Tubular View Research Analysts SECTOR REVIEW

23 September 2013 Europe/France&Italy Equity Research Steel

Tubular view Research Analysts SECTOR REVIEW

Michael Shillaker 44 20 7888 1344 [email protected] Change is in the pipeline James Hanford 44 20 7883 1551 [email protected] Figure 1: Vallourec and Tenaris capex (€m) and free cash flow yield (%) 1400 12% James Gurry 10% 44 20 7883 7083 1200 [email protected] 8%

Liam Fitzpatrick 1000 6% 44 20 7883 8350 4% [email protected] 800 2% Specialist Sales: James Brady 600 44 20 7888 4267 0% [email protected] 400 -2% -4% 200 -6%

0 -8% 2010 2011 2012 2013E 2014E 2015E

VLLP Capex TENR Capex VLLP FCF yield TENR FCF yield

Source: Company data, Credit Suisse estimates

■ Vallourec (O/P, €56) vs. Tenaris (U/P, €15) in a wider sector context. In this report, we present our view on the outlook for the tubular sector and discuss, in particular, the Vallourec versus Tenaris investment case. We reiterate our preference for Vallourec over Tenaris, based on the changes that are occurring in the tubular space and which we think are likely to continue. Tenaris is regarded as high quality by the market, rightly in our view, but it has significantly outperformed the sector and Vallourec, in particular, as a result and we believe the stock is fully priced. In contrast, Vallourec has seen a difficult two years, with delays in key ramp-ups and stagnation in the industrial segment to which it is still significantly exposed. With the key mills now turning profitable, we expect a marked increase in EBITDA even without a material cycle recovery. Vallourec is significantly cutting capex, which should, we believe, make it one of the best cash-flow generators within basic resources. If management delivers on its capex guidance, which we think it will, there is potentially scope for a material re-rating by the market. Tenaris, by contrast, is significantly increasing capex, with a resulting deterioration in FCF yield relative to Vallourec. ■ Structure: We discuss the investment case in detail, addressing the following issues: (1) the medium- and long-term outlook for the Oil Country Tubular Goods (OCTG) market in key geographies and implications for Vallourec and Tenaris; (2) capacity additions and FCF profiles; (3) growth potential from key clients and contracts; (4) comparison of cost positions; (5) implications of the OCTG trade case; (6) fair value estimates; and (7) analyses of ratios and relative share price performance.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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23 September 2013 Key charts

Figure 2: Vallourec FCF yield (%) and capex (€m) Figure 3: Tenaris FCF yield (%) and capex (€m)

1,000 10% 1,400 12% 900 8% 1,200 10% 800 6% 700 4% 1,000 8% 600 2% 800 500 0% 6% 400 -2% 600 4% 300 -4% 400 200 -6% 200 2% 100 -8%

- -10% 0 0% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E

VLLP Capex VLLP FCF yield TENR Capex TENR FCF yield

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 4: Vallourec oil and gas as % of total sales Figure 5: US natural gas conventional and unconventional production (Bcf/d)

70% 45 40 65% 35 60% 30

55% 25

50% 20

45% 15 10 40% 5 35% 0 2002 2004 2006 2008 2010 2012 2014E 30% Q1 Q2 Q3Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1Q2 Q3 Q4Q1 Q2Q3 Q4 Q1Q2 Conventional Unconventional 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13

Source: Company data Source: EIA, Bentek Energy, Credit Suisse estimates Figure 6: Vallourec share price vs. WTI Figure 7: Tenaris share price vs. WTI 160 160 25

140 140 20 120 120 100 15 100 80 80 60 10

60 40 5 40 20

20 0 0

Jul-06 Jul-13

Oct-04 Apr-08 Oct-11

Jan-03 Jun-09 Jan-10

Mar-04 Feb-07 Mar-11

Aug-03 Dec-05 Sep-07 Nov-08 Aug-10 Dec-12

May-05 May-12

Jan-09 Jan-13 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12

WTI oil price Vallourec WTI oil price Tenaris

Source: Thomson Reuters Source: Thomson Reuters

Tubular view 2 23 September 2013 Table of contents

Executive summary 4 Our investment case 5 Tenaris: A solid but fairly valued company 6 Vallourec: Potential still under-appreciated by the market 6 8.4% FCF yield in 2015E through material EBITDA growth and capex reduction 7 Vallourec: Superior cost position 9 Vallourec becoming Tenaris? 10 Further optionality afforded from industrial recovery 11 Growth likely to come from capacity additions 12 Vallourec growth profile 12 Tenaris growth profile 15 Resulting FCF profiles 16 Comparison of cost positions 17 Relative cost positions of mills 18 Steelmaking and engineering margins 19 Raw material price outlook 20 Scrap 21 HRC 21 Iron ore and HBI 22 Currency and inflation considerations 23 Valuation 25 Share price performance 27 Ratio analysis 30 Option value from OCTG trade case 33 OCTG medium- and long-term demand outlook 37 Summary 37 US 39 Canada 44 International market holds big opportunity 44 Brazil 45 Mexico 46 Middle East 47 Barriers to entry 48 Vallourec option value from industrial recovery 49 Vallourec VLLP.PA 52 Tenaris TENR.MI 53

Tubular view 3 23 September 2013 Executive summary In this report, we present our view of the tubular sector, and outline in detail the reasons for our preference for Vallourec over Tenaris. The investment case in summary revolves around the contrast in outlooks for growth and FCF generation for the two companies. In the current environment, particularly in the US and in the near term, we believe OCTG prices will remain relatively stable and that growth will thus be driven by volume rather than price. Vallourec should see material growth from the new VM2 and VSB mills, which are in the final stages of completion, and which we estimate will help EBITDA improve to €1.1bn in 2014E. This marks a significant difference to 2012, when delays in the ramp-up of these key mills hurt profitability and weighed heavily on the share price. The material improvement in EBITDA, combined with a material reduction in capex, should make Vallourec one of the highest FCF generators within basic resources, in our view. Tenaris by contrast appears to have a different road map ahead, with no capacity additions until 2016E when the new Bay City mill comes online, which we think will be accompanied by a material increase in capex and a deterioration in FCF yield relative to Vallourec (Figure 8). Tenaris is a solid company, but fully priced in our view; and we think Vallourec offers significantly better value and growth potential, especially over the medium term. With a rapidly increasing focus on the more profitable oil and gas business, it could be argued that Vallourec is in the process of becoming what Tenaris is now.

Figure 8: Vallourec and Tenaris capex and free cash-flow yield 1400 12%

10% 1200 8%

1000 6%

4% 800 2% 600 0%

400 -2% -4% 200 -6%

0 -8% 2010 2011 2012 2013E 2014E 2015E

VLLP Capex TENR Capex VLLP FCF yield TENR FCF yield

Source: Company data, Credit Suisse estimates We discuss the investment case in detail, addressing the following issues: (1) Comparison of capacity additions and FCF profiles (2) Growth implications from key clients and contracts (3) Comparison of cost structures (4) Valuation, in terms of: a. Our target price calculations b. Relative share price performances c. Ratio analysis (5) The medium- and long-term OCTG demand outlook for key geographies, and what this means for Vallourec and Tenaris.

Tubular view 4 23 September 2013 Our investment case Vallourec and Tenaris are the two main players in the oligopolistic market for premium OCTG (Figure 9). Both produce seamless pipes and connections to be used by oil and gas companies for drilling activities, and seamless pipes to be used in industry and power generation. Tenaris also produces welded pipes to be used in the oil and gas market, which are generally cheaper and lower quality than seamless. Premium pipes and connections are normally used in the most challenging drilling environments, such as deep water, shale plays and sour gas (Figure 10).

Figure 9: Worldwide premium OCTG market share Figure 10: Premium OCTG consumption by application

Deep water VAM Others oil 13% Others (Vallourec/Sumi 21% 32% tomo) 32%

Shallow water 24% Others gas 17%

TMK 6% Shales oil and Tenaris Hydril gas RoW 30% 2% Shales oil & gas USA 23%

Source: Tenaris Source: Tenaris The use of horizontal drilling and hydraulic fracturing (fracking) to exploit shale plays has revolutionised the energy landscape in the US. Figure 11 shows how unconventional natural gas production has completely changed US natural gas production. Premium OCTG casing, tubing and connections are used for more challenging drilling environments, both in the US (which remains the largest OCTG market by some margin) and in more challenging drilling environments outside the US.

Figure 11: US natural gas conventional and unconventional production (Bcf/d)

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Conventional Unconventional

Source: EIA, Bentek Energy, Credit Suisse estimates

Tubular view 5 23 September 2013

Tenaris: A solid but fairly valued company

Figure 12: Average EBITDA margins 2010-12 Figure 13: Gearing ratios 2012

30% 60% 56% 25% 50% 47% 25% 23% 39% 19% 40% 36% 20% 18% 28% 30% 25% 24% 15% 12% 20% 20% 18% 10% 20% 15% 10% 8% 7% 7% 7% 10% 6% 6% 6% 2% 5% 3% 2% 0%

0% -10% -3%

Salz

Outo

Voest

SSAB

Tenaris

Aperam

Thyssen

Acerinox

Kloecner

Vallourec

Kloeckner

Halliburton

Wood Group Wood

Wood Group Wood Baker Hughes Inc. Hughes Baker Baker Hughes Inc. Hughes Baker Source: Company data Source: Company data Tenaris is a quality company, in our view, with an excellent reputation in the premium OCTG market. Financially the company also looks to be in good shape. Not only does Tenaris have superior margins and lower gearing to Vallourec, but it also has higher margins than all the European steel companies under our coverage and oil services stocks such as Halliburton, and lower gearing than all with the exception of Salzgitter (Figure 12, Figure 13). Vallourec: Potential still under-appreciated by the market

Figure 14: Vallourec share price vs. WTI Figure 15: Vallourec vs. Tenaris/steel equity hybrid

160 350

140 300

120 250

100 200

80 150

60 100

40 50

20 0

Jul-08 Jul-13

Apr-07 Oct-09 Apr-12

Jan-06 Jun-11 Jun-06 Jan-11

Feb-08 Mar-10 Feb-13

Dec-08 Nov-06 Nov-11

Sep-07 Aug-10 Sep-12

Jan-09 Jan-13 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 May-09

WTI oil price Vallourec Tenrais/Steel co hybrid Vallourec indexed

Source: Thomson Reuters Source: Thomson Reuters However, we believe that Tenaris's strength is fairly priced in by the market, while the growth potential and quality of Vallourec is under-estimated. Tenaris has outperformed the basic resources space by a significant margin over the past two years, owing largely, in our view, to the resilience of the OCTG market to which Tenaris is so heavily exposed, with oil and gas accounting for c.80% of Tenaris's sales versus c.60% for Vallourec.

Tubular view 6 23 September 2013

Vallourec, by contrast, has seen a difficult few years. Not only have the European industrial and conventional powergen markets suffered heavily during the downturn, which has significantly affected this side of Vallourec's business, but delays to high-profile ramp-ups of key new mills VM2 (USA) and VSB (Brazil) have also had a negative impact on earnings and weighed on the share price. This, combined with several sets of quarterly results missing consensus and guidance, has caused investor sentiment on the stock to fall and for money to move out of Vallourec and into Tenaris, which is seen as the quality name. 8.4% FCF yield in 2015E through material EBITDA growth and capex reduction EBITDA improvement to come through growth tonnage We believe the market has failed to appreciate the Vallourec story. We think growth for tubular stocks will be driven by volume rather than price as we see little upside potential to OCTG prices, and Vallourec's key ramp-ups are now nearing completion, with VM2 turning profitable and VSB likely to do so within the next few months. We estimate that these two new mills will give Vallourec €100m of accretive EBITDA in 2014; a stark contrast to the drag on earnings the ramp-ups had caused in 2012. Therefore, after ongoing delays and €120m of ramp-up costs in 2012, the mills are moving from EBITDA disruption to earnings neutral and then to earnings accretive between 2012 and 2014E. VM2's location will allow Vallourec to better service clients in the Marcellus Basin, which our US commodities team estimates will account for c.15% of US natural gas supply in 2015 (Figure 16), and VSB will export to the Middle East and Africa where national oil corporations (NOCs) such as Saudi Aramco are investing heavily in offshore unconventional drilling. VSB should be highly competitive, not only owing to sourcing iron ore from Vallourec's own Mineracao iron ore mine like the existing Brazilian mill VMB, but also from the weaker BRL as it is an exporting mill (unlike VMB which caters for the Brazilian market). This is in addition to the strong outlook for the existing Brazilian operations at VMB given Petrobras's planned $72bn capex on pre-salt E&P in 2013-17 (the Brazilian pre-salts require exceptionally high premium OCTG, which commands correspondingly high margins).

Figure 16: Marcellus production and % of total US natural Figure 17: Petrobras planned capex in 2013-17 gas

12.0 20% Distribution Corporate 1% 18% 1% Petrochemical Biofuels 10.0 2% 2% 16% Gas & Energy 6% 14% E&P Pre-salt 8.0 31% ($72bn) 12%

6.0 10%

8% 4.0 Downstream 6% (RTC) 28% 4% 2.0 2%

0.0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E2015E Other E&P 29% ($70bn)

Source: EIA, Bentek Energy, Credit Suisse estimates Source: Petrobras 2013-17E Business Plan

Tubular view 7 23 September 2013

Significant capex reduction Furthermore, Vallourec is doing what many investors want the mining companies to do; namely, cut capex and deliver FCF to shareholders. Capex, which had been up at €909m level when the mills were being ramped and FCF reduced (net cash became c€1.6bn of net debt), is now coming down to €650m in 2013E and €450m in 2014E on our estimates, which we consider to be the long-term normalised level. Importantly, management has said it envisages no more capital-intensive projects after VM2 and VSB. Vallourec should therefore be able to grow EBITDA materially without any meaningful cyclical recovery in the business, which we believe makes it a stand-out versus most basic resources stocks. This significant growth in EBITDA and fall in capex should make Vallourec one of the best generators of FCF in the basic resources space, in our view. We estimate an FCF yield of 6.2% in 2014E and 8.4% in 2015E on the current share price (Figure 18). In contrast, for Tenaris, we expect an FCF yield of 4.6% in 2014E and 4.1% in 2015E (Figure 19).

Figure 18: Vallourec FCF yield and capex Figure 19: Tenaris FCF yield and capex

1,000 10% 1,400 12% 900 8% 1,200 10% 800 6% 700 4% 1,000 8% 600 2% 800 500 0% 6% 600 400 -2% 4% 300 -4% 400 200 -6% 200 2% 100 -8% - -10% 0 0% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E

VLLP Capex VLLP FCF yield TENR Capex TENR FCF yield

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Consequently, if the company delivers on growth and maintains capex discipline, which we are confident it will, then there is potentially scope for a material re-rating by the market. Importantly, we are not incorporating into our numbers a return to the strong cycle of 2006-08; the performance is instead coming from the growth tonnage afforded by the two new mills and a reduction in capex.

Tubular view 8 23 September 2013

Vallourec: Superior cost position Integration of iron ore operations provides a cost advantage in Brazil…

Figure 20: TENR and VLLP mills on the operating cost curve for liquid steel (US$/t) 700 Dalmine 600 V&M Star (Italy) Campana (USA) 500 (Argentina) Saint Sauvle 400 (France) Veracruz 300 (Mexico) VMB 200 (Brazil)

100

0 0% 20% 55% 71% 79% 89% 95%

Vallourec Tenaris Operating cost per tonne

Source: MBR, Credit Suisse research We believe that on balance Vallourec has a superior cost position to Tenaris. In our view, the key risk for Tenaris is the fact that it buys all its Hot Rolled Coil from external parties for making welded pipes, whereas Vallourec produces virtually all its own steel. Further, Vallourec benefits from the low cost of its Brazilian operations at VMB, owing to its self-sufficiency in iron ore (its V&M Mineracao mine is located only 30km away and produces 4mt of iron ore a year). Figure 20 shows the relative position of Vallourec's Brazilian operations against other Vallourec and Tenaris mills. The new VSB mill will also source its iron ore from Mineracao, giving it the same normative cost advantage as VMB. Vallourec's long position in iron ore will also be reduced as a result (currently c.3mt of iron ore mined per year at Mineracao is being sold externally to clients such as Vale, which will reduce to c.2mt). …and competitiveness helped further by the weaker BRL

Figure 21: Key currencies against the US$ Figure 22: Blended inflation rates for VLLP and TENR

120 8

110 7

100 6

90 5

80 4

70 3

60 2

50 1

40 0 01/08/2010 01/07/2011 01/06/2012 01/05/2013 01/04/2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F

BRL ARP MXP EURUSD Vallourec - Inflation Tenaris - Inflation

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

Tubular view 9 23 September 2013

Furthermore, Vallourec is benefiting from the weakening BRL against the US$, and should continue to do so, especially once the VSB exporting mill is fully ramped, as this will enhance VSB's competitiveness further as an exporting mill. Furthermore, we think that inflation rates in the countries where Tenaris' steelmaking operations are located will pose a further cost headwind for Tenaris relative to Vallourec and erode the benefits afforded by a weaker Argentinian peso. Figure 22 shows Tenaris's blended inflation rate is approximately twice that of Vallourec. Vallourec becoming Tenaris? We wish to emphasise to investors Vallourec's strategy of moving out of the more stagnant industrial and powergen markets, particularly in Europe, and into the higher-margin premium OCTG market where it is already a market leader and where there is more significant growth potential in our view. Not only is Vallourec in the process of increasing its capacity materially, with the first construction of new major integrated mills since 1976, but the mills will be heavily geared towards the more profitable and resilient oil and gas markets.

Figure 23: Vallourec oil and gas as a % of total sales Figure 24: Credit Suisse EBITDA forecasts (rebased to 100)

70% 200 180 65% 160 60% 140

55% 120

50% 100 80 45% 60 40% 40

35% 20

30% 0 Q1 Q2 Q3Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1Q2 Q3 Q4Q1 Q2Q3 Q4 Q1Q2 2012A 2013E 2014E 2015E 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 Vallourec Tenaris

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates Capex has also been significant over the past few years on adding threading and heat treating capacity near key client operations, allowing Vallourec to increasingly focus on the premium product offering. Further still, Vallourec is taking c.150kt of capacity out of Europe, which is more focused on the lower-margin industrial segment. The net effect is a move away from the industrial segment and into the oil and gas segment. Figure 23 illustrates this rate of change; oil and gas has gone from representing c40% of sales in Q3 2008 to 66% in Q2 2013. This compares with 80% for Tenaris (of which c.80% is OCTG and c.20% line pipe). With VM2 and VSB still ramping, it could be argued that Vallourec is becoming what Tenaris already is, namely, focused primarily on the premium OCTG market with some activity in industrial markets. The combination of these factors indicates a divergence of EBITDA between Vallourec and Tenaris between now and 2015 on our estimates, as shown in Figure 24.

Tubular view 10 23 September 2013

Further optionality afforded from industrial recovery

Figure 25: Vallourec sales by market (2012) Figure 26: Tenaris sales by market (2012) Construction Industrial and other 10% Automotive 7% 4% Chem & HPI Petrochem 10% 7%

Mechanical Eng 9% Line pipe 15% Oil & Gas OCTG 61% 65% Power Generation 12%

Source: Company data Source: Company data Tenaris has significantly outperformed Vallourec over the past two years, owing largely to its greater exposure to the oil and gas markets (c.80% of sales, Figure 26) and delays to the ramp-up of Vallourec's new plants. Vallourec by contrast is still significantly exposed to the industrial and power generation markets, which have performed poorly and weighed heavily on the share price (Figure 25). However, we think Vallourec's exposure to the industrial segment provides further optionality to the company, on top of the underlying investment case, as equity investor sentiment on the stock is correspondingly low as a result. Moreover, we believe Vallourec stands to benefit if we see a turnaround in the industrial segment, as this would likely cause an improvement in volumes and prices. We believe we are beginning to see the tentative signs of a material recovery in Europe, with improving leading indicators and European PMI new orders, for example, at two-year highs, consistent with 0.5-1.0% GDP growth. In a scenario where we do see a material recovery in the European industrial backdrop, we estimate an accretive effect of €100m on 2014E EBITDA for Vallourec, providing the company with further option value on top of the underlying investment case, which is centred more on the oil and gas business.

Figure 27: Euro area PMIs and GDP growth

Source: Thomson Reuters

Tubular view 11 23 September 2013 Growth likely to come from capacity additions

In our view, growth in the medium term will be driven by volume rather than by price, as we see a stable outlook for pricing in a well-supplied US market. Vallourec's new VM2 and VSB mills are nearing completion, having been ramped up over the past two years, and are turning profitable. The small-diameter VM2 mill located next to the existing medium- diameter facility in Youngstown is ideally located to serve key shale plays in the US, and VSB will export to large international clients that are ramping up investment in unconventional drilling, plus should benefit from a weaker BRL. Overall, we estimate the new mills will add €100m to 2014E EBIDTA vs. 2013E.

Both Vallourec and Tenaris are adding substantial amounts of capacity over the next few years, albeit at significantly different times. While Vallourec is nearing completion of the ramp-up of the VM2 small diameter mill in Youngstown, Ohio and the VSB joint venture mill with Sumitomo in Belo Horizonte, Brazil, Tenaris will be bringing on its 650kt Bay City seamless mill in 2016 and ramping it up over the following two years. In our view, the VM2 and VSB ramp-ups are central to the Vallourec investment case, which revolves around material EBITDA addition and a reduction in capex to a long-term normalised level. The Bay City mill will also provide Tenaris with the ability to produce seamless tubes in the US, instead of importing from Mexico, Argentina and Europe. However, as this will be ramped from 2016 this will be much later and would likely involve a significant capex increase in the meantime. Vallourec growth profile Vallourec is adding two key mills, VM2 in Ohio, USA and VSB in Minas Gerais, Brazil. The two new mills will serve to increase Vallourec's capacity materially between the end of 2012 and 2014 (Figure 28), important given that the mills will be focused on the higher- margin oil and gas markets and as we think growth for OCTG producers will come from volumes in the current environment of low pricing power, even at the premium end.

Figure 28: Vallourec volumes 2012-15E (kt)

2700 20 2600

2500 130 2400 170 180 2300 200

2200 120 2572 2100

2000

1900 2092 1800

1700 2012 YE VSB VM2 Europe VSB VM2 Europe 2014 YE < 2013E >< 2014E >

Source: Company data, Credit Suisse estimates

Tubular view 12 23 September 2013

VM2- Youngstown, Ohio One of the two key mill additions for Vallourec is the 350kt (with the potential to eventually increase to 500kt) small-diameter pipe mill located in Youngstown, Ohio, close to the shale gas plays of the Marcellus basin and next to the existing medium-diameter mill. After delays in 2012, which hurt profitability and weighed on the share price, the VM2 ramp-up is now on track – VM2 has always been guided by management to break even at the end of H1, and in the last results conference call it said progress was “in line” with this. Volumes were previously guided to be 200kt at end-2013 and 350kt at the end of next year, although with US OCTG consumption weaker than expected, production could be slightly lower than previously guided, as Vallourec has highlighted it does not want to push excess tonnes into the market.

Figure 29: VM2 located close to key shale plays in Marcellus basin

Source: Vallourec We think VM2 will become more profitable next year when it starts focusing on producing premium-grade pipe (in the early stage of a ramp-up more American Petroleum Institute (API) i.e. standard-grade pipe is produced, as in ramp-up mode a mill does not produce in the sweet spot in terms of product pricing and product margin). The small-diameter mill (60-177mm pipe diameters) will allow Vallourec to better cater for local clients with whom it already has good relationships and who trust the quality of its products (an important factor for larger clients in particular who are willing to pay a premium for what they know to be high quality).

Figure 30: Natural gas production from the Marcellus basin (Bcf/d) and % of total US natural gas supply

12.0 20%

18% 10.0 16%

14% 8.0 12%

6.0 10%

8% 4.0 6%

4% 2.0 2%

0.0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Source: EIA, Bentek Energy, Credit Suisse estimates

Tubular view 13 23 September 2013

The Credit Suisse US commodities research team expects natural gas production from the Marcellus basin to increase sharply over the next few years based on the well completion profile and historical production levels, with 10.8Bcf/d forecast in 2015, by which time it will represent 14% of total US natural gas supply, compared with 5.7Bcf/d in 2012 and 1.0Bcf/d in 2010. The VM2 mill will be well placed to supply clients in the Marcellus basin with small-diameter pipes, but will also be able to cater for clients in other key basins with a range of threading and heat treatment facilities dotted around the US. VSB – Minas Gerais, Brazil The second key mill for Vallourec that is being ramped is the VSB joint venture with Sumitomo in Minas Gerais, Brazil, close to Vallourec's existing operations at VMB, Mineracao and Florestal. The mill will focus on premium large-lot orders and instead of catering for domestic clients such as Petrobras will focus on exporting to international markets such as the Middle East. As such, the mill's competitiveness (with normative costs already significantly lower than European plants as the mill will source ore from Mineracao like VMB) is further enhanced from a weaker BRL. Vallourec's share of investment in the mill is €1.2bn. Figure 31 shows the location of the new VSB mill relative to existing Vallourec Brazilian operations: the VMB mill in Belo Horizonte which serves the Brazilian market, the iron ore mine at Mineracao, and eucalyptus forest at Florestal, which supplies the charcoal to the blast furnace. Like VMB, VSB will source its iron ore from Mineracao and charcoal from Florestal, giving a double advantage to Vallourec – not only will VSB's normative cost position be strong like VMB's as a result of the iron ore integration, but Vallourec's long position in iron ore will also be significantly reduced (Mineracao currently sells c.3mt of ore a year to the external market such as Vale, which will reduce to c.2mt).

Figure 31: VSB located near existing Vallourec operations Figure 32: Tenaris: Bay city located near Gulf of Mexico, at VMB, Florestal and Mineracao South Texas shale plays and existing Tenaris operations

Source: Company data Source: Company data We estimate a loss of €40m for VSB in 2013 in line with with management guidance, with it breaking even at the start of next year. There are two key factors for the improvement in performance over the next 18 months, which we are confident should be satisfied. First is the improvement in mix, with the mill selling more API-grade pipe during the ramp-up, whereas it will be primarily selling premium product once it is ramped up. Accretions appear on track and premium client qualification is almost finished, with one more key customer to qualify. Second, the start-up of the blast furnace, which will use Vallourec’s own iron ore from the Mineracao mine 30km away, and charcoal from Florestal. Therefore, overall, the mill should benefit from having lower costs, higher volume, and higher revenue per ton, all of which should make for stronger profitability in 2014E and beyond.

Tubular view 14 23 September 2013

Tenaris growth profile Bay City The key mill for Tenaris coming online from 2016 and being ramped up over the following two years is the 650kt capacity seamless mill located in Bay City, in the south of Texas. Figure 32 shows Bay City's location to the Gulf of Mexico, the South Texas shale plays such as Eagle Ford and Haynesville, in addition to Tenaris's existing operations.

Figure 33: Nat gas prod'n from Eagle Ford & Haynesville (Bcf/d) and % of US total supply

8.0 20%

7.0 18% 16% 6.0 14% 5.0 12% 4.0 10%

3.0 8% 6% 2.0 4% 1.0 2% 0.0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Eagle Ford Haynesville % of total US supply

Source: EIA, Bentek Energy, Credit Suisse estimates The Credit Suisse US commodities research team expects Eagle Ford to produce almost 5Bcf/d of natural gas by 2015, with Haynesville and Eagle Ford together accounting for 14% of total US natural gas supply by this time. However, the Bay City mill will not just serve clients in these plays and the Gulf of Mexico; it will primarily be built in order to produce seamless in the number one OCTG market where Tenaris does most of its business (Tenaris is currently importing into the US from its mills in Mexico, Argentina and Europe). The project has been guided by management to involve a total investment of $1.5bn, and to be operational by 2016, ramped up over the following 1-2 years. In our model we assume $350m of capex for Bay City in 2014E, $500m in 2015E, $500m in 2016E and $150m in 2017E.

Tubular view 15 23 September 2013

Resulting FCF profiles

Figure 34: Vallourec FCF and capex Figure 35: Tenaris FCF and capex

1,000 10% 1,400 12% 900 8% 1,200 10% 800 6% 700 4% 1,000 8% 600 2% 800 500 0% 6% 400 -2% 600 300 -4% 4% 400 200 -6% 2% 100 -8% 200 - -10% 0 0% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E VLLP Capex VLLP FCF yield TENR Capex TENR FCF yield

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Vallourec Given the timing of capacity additions, over the next 2-3 years the free cash flow profile of Vallourec looks more attractive than that of Tenaris on our estimates, as Tenaris increases capex for the construction of the Bay City seamless mill in Texas and Vallourec reduces capex significantly following completion of the VM2 and VSB ramp-ups, with no more capital-intensive projects envisaged by management. The company has guided for €650m capex in 2013 and €450m in 2014, which we think is the normalised level (Figure 34). As a result, we estimate an FCF yield of 6.2% in 2014E and 8.4% in 2015E, making Vallourec one of the best generators of FCF within the basic resources space in our view after several years of negative free cash flow. We think that if the company delivers on growth and maintains capex discipline (which we are confident it will), then there is potentially scope for a material re-rating by the market. Tenaris For Tenaris we forecast capex increasing to $1bn in 2014 and $1.15bn in 2015. Of this, we see Bay City contributing $350m of capex in 2014E and $500m in 2015E, on top of a $400m maintenance capex and $250m on other threading and heat-treating capacity additions. As a result, we see FCF yields remaining stagnant over the next two years, at 4.6% in 2014E and 4.1% in 2015E.

Tubular view 16 23 September 2013 Comparison of cost positions

Overall we consider Vallourec to be in a superior cost position to Tenaris. In particular, we believe there is a problem for Tenaris in welded, as it procures all its HRC from external mills. We think the risk is to the upside for HRC prices, which, coupled with a weaker demand outlook for welded versus seamless, poses a double negative for Tenaris in our view. Vallourec's self-sufficiency in raw materials in Brazil provides a significant cost advantage, as does the currency exposure at the VSB exporting mill, which benefits from a weaker BRL which has lost 15% against the USD in the past three months.

Both Vallourec and Tenaris produce the vast majority of their steel requirements for seamless, with Vallourec now buying in some billet following the VM2 and VSB ramp-ups and Tenaris buying some billet from Ternium following the recently added 450kt small- diameter pipe mill at Veracruz. However, Tenaris buys all its HRC for making welded pipes, which represents 36% of its total steel needs. Most of the steel for seamless is produced by both companies via the Electric Arc Furnace (EAF) route, with Vallourec also having Blast Oxygen Furnace (BoF) shops at HKM in Germany and in Brazil, where it is self-sufficient in raw materials owing to its iron ore mine at Mineracao and eucalyptus forests at Florestal.

Figure 36: Vallourec steel requirement by process 2012 Figure 37: Tenaris steel requirement by process 2012 Bought in steel 9%

Steel shop BoF Bought in steel Steel shop EAF (RM self Steel shop EAF 36% 41% sufficient) 38% 20%

Steel shop BoF Steel shop EAF 33% + DRI 23%

Source: Company data Source: Company data

Figure 38: Vallourec steelmaking capacity by geography Figure 39: Tenaris steelmaking capacity by geography Romania France 11% 19% USA 19% Mexico 27%

Italy 26%

HKM Brazil 33% 29% Argentina 36%

Source: Company data Source: Company data

Tubular view 17 23 September 2013

Relative cost positions of mills

Figure 40: TENR and VLLP mills on the operating cost curve for liquid steel (US$/t) 700 Dalmine 600 V&M Star (Italy) Campana (USA) 500 (Argentina) Saint Sauvle 400 (France) Veracruz 300 (Mexico) VMB 200 (Brazil)

100

0 0% 20% 55% 71% 79% 89% 95%

Vallourec Tenaris Operating cost per tonne

Source: MBR Figure 40 shows the estimated cost positions of key Vallourec and Tenaris mills for liquid steel production. The clear trend is the lower operating costs that both companies have in their Central and Latin America facilities owing to the cost of energy and labour – with the Vallourec VMB mill in Brazil and the Tenaris Campana DRI mill in Argentina as the lowest cost. At the other end of the scale, Tenaris's Dalmine mill in Italy and Vallourec's Saint Saulve mill in France are very high on the liquid steel cost curve, in the 9th decile. We can see from Figure 40 and Figure 41 the two key differences between Vallourec's steel production costs at VMB in Brazil and the other Vallourec and Tenaris mills; namely, the significantly lower-cost position in general and the make-up of these costs. Whereas raw materials (mainly scrap, iron ore and pig iron) constitute >70% of total costs at other mills (adding depreciation and interest to operating costs), raw materials account for only c.30% of VMB's total costs. This is a result of the iron ore mine at the V&M Mineracao subsidiary, which supplies the VMB mill and is only 30km away. VSB will also source its iron ore from Mineracao, which will have a double benefit for Vallourec: not only will VSB enjoy the same normative cost competitiveness as VSB, but Vallourec's long exposure to iron ore will also be reduced (currently c.3mt of iron ore mined at Mineracao per year is being sold into the market, which will reduce to c.2mt when VSB is ramped).

Figure 41: Estimated composition of total costs 2012

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% VK: VMB TENR: Campana TENR: Veracruz VK: V&M Star TENR: Dalmine VK: Saint Saulve

Raw Materials Energy & Reductants Labour & Overheads Depreciation + interest

Source: MBR

Tubular view 18 23 September 2013

Steelmaking and engineering margins We consider Vallourec and Tenaris to be a mixture of steel and engineering / OFS companies, which, in addition to manufacturing billet for their seamless products, invest significant amounts in R&D. This helps to maintain their leadership in the premium OCTG market and command higher margins on top of the margin from underlying steel making. Not only do Tenaris and Vallourec have very advanced connection technology which prevents over-torquing and maintains a gas-tight seal in extreme drilling environments, but they also provide premium pipes that are specially designed for individual challenges; for example, corrosion-resistant alloys (CRA) for use in the presence of carbon dioxide or hydrogen sulphide; or pipes designed for use in areas of high localised external pressure. This is what separates Tenaris and Vallourec as producers of premium OCTG from producers of solely API- or commodity-grade pipe, which is cheaper and is far from suitable for use in advanced drilling applications. As a result, when looking at spreads over the underlying billet for seamless, we can consider there to be a 'steelmaking' margin and an 'engineering margin', where the latter is approximated by the spread of quoted SML prices over billet. We estimate average SML prices from the Pipelogix Index, which looks at c.40 products from the US spot market (out of >1,000), whereas in reality Vallourec and Tenaris do not sell a material percentage of their products on the spot market but on long-term contracts.

Figure 42: SML spread over billet ($) Figure 43: ERW spread over HRC ($)

US US$ 2200 2000 2000 1800 1800 1600 1600 1400 1400 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jul-09 Dec-09May-10 Oct-10 Mar-11Aug-11 Jan-12 Jun-12 Nov-12 Apr-13

Billet price OCTG pricing Engineering spread Welded pricing HRC price Margin

Source: Pipelogix, Thomson Reuters Source: Pipelogix, Thomson Reuters We can see from Figure 42 and Figure 43 that the spreads of seamless (SML) over billet and Welded (ERW) over HRC have been relatively constant over the past few years, around $1,100 for welded and $1,300 for seamless, confirming a lack of pricing power in the well-supplied OCTG market. The pricing power is lower in our opinion for API- and commodity-grade product, especially in the current environment of oversupply from cheap Korean imports and a well-supplied domestic US market. Looking at what the spread is composed of, we can see that for seamless while the estimated steelmaking margin, i.e. spread between billet and underlying costs, has remained relatively resilient, it is the engineering spread, i.e. spread between SML Pipelogix pricing and billet that has suffered relatively. For welded we see a similar pattern, with the spread between the ERW Pipelogix pricing and HRC less stable.

Tubular view 19 23 September 2013

Raw material price outlook From the start of 2011 the cost position at the steelmaking end has generally strengthened, with scrap, pig iron and HBI prices falling by $70-150 per tonne between the start of 2011 and the end of 2012. However, we now feel a cost headwind is likely from underlying inputs. Looking at ex-China steel production, which we continually emphasise is the key delta in cyclical demand, we see a strong historical correlation between US scrap and HRC prices, and ex-China steel production, which has recently been ticking up and we think will continue to do so based on the key leading indicators.

Figure 44: US HMS#1 Scrap and ex-China steel prod'n Figure 45: US HRC price and ex-China steel prod'n

500 75,000 850 75,000

450 70,000 750 70,000

400 650 65,000 65,000 350 550 60,000 60,000 300 450 55,000 55,000 250 350

50,000 200 50,000 250

150 45,000 150 45,000 01/02/2009 01/02/2010 01/02/2011 01/02/2012 01/02/2013 01/02/2009 01/02/2010 01/02/2011 01/02/2012 01/02/2013

US HMS#1 Scrap Ex-China steel production US HRC Ex-China steel production

Source: Thomson Reuters, WSA Source: Thomson Reuters, WSA Given the recent improvement in ex-China steel production, support from leading indicators such as the ISM and Euro-area PMIs, and given what happens to steel production seasonally, we believe we have reached the inflection point for ex-China steel production and expect the increased momentum to continue over the coming months. Scrap prices have correspondingly started to tick up also owing to increased demand, and are likely to continue in our opinion, posing a cost headwind to Vallourec and Tenaris at their EAF operations. Spot ERW and SML prices tend to lag movements in the scrap price by three months (Figure 46). In reality Vallourec and Tenaris are not materially exposed to the spot market but supply most of their products on contract.

Figure 46: US scrap (3-month lag) against SML and ERW prices 3850 600

3350 500

2850 400 2350 300 1850 200 1350

850 100

350 0 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13

OCTG SML pricing OCTG ERW pricing US Scrap (3 month lag) (RHS)

Source: Pipelogix, Thomson Reuters

Tubular view 20 23 September 2013

With Vallourec's self-sufficiency in iron ore at VMB and VSB and no reliance on external producers for purchasing coils for welded product (unlike Tenaris), it is better placed to deal with this headwind in our view. We think it is Tenaris's position in welded that poses the main risk, especially when combined with our view that the outlook for welded OCTG demand is weaker than that of seamless OCTG over the medium term. Scrap Scrap steel is an important seamless cost component for both Vallourec and Tenaris, which produce much of their upstream billet from EAFs. Tenaris in particular produces around half of its steel via the EAF route, with the Dalmine, Veracruz and Silcotub mills being purely scrap EAF and the Campana mill in Argentina using both scrap and DRI as a scrap substitute. We can see from Figure 47 that US HMS#1 scrap prices have started picking up after two years of price declines, owing to stronger demand for scrap at mini mills. Scrap is a non- speculative material that is only used for steel production by mini mills, and we believe the increase in production is set to continue. We believe scrap prices will continue to rise going into H2, which should pose a cost headwind in our view. The US cycle tends to lead Europe by about three months. Both companies produce c.40% of their steel via the EAF route and are hence roughly equally exposed to this headwind in our opinion.

Figure 47: US HMS#1 scrap and pig iron prices Figure 48: US HRC price

600 1000

550 900 500 800 450

400 700

350 600 300 500 250 400 200 01/01/2011 01/08/2011 01/03/2012 01/10/2012 01/05/2013 300 Scrap Pig iron 01/01/2011 01/08/2011 01/03/2012 01/10/2012 01/05/2013

Source: Thomson Reuters DataStream Source: Thomson Reuters DataStream HRC The key weakness in the cost position of Tenaris compared with that of Vallourec is, in our view, its reliance on external mills for HRC for its ERW pipes. We think Tenaris will face a cost headwind from higher HRC prices in the medium term in the US and in Brazil. Tenaris buys in all its HRC on quarterly contracts for making ERW, which account for c.40% of sales. The majority of coils in the US come from Nucor, with which Tenaris has had a sourcing agreement since 2007, although prices are determined on quarterly contracts. In South America, coils are sourced from ArcelorMittal and Usiminas in Brazil, and Ternium in Argentina. We think the risk to HRC prices, like scrap, is to the upside, which should present Tenaris with a cost headwind for its welded products, for which HRC is the primary input. In Brazil, there have been 5-8% recent price hikes from Usiminas and ArcelorMittal, from which Tenaris procures its HRC in the country. Increases in HRC prices tend to be reflected in the P&L with a 3-6-month lag, as shown in Figure 46.

Tubular view 21 23 September 2013

As we also believe the demand and pricing situation is overall stronger for seamless than for welded owing to a stronger outlook for higher premium products which are usually (although not always) seamless. We consider this to be a double negative for Tenaris, which in addition to seeing a cost headwind from higher HRC prices faces a poorer demand outlook for welded, in our view. Iron ore and HBI The iron ore price is an important consideration for both Vallourec and Tenaris, albeit for different reasons. Tenaris buys between 1m tonnes and 1.5m tonnes of iron ore a year from Vale for making HBI in Argentina. Vallourec by contrast is self-sufficient in raw materials in Brazil, producing c.4m tonnes of iron ore per year from its Mineracao iron ore mine, located 30km from Belo Horizonte. Of this, around 3m tonnes is sold into the market, to clients such as Vale, and Vallourec uses the rest to make billet in Brazil at VMB. However, it sources iron ore from external producers for its other integrated operations. Once VSB is fully ramped, Vallourec's long position in iron ore from selling c.3mt a year into the market will be reduced as c.1mt per year will be consumed internally by VSB. Tenaris, in addition, produces some 23% of its steel billet requirements for seamless tubes via the DRI method at the Campana mill in Argentina using Hot Briquetted Iron (HBI), owing to the local scarcity of scrap, to hedge against spikes in the scrap price given that the rest of its meltshops are pure EAF, and as one of the main cost components of steelmaking is natural gas, this provides a natural hedge to the revenue-cost balance. Iron ore is arguably the material that is most widely expected to see an on-going structural decline in the next few years. There is a lot of visible supply emerging out to 2015 from Rio, Vale and FMG, which is likely to see the cost curve become shallower over the next 2-3 years. However, in the meantime a relatively robust China and recovering ex-China could, in our view, present all the hallmarks of a better-than-expected pricing outcome for iron ore in the next 6-12 months to possibly even 18 months. Therefore, if there is a near-term upside surprise in iron ore prices, in our opinion Vallourec would be better-positioned than Tenaris owing to its self-sufficiency in iron ore and higher realised prices for sale to external clients.

Figure 49: Iron ore fines FOB prices and CS forecasts ($) Figure 50: Latin America HBI price ($)

180 450

160

140 400

120 350 100

80 300 60

40 250 20

- 200 H111 H211 H112 H212 H113E H213E H114E H214E 01/01/2011 01/08/2011 01/03/2012 01/10/2012 01/05/2013

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters

Tubular view 22 23 September 2013

Currency and inflation considerations Figure 51: Key currencies vs. US$ (rebased) Figure 52: Blended forex rates for VK and TENR (rebased)

120 180

110 160 140 100 120 90 100 80 80 70 60 60 40

50 20

40 0 01/08/2010 01/07/2011 01/06/2012 01/05/2013 01/04/2014 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F2014F

BRL ARP MXP EURUSD Vallourec - ER Tenaris - ER

Source: Thomson Reuters Source: Thomson Reuters With the ramp-up of the VSB exporting mill, Vallourec is benefiting from a weaker BRL and should continue to do so. The BRL has lost 15% against the USD over the past three months (Figure 51). Our Latin American Economics team forecasts an average USD/BRL exchange rate of 2.3 in 2013E and 2.4 in 2014E, maintaining VSB's currency advantage as an exporting mill in addition to its low absolute cost position relative to European mills. Figure 53 shows that since the BRL began to significantly weaken against the USD in May, Vallourec has significantly outperformed Tenaris. The weaker BRL adds to VSB's already strong normative cost position owing to the internally-sourced iron ore from the iron ore mine at the V&M Mineracao subsidiary. Figure 53: VLLP and TENR vs. US$:BRL (rebased to 100)

130

125

120

115

110

105

100

80 03/09/2012 03/11/2012 03/01/2013 03/03/2013 03/05/2013 03/07/2013 03/09/2013

VK TENR USD:BRL

Source: Thomson Reuters The strength of the Mexican peso by contrast has caused a relative currency headwind for Tenaris, which, without any seamless capacity in the US, has been importing billet from its steel shops, of which the largest two are located in Mexico and Argentina. When the Bay City mill in Texas goes into production around 2016, this should mitigate the currency effect of importing seamless into the US, but over the next two years it looks like the strength of the MXP relative to the BRL will erode Tenaris's margins versus Vallourec.

Tubular view 23 23 September 2013

Overall, on a blended FX basis the currencies to which Tenaris is exposed have devalued more against the USD than those to which Vallourec has exposure (Figure 52). The Argentinian peso in particular has and should continue to devalue against the dollar, in our view. However, the Credit Suisse Latin American Economics team forecasts that Argentinian inflation rates will remain high, not only against European and American inflation, but also against the other key Latin American countries (Figure 54), arguably offsetting this cost benefit. Looking at the blended inflation rates weighted by steelmaking capacity (Figure 55), we can see that Vallourec is in a better position and the relative advantage is forecast by Credit Suisse to widen through 2014. On balance, we consider Vallourec to be in a superior position to Tenaris with regards to inflation and foreign currency considerations.

Figure 54: Inflation rates (%) Figure 55: Blended inflation rates for VK and TENR (%)

14 8

12 7

10 6

8 5

6 4

4 3 2 2 0 1 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F -2 0 Mexico Argentina Brazil 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F

US Germany France Vallourec - Inflation Tenaris - Inflation

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

Tubular view 24 23 September 2013 Valuation

We believe Vallourec offers better value than Tenaris, which has traded at a significant premium over the past two years, in absolute terms, relative to the oil price, and even after controlling for Tenaris's greater exposure to the oil and gas markets. On static ratios Vallourec offers significantly better value than Tenaris, on our estimates, having grown invested capital and capital employed considerably over the past few years.

Target price calculations Vallourec We have a target price of €56 (14% potential upside) for Vallourec based on our 2014 EBITDA estimate, applying an EV/EBITDA multiple of 8x. We think our 2014 EBITDA estimate of €1,166m is achievable, and could even indicate potential upside in the event of a material recovery in the European industrial backdrop.

Figure 56: Vallourec: TP of €56/share based on 2014E EBITDA (€m) 2014E EBITDA 1,166 Multiple 8 EV 9,329 2014E Net debt 1,710 2014E Pension 115 2014E Minorities 490 2014E Non-core assets 595

Implied Market cap 7,609 # No of shares 125

Implied share price 61

Discounted 1 yr. at 10% 56 Source: Company data, Credit Suisse estimates

Figure 57: Sensitivity of VLLP valuation (€ per share) to the EV/EBITDA multiple

120.0

100.0

80.0

60.0

40.0

20.0

0.0 0 2 4 6 8 10 12 14 16

Source: Credit Suisse estimates While we have a target price of €56 using our 2014E EBITDA estimate of €1,166m, longer term using our 2015E EBITDA estimate of €1,358m we arrive at a target price of €60 (22% potential upside), taking averages of the valuation per share implied by three methods, namely: (a) PV of FCF (b) P/E and (c) EV/EBITDA. This calculation is shown in Figure 58.

Tubular view 25 23 September 2013

Figure 58: Vallourec: Long-term valuation of €60 on our 2015E EBITDA estimate (€m) Underlying Capacity 2,400 Additional Capacity in US and Brazil 650 Reduction of Capacity in Europe (150) Total Capacity 2,900 Utilisation Rate 92%

Shipments 2,673 EBITDA/t 450 Structural EBITDA 1,203 Cyclical improvement 155 EBITDA 1,358

FCF 625 PV of CF (10% WACC, 3% growth) 9,607 Less Liabilities 7,969 Per share 64

P/E EPS 5 Multiple 12 Per Share 55

EV/EBITDA EBITDA 1,358 Multiple 7 Enterprise Value 9,504 Net Debt 1,710 Pensions 115 Associates 187 Equity Value 7,866 Per share 63

Average 60 Source: Company data, Credit Suisse estimates

Tenaris We have a €15 per share target price for Tenaris (20% potential downside), based on our 2014 EBITDA estimate of €3,231m and applying an EV/EBITDA multiple of 8x. Figure 60 shows the sensitivity of our valuation to the chosen EV:EBITDA multiple.

Tubular view 26 23 September 2013

Figure 59: Tenaris: TP of €15/share based on 2014E EBITDA (€m) 2014E EBITDA 3,231 Multiple 8 EV 25,848 2014E Net Debt 970 2014E Pension provisions 162 2014E Minorities 200 2014E Non-core assets 1,076

Implied Market Cap 27,532 # No of shares 1,181

Implied share price (USD) 21 Implied share price (EUR) 15 Source: Credit Suisse estimates

Figure 60: Sensitivity of TENR valuation (€ per share) to EV/EBITDA multiple

30.0

25.0

20.0

15.0

10.0

5.0

0.0 2 4 6 8 10 12 14

Source: Credit Suisse estimates Share price performance

Figure 61: Vallourec vs. Tenaris share price performance Figure 62: Vallourec vs. Tenaris/steel hybrid 350 150 300 130 250 110

90 200

70 150

50 100 30 50 10

Jan-10 Jan-09 Jan-11 Jan-12 Jan-13

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

May-10 May-09 May-11 May-12 May-13

Jul-08 Jul-13

Apr-07 Oct-09 Apr-12

Jan-06 Jun-11 Jun-06 Jan-11

Feb-08 Mar-10 Feb-13

Dec-08 Nov-06 Nov-11

Sep-07 Aug-10 Sep-12 May-09

TENARIS VALLOUREC Tenrais/Steel co hybrid Vallourec indexed

Source: Thomson Reuters Source: Thomson Reuters

Tubular view 27 23 September 2013

Figure 61 shows that Tenaris has significantly outperformed Vallourec since the end of 2011. In our view, this is owing largely to: 1. Tenaris's materially larger OCTG exposure, as the end markets held up much better than the industrial and conventional powergen markets to which Vallourec is also exposed (and was to a greater extent three years ago, with oil and gas representing only c.50% of sales versus 66% in Q2'13). Indeed, as shown by Figure 63 and Figure 64 whereas Tenaris has tracked the oil price closely, Vallourec has considerably underperformed it. Even comparing the Vallourec share price performance with a 'half Tenaris, half steel' hybrid to account for this lower oil and gas exposure, we still see an underperformance that is not warranted in our view (Figure 62).

Figure 63: Vallourec share price vs. WTI Figure 64: Tenaris share price vs. WTI 160 160 25

140 140 20 120 120 100 15 100 80 80 60 10

60 40 5 40 20

20 0 0

Jul-06 Jul-13

Oct-04 Apr-08 Oct-11

Jan-03 Jun-09 Jan-10

Mar-04 Feb-07 Mar-11

Aug-03 Dec-05 Sep-07 Nov-08 Aug-10 Dec-12

Jan-09 Jan-13 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 May-05 May-12

WTI oil price Vallourec WTI oil price Tenaris

Source: Thomson Reuters Source: Thomson Reuters 2. Disruptions and delays to the key VM2 and VSB ramp-ups, which negatively affected EBITDA by €120m in 2012 and caused Vallourec to miss consensus several times. However, we now estimate a positive EBITDA impact of €100m for 2014 with the mills profitable, and a significant reduction in capex to €450m in 2014E from €909m in 2011 with no more capital-intensive projects envisaged. 3. Significant debt increase for Vallourec owing to the ramp-ups, with net debt increasing to €1,614m at the end of 2012 from a net cash position of €407m at the end of 2009. This has caused the debt component of EV to increase materially over this time period and the equity component to shrink relatively. Net debt as a percentage of EV has gone from -8% in 2009 to 23% in 2012 (Figure 65). As net debt decreases to €1,367m in 2015 on our estimates and equity accelerates subsequent to the ramp-ups, this pattern should reverse over the next two years in our view.

Tubular view 28 23 September 2013

Figure 65: Vallourec net debt as a % of EV

30%

25%

20%

15%

10%

0% 2008 2009 2010 2011 2012 2013E 2014E 2015E -5%

-10%

Source: Company data, Credit Suisse estimates

Tubular view 29 23 September 2013

Ratio analysis

Figure 66: Vallourec and Tenaris 2014E key ratios

0 P/E EV/EBITDA EV/sales Depreciation/ Capex/sales EV/CE EV/IC P/B FCF yield (%) sales (%) (%)

Tenaris Vallourec

Source: Credit Suisse estimates In this section we consider some key financial ratios for Vallourec and Tenaris. We can see that while the two stocks have traded roughly equally on an EV/EBITDA (Figure 68) basis (with Vallourec trading at a premium on a P/E basis owing to its weaker earnings from 2011 in the industrial business and hits to the bottom line from the VM2 and VSB ramp-ups), if we look at valuation multiples such as P/B, EV/IC, and EV/CE, Vallourec has been trading at a considerable (and widening) discount to Tenaris since 2009. Figure 71 and Figure 72 show that Vallourec's discount to Tenaris on EV/IC and EV/CE has widened over the past two years because although Vallourec has increased invested capital and capital employed materially, enterprise value has remained relatively unchanged. The 2014E Price/Book ratio also remains cheap relative to Tenaris (1.2x vs. 2.6x for Tenaris, Figure 74). This is arguably justified owing to Tenaris's resilience during the downturn and its greater exposure to the oil and gas markets, its stronger balance sheet and the absence of ramp-up risk, which Vallourec has experienced. However, as we previously mentioned, it could be argued that Vallourec is in the process of becoming Tenaris, with the VM2 and VSB ramp-ups nearing completion, and oil and gas now pushing 70% of total sales (vs. 80% for Tenaris, which includes some 15% as line pipe) versus 50% in 2009. The mills are turning profitable and should reach full production within the next 6-18 months; capex is being reduced materially with no capital- intensive projects envisaged, and net debt and free cash flow profiles will change accordingly, as discussed in the "Growth likely to come from capacity additions" section. Tenaris on the other hand is starting to ramp up investment in its Bay City mill, with $1.5bn of capex planned at present (although we note that as Tenaris has seen with the Veracruz ramp-up, the process can take longer than expected and capex can be correspondingly greater). The expansion and ramp-up risk is hence now with Tenaris instead of Vallourec. Given this, while it could be argued that the discount of Vallourec to Tenaris on valuation multiples could have been justified over the past two years, we now believe that the parameters have changed and that the market valuation should move to reflect this.

Tubular view 30 23 September 2013

Figure 67: P/E (x) Figure 68: EV/EBITDA (x)

30.0 14.0

25.0 12.0

10.0 20.0 8.0 15.0 6.0 10.0 4.0

5.0 2.0

0.0 0.0 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Tenaris Vallourec Tenaris Vallourec

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 69: Depreciation/sales Figure 70: Capex/sales

7.0% 25.0%

6.0% 20.0% 5.0%

15.0% 4.0%

3.0% 10.0%

2.0% 5.0% 1.0%

0.0% 0.0% 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Tenaris Vallourec Tenaris Vallourec

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 71: EV/CE (x) Figure 72: EV/IC (x)

3.5 4.5

4.0 3.0 3.5 2.5 3.0 2.0 2.5

1.5 2.0

1.5 1.0 1.0 0.5 0.5

0.0 0.0 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E Tenaris Vallourec Tenaris Vallourec

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Tubular view 31 23 September 2013

Figure 73: EV/Sales (x) Figure 74: Price/Book (x)

3.5 10.0 9.0 3.0 8.0 2.5 7.0

2.0 6.0 5.0 1.5 4.0 1.0 3.0 2.0 0.5 1.0 0.0 0.0 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E Tenaris Vallourec Tenaris Vallourec

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates The higher valuation multiples Tenaris commands over Vallourec are not unique to Vallourec. Figure 75 shows the EV:IC range for Vallourec, Tenaris and the European steel stocks within our coverage universe since 2009. While Tenaris is trading in the upper third of this range currently, highlighting the market's opinion of Tenaris as a quality and stable company, the rest of the stocks in the chart are trading near or at the low ends of their range, Vallourec included. Combined with our view that Vallourec is becoming what Tenaris currently is, we do not think this premium awarded by the market is justified, especially over Vallourec. As we have already discussed, while we believe Tenaris is a quality company with strong profitability, relative resilience in end markets and a strong balance sheet, it appears to be fairly priced by the market. Many steel stocks are pricing in extremely pessimistic scenarios with EV:IC ratios at the bottom of their EV:IC range since 2009, but we are beginning to see tentative signs of a recovery in the steel cycle: for example, increasing ex-China steel production, extremely low OECD inventory levels with shipments beginning to tick up, and strong US leading indicators such as the ISM.

Figure 75: EV:IC range for Vallourec, Tenaris and steels since 2009 to-date 3.00

2.50

2.00

1.50

1.00 High Low

0.50 Now

0.00

Source: Company data, Credit Suisse research

Tubular view 32 23 September 2013 Option value from OCTG trade case We believe further option value for both Vallourec and Tenaris is afforded by the long- anticipated OCTG anti-dumping trade case against nine exporting countries1, most notably Korea. On balance the case is likely to be more relevant to Tenaris, given that welded accounts for around 40% of its sales and imports from the countries are generally low- grade, welded and carbon pipes, not seamless or alloy. Imports from these countries increased 38% YoY in 2012, with imports from Korea in particular increasing five-fold between 2009 and 2012. Unfairly cheap imports from the nine countries are being expressed by petitioners as a key reason for average OCTG prices in the US declining by 11% over this period. Following the preliminary hearing on 23 July, the US International Trade Commission voted unanimously on 16 August, approving an investigation into the case from the US Commerce Department. The case has attracted interest from investors on the potential for a material improvement in US OCTG prices, with a significant number of questions posed to Vallourec and Tenaris management during Q2 conference calls. The case could be argued to provide price support in the US OCTG market for two main reasons:

■ The nine countries in question account for 49% of US imports and 28% of total US supply – a significant portion.

■ In the similar 2009 anti-dumping case against China, Chinese exports immediately dried up following the filing. In this case any awards granted would likely be retroactive to the 2 July filing date, as they were in the Chinese case. Therefore if exporters from the accused countries are not confident of winning the case they will likely immediately stop all exports into the US, as Chinese producers did in 2009.

Figure 76: US OCTG imports 600,000 80% 70% 500,000 60% 400,000 50% 300,000 40% 30% 200,000 20% 100,000 10%

0 0%

Jun-09 Jun-07 Jun-08 Jun-10 Jun-11 Jun-12 Jun-13

Dec-08 Dec-06 Dec-07 Dec-09 Dec-10 Dec-11 Dec-12 OTCG imports (t) OTCG imports from China (t) China's share

Source: Pipelogix We think that the trade case is more relevant to Tenaris for three key reasons: (1) The US represented 49% of Tenaris sales in 2012, vs. 29% for Vallourec (2) Tenaris produces welded pipe as well as seamless (welded c.40% of revenues, seamless c.60%). 75% of OCTG imports from the nine countries in question have welded casing, with only 25% seamless. (3) The oil and gas market represents c.80% of Tenaris's sales, vs. c.60% for Vallourec.

1 South Korea, India, Turkey, Vietnam, Taiwan, Ukraine, Philippines, Saudi Arabia, Thailand

Tubular view 33 23 September 2013

Figure 77: ERW/SML split of petitioned imports Figure 78: Carbon/alloy split from petitioned imports

% Alloy % SML 13% 21%

% ERW 79% % Carbon 87%

Source: Pipelogix (data for 2010-2013 YTD) Source: Pipelogix (data for 2010-2013 YTD)

Figure 79: ERW/SML as a % of all US imports Figure 80: Carbon/ alloy as a % of all US imports

100% 100%

90% 90%

80% 80%

70% 70%

60% 60%

50% 50%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% ERW SML Carbon Alloy

Korea Other 8 Korea Other 8

Source: Pipelogix (data for 2010-2013 YTD) Source: Pipelogix (data for 2010-2013 YTD) However, although we think the case is more relevant to Tenaris, this could also potentially add further optionality to the underlying Vallourec investment case of long-term EBITDA improvements and increased FCF. If the petition is successful (which we think it will be, especially given the unanimous result of the preliminary hearing) and imports from the nine countries (most notably Korea) are withdrawn from the US OCTG market, this could potentially see OCTG prices edge higher after this year's 11% decline despite a well-supplied US domestic market, as imports from these countries represent around half of US imports and therefore around a quarter of total US supply. Although the imported OCTG products from the nine countries are generally welded with carbon casing and hence are lower quality than the premium seamless products that Vallourec produces, Pipelogix prices show that instead of diverging, seamless and welded prices over the past two years have moved in parallel, with seamless maintaining a c.$300 premium over welded on average (Figure 81). Therefore, a removal of imports from the petitioned countries could in principal provide some support to SML prices as well as ERW, at least in the short term before the c.1.2 million tonnes of US domestic capacity additions through 2013 and 2014 in an already well-supplied domestic market.

Tubular view 34 23 September 2013

Figure 81: Domestic and import OCTG price differential Figure 82: US SML and ERW prices

800 3500

700 3000 600

500 2500

400 2000 300

200 1500 100

0 1000 01-Jan-09 01-Nov-09 01-Sep-10 01-Jul-11 01-May-12 01-Mar-13 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 OCTG SML Pricing OCTG ERW Pricing Pipe logix Domestic less Import differential ($/st)

Source: Pipelogix Source: Pipelogix In the following tables we show our estimated effect on 2014 EBITDA and earnings for Vallourec and Tenaris in a scenario where we do see an increase in OCTG prices following the trade case. We emphasise that this is an estimation for illustrative purposes, and several factors are not taken into account: for example, neither Vallourec nor Tenaris are exposed to the spot market for a material part of their revenues. However, on this estimate a $100 increase in the average realised selling price in North America would add 6.5% to Tenaris's 2014E EBITDA and 5.7% to Vallourec's 2014E EBITDA.

Figure 83: Estimated effect of change in OCTG prices on Tenaris's 2014E numbers Change in N. Am Equivalent pipelogix SML Equivalent pipelogix ERW EBITDA ($m) EPS ($) Revenue/tonne ($) price ($) price ($) (75) 1,775 1,525 3,073 1.62 (50) 1,800 1,550 3,125 1.65 (25) 1,825 1,575 3,178 1.68 0 1,850 1,600 3,231 1.61 25 1,875 1,625 3,284 1.75 50 1,900 1,650 3,337 1.78 75 1,925 1,675 3,389 1.81 100 1,950 1,700 3,442 1.85 125 1,975 1,725 3,495 1.88 150 2,000 1,750 3,548 1.91 175 2,025 1,775 3,601 1.95 Source: Credit Suisse estimates .

Tubular view 35 23 September 2013

Figure 84: Estimated effect of change in OCTG prices on Vallourec 2014E numbers Change in N. Am Pipelogix SML price equivalent ($) EBITDA ($m) EPS ($) Revenue/tonne -75 1,775 1,116 3.05 -50 1,800 1,133 3.14 -25 1,825 1,149 3.23 0 1,850 1,166 3.32 25 1,875 1,183 3.41 50 1,900 1,200 3.50 75 1,925 1,216 3.59 100 1,950 1,233 3.68 125 1,975 1,250 3.78 150 2,000 1,267 3.87 175 2,025 1,283 3.96 Source: Credit Suisse estimates However, there are some caveats and it is not necessarily the case that a drying up of exports from the nine countries will lead to immediate support in OCTG prices. In particular, we flag to investors: (1) The 11% decline in OCTG prices over the year was also accompanied by a reduction in the US rig count. (2) Although imports from China quickly dried up following the filing in 2009, prices were far slower to respond and were accompanied by a rising US rig count, itself at least in part due to rising crude prices (Figure 76). (3) There is a risk that if tariffs on such imports are imposed, they will simply be redirected to other markets (notably Canada, as the number two market for the low-end OCTG products being imported). (4) The imported goods in question are generally of a lower quality than US-produced OCTG, with 75% of tube casing ERW compared with only 45% for the whole import market, and 85% of casing made from carbon steel (as opposed to alloy) versus 65% for the whole import market, and c.10-20% for Vallourec and Tenaris. The API-grade product made by Tenaris and Vallourec is often supplied to large clients under long- term contracts and simply as a complement to the premium product offering (as contracts are often to supply the client with their entire OCTG requirements). API- grade OCTG supplied in this way is therefore unlikely to be threatened by API from the petitioned countries. (5) Even US domestic supply alone has been pushing the US market into overcapacity, with 1 million tonnes of domestic supply added since 2010 and an additional 1.2 million tonnes due to be added over 2013 and 2014. Therefore, while a removal of supply from the petitioned countries could provide some support for prices, we want to emphasise that there is no guarantee of this and in our view it merely provides optionality on top of the underlying investment case for Vallourec and Tenaris. Ultimately we think the OCTG trade case could potentially provide some optionality to both companies, albeit more to Tenaris than Vallourec owing to its welded exposure, but the exact implications of the filing on OCTG prices are still unclear at this stage and an investment decision should not be based solely on speculation over potential implications of the case in our view.

Tubular view 36 23 September 2013 OCTG medium- and long-term demand outlook

Overall, we believe the medium-term demand outlook in the US and Canada remains stable but far from excellent, with the greater growth potential being with the offshore plays in Latin America and the Middle East. On balance, we believe the demand outlook looks stronger for Vallourec, especially in the medium term given its improved ability to serve the fast-growing Marcellus basin via VM2. We also think there is strong growth opportunity in Brazil owing to the planned E&P capex from Petrobras over the next four years and Aramco's investment in sour gas drilling, for which VSB will export high premium product.

Figure 85: OCTG demand by geography (2012) Figure 86: Onshore rigs geographical split (2012)

Asia Pacific ROW Latin America 5% 10% 11% LATAM Africa 5% 2%

US and Canada Middle East FSU 44% 8% 10% Europe 2%

MEA 14% North America 72%

China 17%

Source: Company data Source: Company data Summary We believe the long-term outlook for the OCTG producers is strong overall, with a continuation in the trend towards horizontal and directional drilling as oil and gas resources become less and less conventional. Long term, we see good opportunities in the international offshore market, particularly in Latin America and the Middle East. In the medium term however we consider the outlook to be more challenging in North America, which remains the world's biggest OCTG market by some margin (Figure 85), especially for onshore drilling (Figure 86). US stable but not outstanding in the medium term The relative stagnation in the North American market at present is evidenced by Figure 88, which shows YoY sales growth for Vallourec and Tenaris combined by geography. While sales have significantly increased in the Middle East and South Africa, sales in North America have decreased YoY and QoQ. We think the relative weakness in the North American market compared with the international market will continue, at least until H2 2014E, with the prominence of oil rigs vs. gas rigs to remain for the foreseeable future because of the relative price of WTI vs. Henry Hub. The key opportunity lies in the international tenders The key message is therefore, in our view, a stable but far from stellar North American market, particularly in the medium term, but with strong opportunities for Tenaris and Vallourec in the international offshore market. As shown in Figure 89 and Figure 90, while North America accounts for 66% of global rigs, the vast majority are onshore, and the

Tubular view 37 23 September 2013 region accounts for only 10% of offshore rigs, versus 72% of onshore rigs. Although the US does account for around half of oil and gas sales for both companies, the margins are generally lower, ceteris paribus, because the vast majority of rigs are onshore.

Figure 87: API vs. premium requirements (mt, 2012) Figure 88: TENR and VK YoY aggregate sales growth by market, Q213

0 Americas International China & Russia

Premium API

Source: Company data Source: Company data

Figure 89: Global rigs geographical split (2012) Figure 90: Offshore rigs geographical split (2012)

Asia Pacific North America 7% 10% Latin America 12% Asia Pacific Europe 31% 14% Africa 2%

Middle East US 9% 54% Middle East Europe 12% 4%

Africa Canada Latin America 8% 12% 25%

Source: Company data Source: Company data Onshore rigs generally require lower premium OCTG than offshore, where the technical challenges are much greater. This helps to explain why although North America is by far the biggest market for OCTG overall, the demand for premium OCTG is the same internationally as in North America, with API or standard product representing the vast majority of North American demand (Figure 87). For Vallourec and Tenaris, around 80% of sales are premium, and this is where the highest margins are, whether the premium products in question are connections, casing or tubing. In general, the drilling direction, gas vs. oil mix, and whether the drilling environment is extreme (e.g. corrosive or high pressure) are the key determinants of OCTG intensity and the grade of OCTG required. Horizontal rigs are generally subjected to greater pressure than vertical rigs and require higher-grade casing as a result; gas generally requires higher-grade connections than oil as there must always be a gas-tight seal, and in a

Tubular view 38 23 September 2013 corrosive, extreme temperature or high-pressure environment, the grade of casing must be higher and often specialised for the environment, for example being made from a Corrosion Resistant Alloy (CRA). The margin for error is very small as if the casing fails (it is cemented in place) the well will generally be abandoned. Hence large NOCs with major projects are willing to pay a premium for the highest-quality products. The figures below are provided by Vallourec and Tenaris to illustrate an example of the difference in OCTG requirements according to the type of well.

Figure 91: Approximate OCTG intensities by type of well Type of well Measured % seamless % premium OCTG tons per % small OD depth (ft) connections well Horizontal 13000 60% 30% 190 65% (unconventional) Vertical 3000 35% <5% 45 25% (conventional) Source: Vallourec

Figure 92: Complexity of well and OCTG usage

Source: Tenaris US Price of gas relative to oil is the key In the US, we see several trends that have rendered the medium term more challenging for tubular producers in what remains by a considerable margin the world's largest OCTG market, measured by footage and number of rigs. The main issue among these is the significant decline in US natural gas prices to WTI over the past 3 years (Figure 93), which has caused a major reversal in the rig mix from gas to oil (Figure 94). We expect this trend to continue over the medium term, which is likely to be negative for Vallourec and Tenaris, as ceteris paribus shale gas wells require more premium casing and connections than shale oil wells. Looking at the Credit Suisse forecasts for natural gas and WTI, we expect natural gas prices to remain depressed for the foreseeable future owing to unconventional supply growth outstripping demand. Although we expect the relative price of gas to increase versus WTI in the medium term, we still expect an average of $4 in 2014E and remaining below $5 thereafter (Figure 95, Figure 96). This is due to an acceleration in supply relative to demand, as production increases at key shale plays such as Marcellus and Eagle Ford (Figure 97).

Tubular view 39 23 September 2013

Figure 93: US nat gas and WTI prices (rebased to 100) Figure 94: US rig mix: oil vs. gas split

140 100% 90% 120 80% 100 70%

80 60%

60 50% 40% 40 30%

20 20%

0 10% 10/09/2008 10/06/2009 10/03/2010 10/12/2010 10/09/2011 10/06/2012 10/03/2013 0% Crude Oil-WTI Spot Cushing U$/BBL - DS MID PRICE 07-Jan-05 07-Jan-07 07-Jan-09 07-Jan-11 07-Jan-13 Natural Gas, Henry Hub U$/MMBTU % Gas % Oil

Source: Thomson Reuters Source: Baker Hughes

Figure 95: US natural gas prices and CS forecasts Figure 96: WTI price and CS forecasts $12.00 140

120 $10.00

100 $8.00

80 $6.00 60

$4.00 40

$2.00 20

$0.00 0 1Q07 2Q08 3Q09 4Q10A 1Q12A 2Q13A 3Q14E 4Q15E 1Q17E 1Q07 3Q08 1Q10A 3Q11A 1Q13A 3Q14E 1Q16E 3Q17E

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse estimates

Figure 97: US natural gas supply and demand (Bcf/d) Figure 98: US nat gas conventional & unconv. production 80 45

40 75 35

70 30 25 65 20

60 15 10 55 5

50 0 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2002 2004 2006 2008 2010 2012 2014E

Total Supply Total Demand Conventional Unconventional

Source: EIA, Bentek Energy, Credit Suisse estimates Source: EIA, Bentek Energy, Credit Suisse estimates

Tubular view 40 23 September 2013

Implications for key metrics Given this relative fall in natural gas relative to WTI, what is the effect on the key metrics for OCTG demand? One of the simplest indicators to look at is rig count, although this is a high-level figure that does not take many factors into account and should be read in conjunction with the trajectory and mix data. For example, horizontal and directional rigs are far more OCTG intensive than vertical, yet both count as one rig regardless of footage of OCTG they use. We can see that the rig count has dropped considerably overall since 2012, by around 15% (Figure 99). However, the percentage of vertical rigs has also fallen over this time period, with a relative move out of horizontal and into directional (Figure 100). As a result, footage drilled, which is a more relevant measure than rig count for premium producers as it is generally the horizontal and deeper part of the well that requires the more premium products, has remained relatively stable on an absolute and per well basis (Figure 101 and Figure 102). Footage drilled is more dependent on rig trajectory and efficiency, and benefits premium producers more than producers of lower-grade products, as it is generally the horizontal and deeper part of the well that requires the more premium products because it comes under greater pressure than the vertical section.

Figure 99: US total rig count (oil and gas) Figure 100: US rig count by trajectory

2,300 70%

2,100 60%

1,900 50% 1,700 40% 1,500 30% 1,300 20% 1,100

900 10%

700 0% Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 500 02/01/2009 02/01/2010 02/01/2011 02/01/2012 02/01/2013 % Dir % Horiz % Vert

Source: Baker Hughes Source: Baker Hughes

Figure 101: US footage drilled and OCTG usage Figure 102: US footage per well

600,000 35,000 10

9 500,000 30,000 8 25,000 400,000 7

20,000 6 300,000 15,000 5 200,000 4 10,000 3 100,000 5,000 2

0 0 1 Mar Nov Jul Mar Nov Jul Mar Nov Jul Mar Nov 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Monthly usage estimate (tons) Footage drilled ('000 feet)

Source: Pipelogix Source: Pipelogix

Tubular view 41 23 September 2013

Rig trajectory, rig type and rig efficiency are more important than rig count in isolation, not only because they determine the quantity of OCTG required, but also the grade of casing and connections needed. Horizontal rigs generally require higher-grade casing, as they need to hold their integrity under high pressure during the fracking process. However, in the shale oil example, with a horizontal rig the connection does not need to be as high premium, as although it must not overtorque it does not need to have a perfect gas-tight seal. Therefore, we think it is likely that while the demand for premium connections has declined on a relative basis in the US over the past few years owing to a move away from gas and into oil, the demand for premium casing has likely increased on a relative basis owing to greater horizontal and directional drilling. Demand in the US therefore stable, but not excellent Therefore, while demand for semi-premium and premium in the US has remained stable and Vallourec and Tenaris's mills serving the market have been able to operate near capacity (vs. c.80% for European mills), we see no real signs of demand for premium products improving relative to semi-premium in the foreseeable future, at a fundamental level, owing ultimately to the relative pricing of gas and WTI in a well-supplied market. We think the real growth in demand for Vallourec and Tenaris's premium connections and highest-grade casing will instead come mostly from the large international tenders in the deep offshore market, as discussed below. The US, however, remains the world's largest OCTG market by some margin, and is the number one country for Vallourec and Tenaris in terms of sales. While we expect demand in the US to remain relatively solid in the medium term, we do not expect it to be impressive, with natural gas prices continuing to be depressed relative to oil. We think the outlook for seamless is stronger than for welded, for a range of reasons. Among them are the increasing well depth and reduction in vertical wells relative to horizontal, as welded tubes are usually used in applications such as shallow vertical wells. On the seamless side, however, with greater rig efficiency and an increase in horizontal drilling versus vertical, demand for the seamless products has a stronger outlook in our view. The advantage in this regard therefore goes to Vallourec. It could be argued that given the potential drying up of Korean imports from the current trade case (c.80% of petitioned imports are welded), Tenaris could potentially stand to benefit from higher prices for ERW, which constitute around 40% of sales. However, the majority of Tenaris's ERW is still premium (e.g. the large-diameter surface casing it sells to Petrobras), and the lower-grade ERW is generally provided as part of long-term contracts with clients to supply their API as well as premium OCTG requirements.

Tubular view 42 23 September 2013

Lack of pricing power in a well-supplied OCTG market

Figure 103: US capacity additions Figure 104: US tubular inventory 1400 (Kt (mon 1050 4.5 1200 950 4.0 1000 850 800 3.5 750 600 3.0 650 400 550 2.5 200 450 2.0 0

2013 2014 2015 Later

Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Jan-09 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Vallourec Tenaris Others US tubular inventory US tubular I/S ratio

Source: Company data, Pipelogix Source: MSCI Further to the likely continued oil-heavy rig mix, the US OCTG market looks to be relatively well supplied over the next few years relative to demand growth, and hence we think growth will be volume rather than price-driven. By the end of 2014, 200kt of capacity from TPCO and 200kt from OMK will be added into the domestic market in addition to Vallourec's 350kt from VM2. This should be followed by 350kt of capacity added by TPCO in 2015, and 650kt from the Tenaris seamless mill in Bay City in 2016, with a ramp-up period of one or two years (Figure 103). As a result, there looks to be little potential upside for OCTG prices in the US, even if the trade case against Korean exporters of OCTG is successful (see the 'Option value from OCTG trade case' section of this report). With the US OCTG market already well supplied at the premium end, these capacity additions will mean that Vallourec and Tenaris, which together account for a large chunk of the premium market, must maintain price discipline in the oversupplied market. We do not incorporate pricing problems into our forecasts for Vallourec and Tenaris, as in their controlling position of the premium OCTG oligopoly we assume they will maintain the necessary price discipline. However, in a scenario where discipline is not maintained and one of them looks for volume at the margin, then there would be potential downside risk to OCTG prices and to our 2013/14 estimates.

Tubular view 43 23 September 2013

Canada

Figure 105: Canada total rig count Figure 106: Canada oil / gas split

800 90%

80% 700 70%

600 60%

500 50% 40% 400 30%

300 20%

10% 200 0% 100 1/2/09 9/2/09 5/2/10 1/2/11 9/2/11 5/2/12 1/2/13 9/2/13

% Oil % Gas 0 1/2/09 7/2/09 1/2/10 7/2/10 1/2/11 7/2/11 1/2/12 7/2/12 1/2/13 7/2/13 50 per. Mov. Avg. (% Oil) 50 per. Mov. Avg. (% Gas)

Source: Baker Hughes Source: Baker Hughes Canada is the world's second-largest OCTG market after the US, covering a significant portion of the North American shale plays. In Canada, we see a similar story to the US over the medium term, with the price of natural gas relative to oil causing a deterioration in the rig mix over the past three years (albeit with a move out of vertical into horizontal), which we expect to continue (Figure 105, Figure 106). The key difference between the Canadian and US markets is the strong seasonality caused by the annual spring thaws, which makes the ground soft and wet, making it difficult to move rigs and set up new sites. To correct for the seasonality in Canadian rig count (the Baker Hughes rig count includes only those rigs that are active), a 50-day moving average has been included in Figure 105 and Figure 106 to make the rig count and mix trends in Canada clearer by correcting for the seasonal element. Therefore, demand for OCTG in Canada, like the US, looks to remain stable if not impressive for the next 12 months. Ultimately, an improvement in the natural gas price relative to oil and a reversal of the divergence that has been the case over the past three years would be key to an improvement in margins in the Canadian market, and we see this as an H2 2014E event at the earliest. International market holds big opportunity In our view, the key growth opportunities for Vallourec and Tenaris in the medium term lie outside North America, specifically in Latin America and the Middle East, with the international tenders from big NOCs, especially those engaged in offshore drilling and which have hence placed significant orders for premium products. We can see from Figure 107 that while the US remains by far the largest market for OCTG, the vast majority of product demanded is lower-grade API, whereas internationally the demand for premium OCTG is the same in absolute terms, and much higher vs. API on a relative basis. As a result, while the US accounts for 54% of total global rigs, it accounts for only 10% of offshore rigs (Figure 108). Latin America on the other hand accounts for 25% of offshore rigs currently, a number we think is likely to increase further. This is important for premium OCTG producers, as offshore rigs are generally harder drilling environments and hence require a higher grade of casing, tubing and connections, ceteris paribus, which command correspondingly higher margins.

Tubular view 44 23 September 2013

Figure 107: International premium mkt as big as Americas Figure 108: Global offshore rigs (2012) (mt, 2012)

8 North America 10%

Asia Pacific 6 Europe 31% 14%

Middle East 12% 2

Africa Latin America 8% 0 25% Americas International China & Russia

Premium API

Source: Company data Source: Company data

Figure 109: Brazil offshore/ land split (no. of rigs) Figure 110: Latin America oil/gas rig mix (no. of rigs)

60 450

400 50 350

40 300

250 30 200

20 150

100 10 50

0 0 7/02 7/03 7/04 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 10/04 10/05 10/06 10/07 10/08 10/09 10/10 10/11 10/12

Land Offshore Oil Gas

Source: BHI Source: BHI Brazil In Brazil, the national oil company Petrobras (a key client for Vallourec) has been ramping up its E&P investment heavily in the considerable pre-salt deposits c.300km off the coast. Brazil accounts for around a fifth of total Vallourec sales and Vallourec has been serving Petrobras since 1952. In December 2012, Vallourec renewed its long-term contract with Petrobras to supply the full range of OCTG for a further five years from its VMB mill in Belo Horizonte. Importantly, this is at a time when Petrobras's E&P capex will be heavily centred around pre-salt, which requires very high premium OCTG products. To reach the pre-salt deposits, Petrobras must drill down 3km of water, 2km of sand and rock, and finally 2km of salt. Hence, the pipe and connections must be of the highest quality, as the margin of error is so small. From 2013 to 2017, Petrobras plans to spend $72bn of capex on pre-salt E&P, in addition to $70bn of capex on non-pre-salt E&P. At present, Petrobras produces 2.0Mbpd in Brazil, with 93% of this post-salt and 7% pre-salt. By 2017, the aim according to the most recent business plan is to be producing 2.75Mbpd, of which 58% will be post-salt and 35% pre- salt concessions. By 2020, the aim is 4.2Mbpd.

Tubular view 45 23 September 2013

Figure 111: Petrobras capex Figure 112: Petrobras planned capex 2013-17

250000 Distribution Corporate 1% 1% Petrochemical Biofuels 2% 2% 200000 Gas & Energy 6% E&P Pre-salt 31% ($72bn) 150000

100000 Downstream (RTC) 50000 28%

0 2001 2003 2005 2007 2009 2011 2013-16 Other E&P 29% ($70bn) E&P Other

Source: Petrobras Source: Petrobras This is a key opportunity for Vallourec vs. Tenaris in our opinion. While Tenaris also counts Petrobras as a major client, it does not supply premium OCTG but line pipe instead, and Petrobras's downstream investment has been much weaker, a trend which looks set to continue. We estimate that Vallourec supplies around 20kt of OCTG a year for pre-salt use to Petrobras, which is drilling 27 pre-salt wells with 18 rigs. We estimate this could increase to 80kt by 2016, given this planned capex of $72bn on pre-salt E&P over the next four years. Of the $237bn of total planned capex $207bn is already under implementation, with $147bn of this (71%) in E&P. Well construction represents 51% of E&P spend, or $75bn. Mexico Tenaris's largest client is Pemex, the Mexican state-run oil monopoly, which accounts for around 10% of sales at present. However, this percentage could potentially increase in the coming years (Tenaris said in its Q2 conference call that the impact would be slow and the full effect would likely be seen in 2015), if the Mexican energy reform measures have significant impact. While Tenaris provides Petrobras, Vallourec's key client, with surface casing and line pipe, Vallourec does no business with Pemex. Pemex is capped in funding and technology, and cannot exploit its unconventional reserves, which are much more OCTG-intensive than conventional reserves. If the state's exclusivity in hydrocarbons exploitation is overhauled and JVs or production-sharing agreements are implemented, this should mean the country's vast unconventional resources can be exploited and Tenaris would be able to supply higher-margin products to Pemex and its partners, and in greater quantities. Mexico is the world's 10th-largest oil producer, with estimated resources at 115bn boe, of which only 28bn boe is conventional. Therefore, 75% of these reserves are non-conventional (i.e. shale oil, shale gas and deep water), and importantly they cannot be exploited under the existing legal framework. Instead, Pemex remains focused on conventional fields. Under a reform, we think it is likely that JVs or profit-sharing agreements would be implemented to exploit the higher- cost unconventionals, and Tenaris would be a likely beneficiary of this, supplying higher- margin premium products to exploit the shale and deep water reserves.

Tubular view 46 23 September 2013

The Credit Suisse Mexican research team believes meaningful energy reform will be approved in Mexico before the year end, with the reform approved during the ordinary session of Congress, which takes place from 1 September to mid-December. The proposals from both the PRI and PAN parties have been submitted and the Credit Suisse Mexican team expects them to meet in the middle, with an amendment of the constitution to overhaul the state's exclusivity in hydrocarbon exploitation, with production-sharing agreements allowing the state to keep a controlling participation in all oilfields but for partners to also profit as well via their own stake. For greater detail on Mexican energy reform, see the 12 August Credit Suisse Mexican energy reform primer Mexico Energy Reform - Change The Constitution - Change Mexico's Future. Middle East

Figure 113: Middle East offshore/onshore mix (no. of rigs) Figure 114: Middle East oil/ gas rig mix (no. of rigs) 400 350

350 300

300 250 250 200 200 150 150 100 100

50 50

0 0 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

Land Offshore Oil Gas

Source: BHI Source: BHI While the US is the world's largest OCTG market overall by some margin, the Middle East is the number one market for premium OCTG products. The largest oil company and client in the region is Saudi Aramco, a key client for both Vallourec and Tenaris. Over the past few years Aramco has been investing heavily in offshore sour gas drilling as conventional oil reserves decline and domestic gas demand increases, aiming to boost the number of rigs to 170 by the end of 2013 versus c.140 at the start of 2013. Vallourec's new VSB exporting mill in Brazil will cater for Aramco and other producers in the region. Vallourec's share of the mill is 300kt of annual capacity, a lot of which will be exported to the Middle East and Africa. Vallourec also acquired Zamil pipes, located in Damamm in the Dharan metropolitan area (where Aramco is headquartered) in 2011, for US$135m. Zamil has 100kt of heat treating and threading capacity, reducing lead times for Aramco orders and lessening the burden on other Vallourec threading units, which are operating near full capacity. Aramco is also an important client for Tenaris, which supplies Aramco with chrome pipes for use in sour gas drilling. Tenaris also opened a new 35kt threading plant in Dammam in 2010 to serve Aramco with Blue and Wedge connections. Overall, we believe large tenders from international producers such as Aramco in the Middle East and Africa will be a key growth opportunity for both Vallourec and Tenaris.

Tubular view 47 23 September 2013

Barriers to entry

Figure 115: Premium OCTG market share 2012

VAM Others (Vallourec/Sumitomo) 32% 32%

TMK 6% Tenaris Hydril 30%

Source: Company data The Vallourec/ Tenaris/ Sumitomo oligopoly controls around two-thirds of the global premium OCTG market (Figure 115), which at around 3.3mt per year of casing, tubing and connections combined is c.20% of the broader OCTG market. In our view, the barriers to entry are stronger for premium connections than for premium pipes, as this is where the expertise/R&D really comes in and incumbents are able to apply the greatest margins. We think that pipes, even the more advanced CRA versions designed for the most hostile of drilling environments, are easier to replicate than the connections, which are advanced and where drilling companies have very little margin for error, for example in offshore wells. In saying this, even the pipes incorporate very advanced technology, and each premium grade is designed for a specific application, e.g. for use in highly corrosive, high-collapse, sour, or low-temperature environments. By contrast, we point to the waves of Asian imports into the US, most recently from the nine countries involved in the US anti-dumping trade case and China four years previously, and note how low-quality welded pipes from those countries can be substituted for the commodity-grade pipes produced in the domestic market. This can be evidenced by the struggling performance of domestic producers of commodity-grade OCTG over the past two years. This places Tenaris and Vallourec, for whom premium represents c.80% of sales, in a much stronger position to producers of API, as premium products cannot be substituted by the vast majority of cheap imports. However, it is not impossible to develop premium connections and we think new entrants could take away share in this market also, albeit far harder than for API or commodity- grade products. For example, in 2007 when Tenaris bought Hydril, before the acquisition, US steel had been producing pipes which were then Hydril threaded. When Tenaris acquired Hydril, US Steel came up with not only its own semi-premium connections but its own premium connections, the Patriot and the Liberty, showing that although much harder to replicate than pipes, premium connections can be replicated and dents can be made in the market share of the premium oligopoly players.

Tubular view 48 23 September 2013

That said, incumbents spend large amounts on R&D too and have excellent relationships with large NOCs such as Petrobras or Pemex, often supplying flagship clients with their full range of premium and API requirements on long-term contracts. Hence barriers to entry do remain significant in the premium connections market on the whole.

Figure 116: Vallourec seamless/ welded split (2012) Figure 117: Tenaris seamless/ welded split (2012)

Seamless 53%

Seamless 100%

Source: Company data Source: Company data

Figure 118: Petitioned imports seamless/ welded split Figure 119: Petitioned imports carbon/ alloy split (2010- (2010-13 YTD) 2013 YTD)

Seamless 21% Alloy 13%

Welded 79% Carbon 87%

Source: Pipelogix Source: Pipelogix Vallourec option value from industrial recovery We estimate that in the event of a material industrial recovery in Europe, this could add an additional €100m to our 2014E EBITDA relative to 2013E. We think that tentative signs of such a recovery are emerging and that this affords Vallourec additional option value over Tenaris. As shown in Figure 120 and Figure 121, the industrial and powergen segments still account for c.40% of Vallourec's business (although this is rapidly decreasing with the ramp-up of VM2 and VSB – oil and gas accounted for 66% of Q2 2013 sales versus 61% in FY2012 for example) versus c.20% for Tenaris.

Tubular view 49 23 September 2013

Figure 120: Vallourec sales by market (2012) Figure 121: Tenaris sales by market (2012) Construction Industrial and other 10% Automotive 7% 4% Chem & HPI Petrochem 10% 7%

Mechanical Eng 9% Line pipe 15% Oil & Gas OCTG 61% 65% Power Generation 12%

Source: Company data Source: Company data In this report we have primarily focused on the oil and gas markets, as Vallourec is undertaking a clear strategy of positioning itself in the premium oil and gas market, which is higher margin and has been much more resilient in the downturn, with high oil prices maintaining drilling activity in the US and heavy investment in the offshore market from NOCs. Indeed, it is the oil and gas segment which has been driving Vallourec's growth over the past few years, and it is where the company is concentrating the majority of its investment, not just in the large VM2 and VSB mills, but also in acquisitions and the construction of various threading and heat treating capacity close to end markets (for example Zamil pipes in Saudi Arabia), which allows Vallourec to better service its clients and further develop its relationship with them. That said, while the focus from us and the market has primarily been on Vallourec's oil and gas business as the key growth driver, we believe there is potential option value from a recovery in the industrial backdrop, of which we feel tentative signs are emerging. We believe that a material recovery in the European industrial cycle could add €100m to 2014E EBITDA via an improved performance from the industrial and power generation segments.

Figure 122: Euro area PMIs and GDP growth

Source: Thomson Reuters

Tubular view 50 23 September 2013

We believe the key leading indicators are now looking supportive for Europe and the OECD in general. For example, Figure 122 shows European PMI new orders are at two- year highs, consistent with 0.5%-1.0% GDP growth, as noted by the Credit Suisse strategy team when it upgraded the region a few weeks ago (see Global Equity Strategy - Upgrade Continental Europe: what to buy) We also believe that steel is the lead indicator of the IP cycle, and the sustained uptick in ex-China steel production over the past few months is hence positive for lead indicators, especially as seasonally one would expect this uptick in production to continue through September and October, typically stronger months than the summer, which is vacation period. Miners, steel equities and commodities all correlate well with the steel cycle, which has more or less been in a three-year slowdown since the peak of April 2010. In Figure 123 we show how data support a re-acceleration in the cycle, which has (early stages) already commenced. We can see the ISM has been improving recently, with the most recent figure of 55.4 significantly beating consensus expectations of 51. Furthermore, the US cycle tends to lead that of Europe by 2-3 months and we think that economies are probably less decoupled than the market believes – a stronger US is likely to have implications for other global economies and vice-versa.

Figure 123: ISM leads the IFO Figure 124: Ex-China steel production growth 120 65 80000 20% 115 60 75000 15% 110 55 70000 10% 105 50 65000 5% 100 45 60000 0% 95 40 55000 -5% 90 50000 -10% 85 35 45000 -15% 80 30

40000 -20%

Jul-13 Jul-99 Jul-06

Oct-04 Oct-97 Apr-01 Apr-08 Oct-11

Jan-96 Jun-02 Jan-03 Jun-09 Jan-10

Mar-97 Feb-00 Mar-04 Feb-07 Mar-11

Dec-98 Nov-01 Dec-05 Nov-08 Dec-12

Aug-96 Sep-00 Aug-03 Sep-07 Aug-10

May-98 May-05 May-12

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Jan-01 Jan-07 Jan-00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 IFO US ISM Ex-China steel output Ex-China production growth Poly. (Ex-China production growth) Source: Thomson Reuters Source: WSA All this indicates to us the first signs of a material recovery in the OECD. With c.35% of Vallourec's sales still in the industrial business, a material recovery would, in our view, provide an additional €100m of EBITDA in 2014E and provide further optionality from an industrial recovery on top of the structural move into oil and gas.

Tubular view 51 23 September 2013

Vallourec VLLP.PA Price (19 Sep 13): Eu49.56, Rating: OUTPERFORM [V], Target Price: Eu56.00 Income statement (Eu m) 12/12A 12/13E 12/14E 12/15E Per share data 12/12A 12/13E 12/14E 12/15E Revenue (Eu m) 5,326 5,404 6,382 6,885 No. of shares (wtd avg) 122 125 125 125 EBITDA 786 900 1,166 1,358 CS adj. EPS (Eu) 1.77 1.78 3.32 4.56 Depr. & amort. (312) (370) (385) (385) Prev. EPS (Eu) — — — — EBIT (Eu) 474 530 781 973 Dividend (Eu) 0.69 0.66 1.16 1.59 Net interest exp. (98) (110) (90) (80) Div yield 1.39 1.33 2.34 3.22 Associates — — — — Dividend payout ratio 38.88 37.00 35.00 35.00 Other adj, — — — — Free cash flow per share (2.69) (0.89) 3.11 4.18 PBT (Eu) 376 420 691 893 (Eu) Income taxes (112) (147) (221) (268) Key ratios and 12/12A 12/13E 12/14E 12/15E Profit after tax 264 273 470 625 valuation Minorities (54) (60) (70) (70) Growth(%) Preferred dividends — — — — Sales — 1.5 18.1 7.9 Associates & other 6 10 15 15 EBIT — 11.8 47.3 24.5 Net profit (Eu) 217 223 415 570 Net profit — 2.9 86.1 37.4 Other NPAT adjustments — — — — EPS — (25.2) 86.1 37.4 Reported net income 217 223 415 570 Margins (%) EBITDA margin 14.8 16.7 18.3 19.7 Cash flow (Eu) 12/12A 12/13E 12/14E 12/15E EBIT margin 8.9 9.8 12.2 14.1 EBIT 474 530 781 973 Pretax margin 7.1 7.8 10.8 13.0 Net interest 98 110 90 80 Net margin 4.1 4.1 6.5 8.3 Cash taxes paid 112 147 221 268 Valuation metrics (x) Change in working capital 37 (84) (15) (37) EV/sales 1.5 1.5 1.3 1.1 Other cash & non-cash items (246) (164) (238) (311) EV/EBITDA 10.0 9.1 6.8 5.6 Cash flow from operations 475 539 839 972 EV/EBIT 16.5 15.5 10.2 7.9 CAPEX (803) (650) (450) (450) P/E 27.9 27.8 14.9 10.9 Free cash flow to the firm (328) (111) 389 522 P/B 1.3 1.3 1.2 1.1 Acquisitions — — — — Asset turnover 0.58 0.57 0.64 0.66 Divestments — — — — ROE analysis (%) Other investment/(outflows) — — — — ROE stated-return on — 4.6 8.1 10.4 Cash flow from investments (803) (650) (450) (450) equityROIC 4.9 4.7 7.1 9.0 Net share issue/(repurchase) — — — — Interest burden 0.79 0.79 0.88 0.92 Dividends paid (183) (111) (112) (180) Tax rate 29.9 35.0 32.0 30.0 Issuance (retirement) of debt — — — — Financial leverage 0.45 0.44 0.41 0.38 Other (1,102) (150) — — Credit ratios (%) Cash flow from financing (1,286) (261) (112) (180) Net debt/equity 31.0 36.9 29.7 22.0 activitiesEffect of exchange rates — — — — Net debt/EBITDA 2.1 2.2 1.5 1.0 Changes in Net Cash/Debt (1,614) (373) 277 342 Interest coverage ratio 4.9 4.8 8.7 12.2 . Net debt at start — 1,614 1,987 1,710 Change in net debt 1,614 373 (277) (342) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Net debt at end 1,614 1,987 1,710 1,367 (EUROPE) LTD. Estimates.

Balance sheet (Eu m) 12/12A 12/13E 12/14E 12/15E Assets Cash and cash equivalents 546 324 601 943 Accounts receivable 969 1,027 957 1,033 54 Inventory 1,430 1,554 1,729 1,731 Other current assets 262 247 277 290 44 Total current assets 3,207 3,151 3,564 3,997 Total fixed assets 4,516 4,816 4,881 4,946 34 Intangible assets and goodwill 735 735 735 735 24 Investment securities 408 408 408 408 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Other assets 344 354 369 384 Total assets 9,210 9,465 9,958 10,470 Price Price relative Liabilities Accounts payable 678 761 881 934 The price relative chart measures performance against the CAC 40 INDEX which Short-term debt 750 750 750 750 closed at 4209.03 on 19/09/13 Other short term liabilities 645 645 645 645 On 19/09/13 the spot exchange rate was €1./Eu 1. - Eu .74/US$1 Total current liabilities 2,072 2,155 2,276 2,329 Long-term debt 1,410 1,410 1,410 1,410 Other liabilities 515 515 515 515 Total liabilities 3,998 4,080 4,201 4,254 Shareholders' equity 4,796 4,934 5,266 5,691 Minority interest 417 450 490 525 Total equity & liabilities 9,210 9,465 9,958 10,470 Net debt (Eu m) 1,614 1,987 1,710 1,367

Tubular view 52 23 September 2013

Tenaris TENR.MI Price (19 Sep 13): Eu18.44, Rating: UNDERPERFORM*, Target Price: Eu15.00 Income statement (US$ m) 12/12A 12/13E 12/14E 12/15E Per share data 12/12A 12/13E 12/14E 12/15E Revenue (US$ m) 10,834 11,380 12,236 13,159 No. of shares (wtd avg) 1,181 1,181 1,181 1,181 EBITDA 2,924 3,045 3,231 3,431 CS adj. EPS (US$) 1.44 1.54 1.62 1.75 Depr. & amort. (568) (608) (608) (608) Prev. EPS (US$) — 1.52 1.61 1.74 EBIT (US$) 2,357 2,437 2,623 2,823 Dividend (US$) 0.38 0.70 0.70 0.70 Net interest exp. (22) (10) (10) (10) Div yield 1.52 2.80 2.80 2.80 Associates (64) 60 60 60 Dividend payout ratio 26.40 45.52 43.08 39.99 Other adj, (28) — — — Free cash flow per share 0.91 1.06 1.11 1.00 PBT (US$) 2,243 2,487 2,673 2,873 (US$) Income taxes (542) (622) (695) (747) Key ratios and 12/12A 12/13E 12/14E 12/15E Profit after tax 1,701 1,866 1,978 2,126 valuation Minorities (2) (50) (60) (60) Growth(%) Preferred dividends — — — — Sales — 5.0 7.5 7.5 Associates & other — — — — EBIT — 3.4 7.6 7.6 Net profit (US$) 1,699 1,816 1,918 2,066 Net profit — 6.9 5.6 7.7 Other NPAT adjustments — — — — EPS — 6.9 5.6 7.7 Reported net income 1,699 1,816 1,918 2,066 Margins (%) EBITDA margin 27.0 26.8 26.4 26.1 Cash flow (US$) 12/12A 12/13E 12/14E 12/15E EBIT margin 21.8 21.4 21.4 21.5 EBIT 2,357 2,437 2,623 2,823 Pretax margin 20.7 21.9 21.8 21.8 Net interest (22) (10) (10) (10) Net margin 15.7 16.0 15.7 15.7 Cash taxes paid — — — — Valuation metrics (x) Change in working capital (303) (361) (210) (343) EV/sales 2.7 2.5 2.3 2.1 Other cash & non-cash items (171) (14) (87) (139) EV/EBITDA 10.0 9.3 8.6 8.0 Cash flow from operations 1,860 2,053 2,316 2,331 EV/EBIT 12.4 11.6 10.6 9.8 CAPEX (790) (800) (1,000) (1,150) P/E 17.3 16.2 15.4 14.3 Free cash flow to the firm 1,071 1,253 1,316 1,181 P/B 2.6 2.3 2.1 2.0 Acquisitions (511) — — — Asset turnover 0.68 0.71 0.70 0.70 Divestments 11 — — — ROE analysis (%) Other investment/(outflows) (195) 15 15 15 ROE stated-return on — 15.0 14.4 14.3 Cash flow from investments (1,484) (785) (985) (1,135) equityROIC 15.1 14.7 14.8 14.9 Net share issue/(repurchase) — — — — Interest burden 1.0 1.0 1.0 1.0 Dividends paid (450) (486) (871) (871) Tax rate 24.1 25.0 26.0 26.0 Issuance (retirement) of debt 783 (1,202) — — Financial leverage 0.15 0.04 0.04 0.04 Other (988) 1,202 — — Credit ratios (%) Cash flow from financing (654) (486) (871) (871) Net debt/equity 2.3 (3.9) (6.9) (8.5) activitiesEffect of exchange rates 7 — — — Net debt/EBITDA 0.09 (0.17) (0.30) (0.38) Changes in Net Cash/Debt (271) 782 459 325 Interest coverage ratio 106.9 243.7 262.3 282.3 . Net debt at start — 271 (511) (970) Change in net debt 271 (782) (459) (325) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Net debt at end 271 (511) (970) (1,295) (EUROPE) LTD. Estimates.

Balance sheet (US$ m) 12/12A 12/13E 12/14E 12/15E Assets Cash and cash equivalents 828 409 868 1,193 Accounts receivable 2,071 2,225 2,325 2,500 18 Inventory 2,986 3,135 3,426 3,684 Other current assets 1,102 1,120 1,196 1,223 Total current assets 6,987 6,889 7,815 8,601 13 Total fixed assets 4,435 4,627 5,019 5,561 Intangible assets and goodwill 3,200 3,200 3,200 3,200 8 Investment securities — — — — Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Other assets 1,342 1,387 1,432 1,477 Total assets 15,964 16,103 17,466 18,838 Price Price relative Liabilities Accounts payable 883 905 1,101 1,184 The price relative chart measures performance against the FTSEUROFIRST 300 Short-term debt 1,212 10 10 10 INDEX which closed at 1265.48 on 19/09/13 Other short term liabilities 734 674 734 768 On 19/09/13 the spot exchange rate was €1./Eu 1. - Eu .74/US$1 Total current liabilities 2,829 1,589 1,846 1,963 Long-term debt 532 532 532 532 Other liabilities 1,042 1,042 1,042 1,042 Total liabilities 4,404 3,163 3,420 3,537 Shareholders' equity 11,388 12,755 13,847 15,087 Minority interest 172 185 200 215 Total equity & liabilities 15,964 16,103 17,466 18,838 Net debt (US$ m) 271 (511) (970) (1,295)

Tubular view 53 23 September 2013

Companies Mentioned (Price as of 19-Sep-2013) Acerinox (ACX.MC, €8.386) Aperam (APAM.AS, €11.825) ArcelorMittal (MT.N, $14.55) Halliburton (HAL.N, $49.54) Kloeckner & Co. (KCOGn.DE, €10.495) Outokumpu (OUT1V.HE, €0.552) Petrobras BR (PETR3.SA, R$17.95) SSAB (SSABa.ST, Skr44.6) Salzgitter (SZGG.DE, €32.18) Sumitomo Heavy Industries, Ltd. (6302.T, ¥486) Tenaris (TENR.MI, €18.44, UNDERPERFORM, TP €15.0) Ternium (TX.N, $25.23) Thyssen Krupp AG (TKAG.F, €17.274) Usiminas (USIM5.SA, R$10.65) Vale (VALE.N, $16.52) Vallourec (VLLP.PA, €49.56, OUTPERFORM[V], TP €56.0) Voestalpine (VOES.VI, €35.2)

Disclosure Appendix

Important Global Disclosures Michael Shillaker, James Hanford, James Gurry and Liam Fitzpatrick each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Tenaris (TENR.MI)

TENR.MI Closing Price Target Price Date (€) (€) Rating 05-Aug-11 12.62 15.79 N 28-Feb-12 14.40 14.81 01-Jun-12 12.03 14.81 U 25-Jan-13 15.61 14.88 29-Apr-13 16.50 15.00 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL UNDERPERFORM

3-Year Price and Rating History for Vallourec (VLLP.PA)

VLLP.PA Closing Price Target Price Date (€) (€) Rating 10-Nov-10 77.75 90.00 N 08-Apr-11 84.10 110.00 O 13-May-11 89.18 115.00 28-Jul-11 69.99 100.00 20-Oct-11 42.30 60.00 23-Feb-12 52.95 60.00 N 02-May-12 45.02 54.00 11-May-12 34.30 50.00 08-Nov-12 32.98 40.00 03-May-13 40.39 47.70 O NEUTRAL OUTPERFORM 30-Jul-13 43.12 56.00 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

Tubular view 54 23 September 2013

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (55% banking clients) Neutral/Hold* 40% (48% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Price Target: (12 months) for Tenaris (TENR.MI) Method: We arrive at our target price of E15.0 by applying an 8x EV:EBITDA multiple to our 2014E estimate and subtracting the relevant balance sheet figures to arrive at an implied market capitalisation, then dividing by the number of shares outstanding.

Risk: Risks that rig counts will decrease (as OCTG pricing in the market is closely related to rigcount), energy equipment cycle risks (a slowdown in power plant and oilwell construction will adversely affect demand for Tenaris' pipes); operational risks (risks in execution of the capex plan), acquisition risks (risks that the company may be tempted to overpay for potential acquisitions by paying multiples higher than the current trading multiples); steel cycle risks (scrap is a key raw materials, costs for which increases when steel prices rise); political risks (some of Tenaris' customers are national oil companies, whose purchasing policies may vary depending on the government of the day in the country).

Tubular view 55 23 September 2013

Price Target: (12 months) for Vallourec (VLLP.PA) Method: Our price target is EUR56, which we arrive at by applying an 8x EV:EBITDA to our 2014E EBITDA estimate, subtracting the relevant balance sheet figures (2014E net debt, pension, minorities, and non core assets) and applying a 10% discount to the implied share price arrived at.

Risk: Risks that rig counts will decrease (as OCTG pricing in the market is closely related to rigcount), energy equipment cycle risks (a slowdown in power plant and oilwell construction will adversely affect demand for Vallourec's pipes); operational risks (risks in execution of the capex plan), acquisition risks (risks that the company may be tempted to overpay for potential acquisitions by paying multiples higher than the current trading multiples); steel cycle risks (scrap is a key raw material, costs for which increase when steel prices rise); political risks (some of Vallourec's customers are national oil companies, whose purchasing policies may vary depending on the government of the day in the country).

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (TENR.MI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (TENR.MI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (TENR.MI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (TENR.MI) within the next 3 months. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (TENR.MI, VLLP.PA) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (TENR.MI, VLLP.PA). As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Europe) Limited...... Michael Shillaker ; James Hanford ; James Gurry ; Liam Fitzpatrick Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse.

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