the company's business plan.
S&P expects robust demand in the oil and gas market to continue, given the hefty investments in the industry amid a favorable outlook. However, the rating agency does not foresee an upswing in Vallourec's profits in the European industrial segment owing to competition and lackluster demand.
