Draw up a list of business sectors that tend to spell bad news for the environment and the oil and gas industry is bound to feature close to the top. Do the same with materials that are likely to be a no-no from the planet’s point of view of view and, likewise, pretty high up will probably be steel.
The activities of the oil and gas sector – exploration, extraction and the like – account for about 9% of all human-made greenhouse-gas emissions, according to consultants at McKinsey, while the fossil fuels that result are responsible for a further 33% of global emissions when we burn them. Ms Pipe
Similarly, the steel industry is behind roughly 7% of the world’s carbon dioxide emissions, according to the European Commission, making it one of the three biggest-emitting global industries, according to McKinsey.
The industry is a prime candidate for decarbonisation, given the demand for its product is not going to go away. Steel is a core part of the all-essential construction sector and, for offshore oil and gas rigs, one of the few materials that can withstand the violence of 100-foot waves and ocean storms.
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The good news is that, despite backtracking by companies such as BP and Shell on the renewable energy transition, there are plenty of businesses that are alive to the issues, and playing their part. Among them is Tenaris (IT:TEN), worthy of further scrutiny not least because it effectively straddles both sectors. The Luxembourg-headquartered group, founded in Italy, makes seamless and welded steel tubes and pipes, mainly for customers in the oil and gas industries, which use them in their rigs both onshore and offshore, in 25 countries worldwide.
Tenaris has attracted strong backing from the top-performing portfolio managers tracked by Fix the Future: eight hold the shares, with nearly all running overweight positions versus their benchmarks. That places the company in the top 200 stocks in our database of more than 6,000 Elite Companies, based on our unique measure of portfolio manager conviction.
Source: Citywire/Morningstar, latest disclosed holdings data
Why do they like it? After the disruption of the pandemic, sales, profits and margins surged in 2022, and analysts expect further growth this year. Debts are extremely low, while cashflows are racing ahead. Meanwhile, a lowly price-earnings ratio in the single digits and a prospective dividend yield of 3.6% suggests – certainly to some top investors – that it is looking cheap.
Matt Linsey and Kamil Dimmich, elite managers at Pacific Asset Management who run the Pacific North of South EM All Cap Equity fund, say: ‘Tenaris, as the largest pure-play producer, is able to generate best-in-class margins, with strong cash flows. Unlike many of its peers, it is able to pay dividends - we think the current forecast dividend yield is close to 4%.’
Tenaris’ highest-conviction elite portfolio manager backers are Aymar de Léotoing and Julien Bernier: the shares are the top holding in their Digital Stars Europe fund and the second-largest in another they run, Digital Stars Europe ex-UK. They first invested in Tenaris in March 2021, since when the shares have rallied more than 40%.
Bernier and de Léotoing work for quantitative investment specialists Chahine Capital. Charles Lacroix, Chahine’s chief executive, says: ‘We quantitatively split the European equity market and each stock into three different styles: growth, value and quality/visibility.’
‘Quality/visibility stocks are usually characterised by a higher return on equity than the market average, a lower dispersion of their earnings per share over time, a low debt/market capitalisation ratio combined with lower stock price volatility – hence the “visibility”.’
Lacroix says Chahine’s analysis scores Tenaris highly both on growth – where it is way ahead of the sector average – and valuation, where it is slightly above the average for its peer group in the basic resources sector. He says this is ‘rather unusual and an attractive fundamental combination’.
‘One could deduce that Tenaris is attractive by combining supportive growth and valuation, but it seems the market has not recognised this recently,’ he adds.
Tenaris traces its history back to 1909 but was created in its current form in 2002 through the merger of three steel pipe manufacturers: Dalmine in Italy, Siderca in Argentina, and Tamsa in Mexico. Shares in the company were simultaneously listed in New York, Milan, Buenos Aires and Mexico. The leading architects of the creation of the business were the Rocca family, initially Agostino, an influential figure in the Italian steel-making industry who took charge of Dalmine in 1935. He and his son, Roberto, later founded Techint, an industrial conglomerate that is still owned and controlled by the family, which in turn owns just over 60% of Tenaris. Given the group’s €15.6 billion market value, that is a lot of invested wealth.
Tenaris has manufacturing facilities in 16 countries, capable of producing 4.7 million tons of seamless pipes and 3.2 million tons of welded pipes each year. Five of its factories make electric steel, a speciality, lower-carbon alloy used in electromagnetic devices such as motors and generators. And, in addition to serving the oil and gas sector, the group produces steel pipes with a select group of industrial uses, including in cranes, hydraulic cylinders, cars and trucks (airbag inflators, gears and axles, for example).
Traditionally investors have viewed Tenaris as a supplier to the oil and gas sector, its largest customer base, and tied to its fortunes. Historically, Tenaris’ shares have risen and fallen in line with drilling activity and the oil price, most notably when the pandemic struck and the price of Brent crude crashed.
Russia’s invasion of Ukraine, and the surge in commodity prices it produced, propelled Tenaris’ shares on their latest rally. It also cemented Tenaris’ traditional customer base of oil and gas companies, as the world’s energy security was thrust into sharp relief. Europe and the US have focused on securing greater energy self-reliance meaning that, despite support for the energy transition, oil wells are likely to be with us for some time yet.
That should lead to rising demand for Tenaris’ products. Management consultants Fairfield Consultancy Services has predicted the global business in oil country tubular goods (OCTG) – the pipes, casings and tubes used in oil production – will grow from $34.2bn in 2020 to $65.9bn by the end of 2026. Fairfield argues that China and the resurgence of the US market for shale drilling – where Tenaris has a big presence – will be at least in part responsible for the growth, naming Tenaris as one of the main players, alongside Nippon Steel, ArcelorMittal and GE Steel Resources.
Linsey and Dimmich say: ‘The global OCTG market has become more concentrated over the past ten years following recent oil price downturns, and the Russia-Ukraine war has also removed some volumes.
‘In 2022, OCTG prices rose significantly as demand for oil and gas increased sharply coupled with supply chain issues and falling flat steel input costs. Tenaris, with its global integrated business model was able to benefit and increased Ebitda margins from 21% to 31% year over year.’
Nevertheless, Tenaris has been taking steps to diversify its customer base and enhance its product range in response to the energy transition. It is developing steel systems for storing hydrogen, for example, and supplying components for the first renewable energy storage facility in the Netherlands, in Groningen. Tenaris is also working on pipes, tubes and casing for use in carbon capture, utilisation and storage systems, seen as an important development for those industries that have found it hard to curtail their emissions. In short, Tenaris is positioning itself well for the moment when the eminence of oil and gas fades and the world fully embraces new energies.
The company is also taking steps to make its own steel-making processes more sustainable, setting interim targets to reduce the carbon intensity of its steel by 30% per ton by 2030, versus 2018 levels, and is halfway there. One of the ways it aims to achieve this is by using a high percentage of recycled steel scraps in the new steel pipes and tubes it makes. Thanks to its use of electric arc furnaces at some of its sites, its average steel product is 78% recycled, but in some cases it has achieved 82%. Tenaris has also been taking steps to increase its use of renewable energy, including a commitment to build a $190m wind farm in Argentina, which will supply up to 50% of the electricity required at its local mill in the country.
After sales and profits were hit hard by the pandemic, Tenaris has more than rebounded. Sales have risen by more than 70% over the past five years, from €6.5bn in 2018 to €11.2bn last year, with Ebit climbing from €736m to €2.9bn over the same period, as operating margins more than doubled, from 11.3% to 25.9%. Analysts are forecasting a further climb in sales and Ebit to €13.8bn and €4.4bn this year.
The group’s balance sheet is also looking healthy. A net cash or cash equivalents position of €863m is forecast to mushroom to more than €8.6 billion in three years’ time, by when its operating cashflows will be pretty much unassailable, while it is expected to keep a tight lid on capital expenditure. All that cash will give Tenaris plenty of scope to invest in growth, including through acquisitions, of which there has been a steady stream in recent years, though last year’s attempt to buy Benteler Steel & Tube Manufacturing Corporation collapsed as a result of competition concerns among regulators.
‘Tenaris operates with a strong balance sheet,’ say Linsey and Dimmich. ‘Its gearing ratio [debt to equity] has averaged below 10% in the last ten years. At year end 2022, the company reported a net cash position of close to $400m. This allows the company operational flexibility if oil prices turn down.’
Its healthy capital position should also make it possible for Tenaris to increase returns for shareholders through dividends and stock buybacks – analysts reckon that the yield on the companies shares will increase to 4% in 2025.
Tenaris’s valuation is certainly undemanding: the shares trade for just over five times forecast earnings over the next 12 months, behind both ArcelorMittal, at 7.1 times, and Nippon Steel, at 6.3.
Given the environmental impact of its steel products and oil and gas customers, it’s hard to put together a compelling argument that Tenaris is fixing the future, though Linsey and Dimmich point out that the group has doubled its estimated capital expenditure for this year in order to meet its decarbonisation targets. It does seem clear, however, that it is actively moving in a more sustainable direction and is going to be as much a part of the solution as it is involved in the problem.
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