TUBOS REUNIDOS GROUP Special Products & Integral Services Worldwide Tubos Reunidos March 2016
TUBOS March 2016 REUNIDOS Content GROUP Tubos Reunidos Group 1. Market Context 2. Impact in TR´s Activity 3. TR´s Response Apendix 1: Company Overview Appendix 2: Strategy Appendix 3: TR – MISI – JFE: Strategic Agreement Appendix 4: Summary Financial Accounts 2
1. Market Context
TUBOS March 2016 Market Context REUNIDOS GROUP Sharp decrease in oil prices since mid 2014 is leading to a strong reduction in drilling programs and in oil&gas exploration and production investment globally Significant negative impact in seamless steel tubes for oil&gas, OCTG demand, also amplified by inventory adjustments from distributors Increase in global competition for seamless steel tubes in all market segments Oil Price evolution (USD) Global E&P CAPEX, US$ bn 160 -27% 140 120 International 100 E&P CAPEX 80 60 -40% 40 North America E&P CAPEX 20 WTI Oil Brent Source: Bloomberg Source: Citi Research Seamless Steel tubes sector marked by severe oil price drop and Seamless Steel tubes sector marked by severe oil price drop and major E&P capex cuts major E&P capex cuts 4
TUBOS March 2016 Market Context REUNIDOS GROUP Reaction has been sharper in North American due to short-run responsiveness of shale oil to price changes as consequence of its short lead and pay-back times, lower upfront costs and rapid well level decline rates Time lag Total rig count between Fix / variable investment Decline rate costs decisions and production 1.930 2.250 September 2014 2.000 Far slower High ratio than uncon- of fix costs 1.750 Conven- - 58% Years ventional to total 1.500 tional costs 1.250 1.000 750 High ratio 714 Uncon- 75% in the 500 of variable December 2015 Weeks ventional first year 250 costs to total costs 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 USA International Source: Baker Hughes Source: BP Global In the short run, responsiveness of shale oil to price changes is In the short run, responsiveness of shale oil to price changes is far greater than that for conventional oil – equally, faster supply far greater than that for conventional oil – equally, faster supply response from Nortamerican shale oil is expected on the rebound response from Nortamerican shale oil is expected on the rebound 5
TUBOS March 2016 Market Context REUNIDOS GROUP As consequence, demand for OCTG (Oil Country Tubular Goods) has suffered strong reductions globally and in a stronger manner in Northamerica. This reduction of consumption has been amplified dy distributors inventory reductions. US OCTG consumption (New Pipe Global OCTG consumption (Million tons) consumption) Million tons The 54% reduction in US OCTG Consumption is sharpened by the reduction of inventory, resulting in a real impact for Pipe Manufacturers of -65%. -32% 5,75 6,50 -64% 5,70 -54% 3,5 3,00 6,5 0,7 11,75 11,2 10,9 9 2,3 OCTG Reduction in Reduction of New Pipe 2012 2013 2014 2015E Consumption consumption Inventory consumption 2014 International USA Source: Bexrtor estimates Source: Bexrtor estimates, Preston Pipe & Tube Report High declines in OCTG demand – mainly in North America High declines in OCTG demand – mainly in North America 6
TUBOS March 2016 US Shales productivity REUNIDOS GROUP improvement Lower Break Even prices at US shales (USD WTI) Productivity gains and cost deflation in • Source: Tenaris 78 E&P activities are contributing to reduce 72 71 61 the oil price needed to develop oil 50 resources There ´ s still room for further productivity Potential for • further improvements as explorations and reductions production companies enhance drilling 2011 2012 2013 2014 2015E techniques in shale formations: Counties & Plays oil price Break-Even Higher number of wells per rig • Source: Bloomberg Intelligence $70 Lower number of drilling days per well • Eagle Ford Spraberry Wolfcamp Bone Spring Wolfbone $60 Higher production per well: Increased • $50 reservoir contact, with longer laterals $40 and Improved drilling / fracking quality, $30 refracking $20 $10 Penetration of new techniques across • $0 basins Eagle Ford - DeWitt (TX) Wolfcamp - Reeves (TX) Bone Spring - Ward (TX) Wolfcamp - Loving (TX) Bone Spring - Loving (TX) Wolfbone - Reeves (TX) Spraberry - Howard (TX) Spraberry - Midland (TX) Spraberry - Martin (TX) Wolfbone - Play Average Bone Spring - Play Average Eagle Ford - Karnes (TX) Bone Spring - Eddy (NM) Wolfcamp - Ward (TX) Bone Spring - Lea (NM) Spraberry - Glasscock (TX) Spraberry - Play Average Spraberry - Andrews (TX) Spraberry - Upton (TX) Eagle Ford - Gonzales (TX) Eagle Ford - Live Oak (TX) Eagle Ford - Play Average Wolfcamp - Play Average Eagle Ford - Zavala (TX) Eagle Ford - LaSalle (TX) Eagle Ford - Atascosa (TX) Spraberry - Irion (TX) Eagle Ford - McMullen (TX) Wolfcamp - Reagan (TX) Eagle Ford - Lavaca (TX) Spraberry - Reagan (TX) Eagle Ford - Dimmit (TX) Wolfcamp - Irion (TX) The diversity of break-evens highlights the • hazard posed by looking for a single number, even within a play US shale breakeven are falling rapidly with room for further US shale breakeven are falling rapidly with room for further improvements improvements 7
TUBOS March 2016 Expected E&P Investment REUNIDOS GROUP Recovery 2014-2040: oil global production needs Stylised oil production cost curve (mb/d) Demand, accumulated increment. $/bbl, Brent equivalent Annual rate (2012-2035) 0,5% 10 120 100 Offshore / Deepwater New reserves need to be put -10 80 Oil sands / Other in production progressively to meet oil demand 60 -30 40 Decline of current Shale Onshore / production fields , -50 20 Middle East Other conventional accumulated increment, Annual rate (2013-2040) 6,0% 0 -70 0 10 20 30 40 50 60 70 80 90 100 Source: BP 2014 2040 Production (Mb/d) Source: International Energy Agency “Oil Medium Term Market Report . February 2015” E&P investments will be allocated in those • Rebound on E&P activity is required as • technologies with lower cost of production depletion of current production fields is estimated The majority of US shale oil lies somewhere broadly at +/-6% p.a. and oil demand grows at 0,5% p.a. • in the middle of the aggregate cost curve As depletion rates progressively impact production, investments As depletion rates progressively impact production, investments would need to be reactivated to meet demand requirements. would need to be reactivated to meet demand requirements. Marginal cost of production will determine future oil prices Marginal cost of production will determine future oil prices 8
TUBOS March 2016 US Shale expected growth REUNIDOS GROUP 2014-2020 oil production, mb/d US Shale oil forecast 2015-2035 (mb/d) Others Mundo OPEC +1 99,1 USA+Canadá +1,9 100 +3 World 93,3 51% of incremental supply +6 mb/d 0 2014 2020 Source: IEA (International Energy Asociation) Medium-Term Market Report February 2015 2005 2010 2015 2020 2025 2030 2035 Northamerica remains the top source of Source: BP 2016 Energy Outlook • growth through 2020, 51% as per IEA … with most growth coming from shale oil • estimates… Northamerica is expected to be the main driver of supply growth. Northamerica is expected to be the main driver of supply growth. US Shale is best positioned to enjoy a potential rebound faster US Shale is best positioned to enjoy a potential rebound faster than other uneconomic and long lead time projects than other uneconomic and long lead time projects 9
2. Impact in TR´s Activity
TUBOS March 2016 Impact in Tubos Reunidos REUNIDOS GROUP activity in the short term Consolidated ('000 EUR) Q4 2015 Q4 2014 % var FY 2015 FY 2014 % var Revenue 76.808 108.064 (28,9%) 352.478 407.952 (13,6%) EBITDA * 270 10.287 (97,4%) 19.773 41.373 (52,2%) % o. sales 0,4% 9,5% 5,6% 10,1% EBIT (8.893) 3.744 (337,5%) (16.365) 15.012 (209,0%) Profit for the period (7.701) 2.000 (485,1%) (16.188) 7.079 (328,7%) Adjusted profit for the period* (6.277) 2.000 (413,8%) (10.492) 7.079 (248,2%) Note *: Excludes impact of the impairment accounted in 4Q 2015 of the Group's stock in the US for a value of 1.978 ('000 Euros) before taxes. 7.911 ('000 Euros) in FY 2015. Consolidated sales in 2015 have been affected by strong decrease in activity in oil&gas segment in Northamerica as well as by strong competition and lower prices in other market segments. Profitability impacted by production inefficiencies resulting from low utilization of production capacity and an extraordinary provision due to the impairment of inventory realisable value in Northamerica amounting to €7.9 million before taxes. Measures have been executed and initiated, which will entail a reduction of costs in 2016 of 13 million euros over 2015 and attain lower recurrent costs of 15 million euros at EBITDA level in 2017 onwards. 2015 results affected by the fall in the oil price 2015 results affected by the fall in the oil price Temporary and structural measures under implementation to Temporary and structural measures under implementation to improve competitiveness and cash generation capabilities improve competitiveness and cash generation capabilities 11
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