Tenaris SA (TS) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Tenaris Earnings Conference Call.

My name is Marisol and I will be your operator for today.

At this time, all participants are in a listen-only mode and we will conduct a question and answer session towards the end of the conference.

(Operator Instructions).

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the presentation over to one of your hosts for today's call, Mr.

Giovanni Sardagna, Investor Relations Director.

Please proceed, sir.

Thank you, Marisol, and welcome to Tenaris 2008 third quarter conference call.

Before starting, I would remind you, as usual, that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied herein.

Factors that could affect those results include those mentioned in the Company's 20-F and other documents filed with the SEC.

With me on the call today are Paolo Rocca, our Chairman and CEO, Guillermo Vogel, Vice President of Finance and Member of our Board, Ricardo Soler, our CFO, German Cura, the Managing Director of our North American operation, and Alejandro Lammertyn, our Commercial Director.

In our results for the third quarter, we registered a slight decline in sales compared to the second quarter, with our seamless sales volumes affected by the usual seasonal factor of summer shutdowns in Europe.

However, our EBITDA and operating income rose, both setting new quarterly records.

EBITDA exceeded $1b for the first time.

These results reflected an increase in average selling prices and lower than expected costs, which were positively affected by the devaluation of the US dollar against most of our local currencies, and by higher efficiency in our industrial system.

Compared to the third quarter of last year the results compare favorably, with sales up 28%, EBITDA up 33%, operating income up 39% and net income up 42%.

Seamless sales volumes were 3% higher and welded volumes were almost 10% higher, reflecting the strong operating environment shown in the North American market after the severe de-stocking of last year, and the run up in the oil and gas prices earlier this year.

Higher average selling prices, which were up 20% over last year and 14% sequentially, reflect implementation of prices increases in an environment where pipe prices, particularly in North America, have risen strongly.

Our net debt position during the quarter remained stable.

Our cash flow was affected by the timing of tax payments on earnings from the sale of Hydril pressure control business, and on income taxes in Italy and an increase in inventories.

During the quarter, we increased inventories of steel for welded pipe production, particularly in Canada, in order to secure supply to our customers over the coming quarter.

We expect to gradually reduce our inventories during the following quarters.

The Board of Directors approved the payment of an interim dividend of $0.13 per share, or $0.26 per ADR (sic).

We have a strong capital structure and liquidity.

As of September 30, our ratio of net debt to annualized EBITDA stood below 0.4 times, with a net debt just short of $1.5b.

We have a sound debt structure, fit for today's credit environment.

Our total debt of $3b has a weighted average pre-tax cost of approximately 4.5%.

We have over $1.5b of liquidity in the form of cash and cash equivalents.

I would also like to point out that we have always been cautious about the management of our financial position, and consequently have not to date suffered any significant financial losses in the current financial crisis.

Now, I will ask Paolo to say a few words about how we are seeing current conditions and our positioning in a more difficult environment.

Well, thank you, Giovanni, and thanks to all of the people that are participating in this conference.

I would like to share with you the remarks we prepared for this conference.

I think it's fair to say that our vision today is not the same as that of three months ago.

In the last few weeks, the world economy has undergone a major financial crisis, whose consequences are now spreading to the real economy.

Business conditions have changed so rapidly that at this point it is not clear how deep and how long the impact on the real economy will be.

Consequently, also the demand of energy is difficult to forecast and estimate for the coming years.

Oil and gas prices, which have run up regularly in the first half of the year, have fallen even more rapidly and are now back at the level seen in the first half of 2007.

The cash flow of our customers, and consequently their willingness and ability to reinvest those cash flows, are clearly going to be affected in an environment where credit is severely restricted.

As in other sectors of the economy, we are having to adjust from an environment of strong expansion to one where we expect contraction, but at this stage it is still unclear as to its extent.

However, we believe that the energy sector will be impacted less than most other sectors of the economy, due to the constraint on the supply base, which is characterized by high depletion rates, and the long lead times to develop new reserves, the difficulties in gaining access to reserves and the strategic relevance of oil and gas for national security of many countries.

The oil and gas sector could not go against the stream, but it will have a dynamic on its own, in our view, compared to the dynamic of the crisis that is affecting gradually, increasingly, the real economy.

US gas production, as an example, suffered from very high first year depletion rates.

More than 30% of current production of gas comes from wells drilled over the past 12 months.

These first-year depletion rates are even higher for the new unconventional shale places.

This means that any reduction in drilling will have immediate impact on the supply of gas.

Large oil and gas projects, including most of the new deepwater projects, have a long gestation period and they are usually carried out by financially strong companies.

Those that already have investment commitment will continue to move forward and have the means to do so.

For our planning purposes, we are looking at two basic scenarios.

The first would assume more or less the current level of prices for oil and gas, let's say oil between $60 and $70 per barrel for the WTI and $6 to $7 for the gas, per million BTU.

In the scenario of a recession affecting mostly the developed countries, OECD countries, and also impacting, slowing down, the dynamic of the BRIC and the developing countries, in this scenario, the exploration and production expenses will go back, will go down, will be reduced, because of the financial constraints.

The North American rig count could decline in this scenario, in our view, between 15%, 10%, 15%, 20% from the current level and could decline marginally in the international field.

In this scenario, the reaction of the oil and gas companies will be mainly driven by the financial constraints, more than by the lack of profitability on the project.

We are also considering a second scenario that would imply a more severe recession that in this case would affect severely the developed countries but also will affect the developing countries.

In this second scenario, we may assume a price of oil below $50 per barrel for the WTI.

This is an area in which the rig count could fall further, and the exploration and production CapEx would reflect the lack of return on many projects.

This is a scenario in which there will be cancellation of projects.

In the first scenario, we expect to have delays, but basically we consider that the oil companies made their plan on a basis of an oil price in the range between $60 and $70, so it will not affect really in the first scenario the profitability of the project.

We are preparing for both of these scenarios.

I believe that Tenaris is very well positioned in overcoming this crisis, whatever the challenge could be.

Over the past two years, we have built a solid position in North America, the world's largest market.

We are focused on building our alliance business model, where we offer a complete range of products for every application directly to the main player.

Consequently, the majority of our exposure is to larger and less leveraged players.

80% of our US OCTG sales during the third quarter have been done to alliance and program customer.

Our exposure in the rest of the world is predominantly to operators of large complex projects with long lead times, high technical requirement international oil companies, for whom energy is a matter of national security.

In 2007, 45% of our OCTG sales outside US and Canada were to national oil companies and the large part of the remainder were to operation of international oil companies.

In a world where oil and gas projects are increasingly complex, our product and services capability provides us a solid competitive advantage, as is shown in our 35% global market share or our premium Tenaris/Hydril connection.

We have a flexible and competitive global industrial system, which will benefit from a market environment where steel and steel making raw material cost has fallen.

The recent increase in the value of US dollar against the currency of many of the countries in which we have our production facilities will also help our relative cost position.

Our financial position is solid.

We have no losses at this point for any kind of derivative or losses on our liquidity, and this allows us to proceed with the capital investment program and expansion in Mexico that we previously announced.

This program will strengthen still further our relative competitive position for the next cycle of expansion in our industry.

And we still confirm that we are planning to have our first pipe by the end of 2010, the pipe from the new mill up to 7 inch in Veracruz.

We have a very strong human resource basis.

And considering this, coupled with our financial position, we are prepared to seize any opportunity that could arise from this harsh environment, as we did in the past.

Thank you.

I will stop here and I will leave the floor open for any questions you may have.

(Operator Instructions).

And our first question comes from the line of Michael LaMotte from JP Morgan.

Please proceed.

Good morning, gentlemen.

Thank you.

Good morning.

The first question I have is on the volume side, particularly welded tubes at 263,000 tonnes for the quarter, down sequentially quarter on quarter.

Could you talk about what specifically happened in that market, with those product lines in the quarter?

Well, in this -- in ERW product, really what we are doing, we are gradually increasing it.

We've been increasing during the quarter our sales especially into United States and Canada.

While on the project side, on SAW, you know this is driven by project and the shipments sometimes are concentrated.

But really, we see no major or any other -- for the moment, say, in this quarter we have no major adverse change.

We had some losses due to the Hurricane Ike.

As you know, it affected our facility in Houston and in Louisiana.

This has affected our production and to some extent some of the shipment.

But I would leave to German to comment on this issue and how it affected operations in the third quarter.

Just to add, Mike, with respect to the last few days of September, five of our facilities in the Houston area, and maybe more importantly also the Houston port, was closed for a week and in some instances a little over a week.

We were confronting, by and large, lack of power.

No damages at the plant whatsoever, but lack of power.

And that had an impact on last September weeks of shipment.

Okay.

So would that be expected, then, to show up in the fourth quarter, a step up in volume, perhaps?

For the fourth quarter, I think overall welded-wise would be positively impacted by our Canadian upcoming bigger drilling system requirements.

As far as the US, we'll see a slight increase in preparation for what typically has been referred as the December tax effect.

But overall, we will see a slight improvement, by and large, driven by the Canadian market.

Okay.

Second one from me, is there any potential currency impact on the value of your current backlog?

Clearly, there's been quite a bit of movement, especially over the last six weeks, in a lot of the currencies in which -- countries in which you have sales.

And we've seen other services companies speak to this issue just recently and I was wondering if we could see any risk to backlog related to currencies.

Well, we do not expect this to have a relevant impact because, basically, in many of these markets, we are selling with conditions that tie our price to dollar.

In some other, we are using hedge to defend our position.

So, as a whole, I do not expect currency devaluation to have a negative impact on our -- let's say on our backlog for the time being.

Okay, great.

And the last one for me.

If I look at your cost per tonne, the increase sequentially looked rather modest.

And I am really wondering where the steel cost inflation from the first half of the year went because the numbers, actually, for the fourth quarter, if I look at the bottom line, look to be pretty strong still.

And now we are in a deflationary environment for steel, which should benefit you as we move into '09.

Can you talk about that a bit?

Yes, Michael, we can comment on this.

This is also something that has relevance for our operation, even beyond our original expectation.

We are having, in this quarter, an increase in cost that has been below what we expected originally.

This is due for the sharp drop in the cost of raw material.

Even considering the way we've planned for it, still this had an impact on some of our cost.

The second point is devaluation.

Devaluation in the region, especially in Latin America, improved our costs, even the fixed costs to some extent.

This has been also an impact.

Freight went down very much and this also is affect -- that is affecting our logistic costs maybe even beyond -- is affecting positively even beyond what we originally expected.

And the third point is efficiency.

During these three months, as you know, we had the stoppage, the annual stoppage of the plant, and we plan for a start up after the stoppages.

The plant performs very well in starting back operations after the stoppage, and this had a favorable impact on our cost.

Looking forward, I think that this is -- will have, for sure, an impact on our costs.

Raw material costs are going down faster.

The nature and the structure of our supply of metallics, that is a very relevant share of our costs, allow us to capture very fast what is happening in the market.

And so we think that in the coming quarter we will see a positive impact on our costs, maybe at first a limited increase because of the accounting, and then to get some benefit and reduction -- and cost reduction.

That's great.

That's very helpful.

Thanks so much.

And your next question comes from the line of Ole Slorer from Morgan Stanley.

Please proceed.

Thank you very much.

I've got a bit of feedback on the line here.

But if you could just help us understand a little bit the nature of the very strong margins in the quarter just a little bit more.

The margin certainly came in substantially higher than what we thought.

And I realize that there was a mix shift, in that the decrease in welded sales was sequentially larger than the decrease in seamless, and this will, of course, have a positive mix effect.

But was there any surprises to you in the quarter with respect to this strength of the margin, because certainly I thought that the costs would still be lingering?

And that was, I think, some of the concerns you also highlighted at the end of the second quarter, when you talked about the third quarter.

Yes.

Ole, as I told before to Michael, we were not anticipating the devaluation of the currency to the extent it reached during this quarter, and this had definitely an impact on our costs for personnel, on different points of our cost line.

Second, also the, as I mentioned, efficiency had an impact, probably.

Looking at the world with the eyes of July of this year, we had a different picture.

We were probably a little more concerned and we didn't expect some of the sudden drops.

Remember, the influence of metallics on our cost line is important.

And so a sudden drop, even if because of the FIFO accounting, is only impacting in a limited way.

But still, this has been sufficient to improve, let's say, this line compared to our expectation.

On the price side, I think we faced good demand and this is also reflected on the price side, on our profit and loss.

I think these are the basic things.

If we look --

The plants are working very well.

And as I say, the start-up had an influence on our costs.

And the maintenance that you've done in Mexico, is that now completed and are all your plants up and running successfully in the fourth quarter?

Yes.

And you know we were making a big intervention in the very core of our mill.

So we were expecting -- we were factoring in, in our original expectation, a slow start-up of the operation.

The reality has been much better, compared to our forecast.

And actually, in this month, we are reaching a record production ever in our production system worldwide.

So, I am just trying to understand what you are saying.

So, as we look into the fourth quarter, you should now start to get a much bigger effect on the positive costs side.

And if I look at, for example, hot rolled coil prices, they are rolling over hard; you should really get a nice margin on your welded side.

If I look at the average revenue that you did for your products of about $2,750 in the quarter and I look at the latest trends, I don't think any of us know what's going to happen to OCTG pricing, but so far it appears to be stable and certainly stable for this quarter and next.

So, as to what I see, the fourth quarter and even the first quarter should be incredibly strong.

Can you give us some guidance, some help with how you see the near-term margins?

As you say, we will have a positive impact on our cost.

Now, it's difficult to say how the impact of the market will be on prices and volume, even if we do not anticipate immediate changes, let's say, or strong changes in the short term.

But still, we are living in a world of very, very high uncertainty, very high uncertainty.

And so, your observations are correct.

We will have, on our cost, the benefit of being able to reduce cost of metallical order, and to some extent also our fixed costs and our variable costs.

It is more difficult to say what could happen to the margin, because even if we are positive on this we think that this will depend on the trend in the market.

Of course, of course.

If we look, therefore, a little bit further ahead and we look at your plan A, I would imagine that there will be then significant price pressure on industrial tubes, on maybe line pipe, on tubes for refining projects that look to be canceled, particularly in the Middle East.

At the same time, we've heard before that you expected an increased output of premium product next year.

But is this still the case, given some risks of slippage, particularly maybe in the Middle East?

Can you give us a little bit of an update on which areas you see the greatest risk?

You highlighted your premium offering, and to what extent do you see that premium offering giving you some protection?

Are you still looking for an improved mix next year or is even this now at risk?

Well, the first thing is the -- for sure, the industrial sector is living through very difficult times and this is clearly reflected in our -- also in our position.

Now, as you know, this sector is not very relevant for us.

I mean it's not so important as the energy.

It may impact, you may say, 10% to 15% of our sales.

The rest of our system is driven by energy.

In the industrial sector, we are facing a reduction in shipments that are very, very substantial.

The automotive industry is gradually reducing stocks, level of activity and so.

So there are segments in which we are shipping 50% of what we were shipping before.

When you talk about energy and project, I would get back to the two scenarios that I anticipated in my original statement.

Up to now, what we see is more close to the first scenario.

We see companies still keeping reference of price of oil in the range of $60 to $70, and so delaying projects in some cases because of financial reasons.

But we are not seeing really substantial cancellation of projects.

But I would ask Alejandro Lammertyn to comment on how some of these big projects in the Middle East, for instance, are behaving.

Yes.

Ole, as you were mentioning, there are some comments on the reduction in the Middle East, particularly in Saudi Arabia, that are more related to the downstream sector of the market and not to the upstream sector of the market.

We are talking about, for example, Manifa and Karan field.

We have been commenting of some delays in the projects, but not at this moment cancellation.

Of course, the cost side of the analysis is there.

For the rest of the projects, on the pipeline sector we still see a solid backlog.

We have just secured the Usan project for Total in Angola and they are following the same trend that they were doing before.

For the Caspian Sea, we are also seeing our -- the projects that we are following, KCO that is already up and running, they will -- as far as today, they will follow the project -- they will continue with the project.

There is some concern on the new places, for example of Karachaganak, but are more related to cost analysis rather to the benefits or the price of oil that would limit their project.

So we feel confident of the overall medium-term vision on these projects.

There might be some delays.

Just wait and see how the costs will evolve.

But we don't see any cancellation as of the picture of today.

Okay.

Well, thank you very much.

And Paolo, thank you very much for joining us on the call.

Appreciate it.

Thank you, Ole.

And our next question comes from the line of Charles Minervino from Goldman Sachs.

Please proceed.

Hi, good morning.

Good morning.

I wanted to talk about the US market a little bit.

You've seen quite a bit of increases in international imports.

The Chinese manufacturers have really stepped up some shipments to the US.

Can you give us a sense of what you're seeing from your perspective, how you are dealing with this incremental competition and if you think it's sustainable for a prolonged period of time?

Yes.

This is a very important issue because, as you were rightly saying, the Chinese imports are representing in this quarter around 37% of overall demand for OCTG, so a very high number.

I think this is also a reflection of decisions taken many months ago.

But anyway, I will ask to German to comment on the impact of this on the American market.

Let me just say that over the quarter we've seen Chinese OCTG imports, both the sum of seamless and welded, go in above 600,000 tonnes, a number that we have not seen before, ever before.

The first nine months of 2008, the Chinese imports reached 1.2m tones, an unprecedented number.

Now, as you know, we are monitoring this.

It is naturally affecting the overall market environment.

We are monitoring this so much that, as a US industry, we are at the present time transitioning a dumping case, a trade case, against line pipe welded imports from China and Korea.

And only last week, the Department of Commerce found preliminary antidumping duties of 70% to 80%, depending on the exporter.

So, it's a very concerning aspect.

We believe that the Chinese are probably not going to slow down any time in the near future.

We anticipate China imports probably reaching or surpassing the level of 1.5m tonnes of OCTG for the year.

And this deals with a variety of structural points.

I don't want to take a lot of time over the call, but we are still dealing with the 13% rebate which the Chinese only pipe exporters are getting, among many other subsidies.

That's really helpful.

And can you just give us a sense of your outlook for pricing in the US?

If OCTG prices come down, do you anticipate seeing the imports slow or do you think we have a structural change here, where they will just keep coming?

Well, as I was saying, let's assume -- let's get back to the two scenarios.

In a recessionary scenario still, when you talk about a reduction in rigs in the range of 15% or around that, there will be a pressure on pricing for pipes.

I would expect the prices -- that the prices could go down by 10% to 15% by middle of 2009, let's say.

And this will depend on also the pressure that China could put on the low-end pipes.

Because remember, this is -- the Chinese imports are focused on segments which are distributor, small independent drilling, to segments that today are under pressure because of financial constraint.

And so they maybe -- let's say this effect could affect our sales less than other, I think.

But this is my anticipation in terms of pricing.

China is an important issue.

Today, China is exporting from China close to 60% of the production of Oil Country Tubular Goods.

This is, I think, a position that is not sustainable in the long run.

In the short run, it is deriving from excess capacity and from some limited growth of the domestic oil industry.

But over time, I don't think this is credible.

We have seen this in Canada, in which we -- the industry succeeded in getting through an antidumping case against welded casing.

We have seen this in Europe, where also the industry has been in the process and is getting some success in pushing through a case.

I think there will be -- in an environment like the environment we are facing, which is a recessionary environment, of severe extent, I think this situation is not really sustainable for long.

Okay.

That's very helpful.

Just one final one.

I just wanted to double check.

You said there that you thought maybe US pricing could go down 10% to 15%.

Was that in kind of your current scenario, and then in a bearish scenario you could potentially see further price decreases?

I just wanted to clarify that point.

Well, even in the scenario of the more extreme, more severe recession, still I think a market like the US, in which imports are taking almost 57%, import reduction will compensate for a reduction in demand.

And so, in the end, as I was saying, pricing will stay -- should stay in these ranges.

Let me correct on one thing.

I mentioned before the case in Canada.

The case was for seamless OCTG, not for casing, seamless casing, not for welded casing, as I said.

Okay.

That's very helpful.

Thank you.

And your next question comes from the line of Frank McGann from Merrill Lynch.

Please proceed.

Yes, good afternoon.

Just a question on pricing, to follow up.

Three months or so ago, the plan was to negotiate pretty strong price increases with your global customers that should go into effect over an extended period of time, but should have led to major price increases.

Obviously, the market has changed a lot.

US prices actually have held up quite nicely so far.

But I was wondering what you think is -- or how your discussions are going with those international customers, whether you are getting push back now, whether with the fall in raw material costs and the potential for somewhat weaker demand is having an effect on what you think prices can do over the next 12 months in the international environment.

Well, you are right.

The reason why we are discussing a price increase was that some of the long-term contracts were coming with relatively low price compared to an environment we had in the first semester, because the nature of the agreements done in 2006 or even before left some of the price out, let's say, of the market range.

Now, we are discussing with our clients.

I think we still will be able to get some increases in some of the very -- of the older contracts.

And -- but we cannot -- we don't think that we could today have a price increase compared to the price level that we had in the first semester.

International markets were slightly below the level of pricing that we had in other regions, in the US in general.

So this, I think, is the dynamic of the negotiation.

By and large, I would say that today we are really relying on formulas to try to maintain the long-term relation and at the same time to give to the client good visibility of the market trend, using in the formula factors like cost of raw material or Pipe Logix to accompany the movement in the market.

And on this ground, I think we are succeeding in proceeding in our negotiation.

I will ask Alejandro to comment, maybe, on if this is also how he feels about this.

Well, as we said in the last conference call, we are renegotiating the long-term agreements.

We finish the renegotiation of the long-term agreements with price adjustments and putting the formula base on these indexes that Paolo was mentioning.

Of course, we will have better price conditions, but they will be readjusting according to these indexes next month.

Okay, great.

Thanks.

One other question, if possible.

The Mexican Energy Reform, I was wondering what your view is of that and how that will affect your business, potentially, over the next two to three years in Mexico.

It's a good question, Frank.

I would ask Guillermo to define on this issue.

Yes.

Thank you, Paolo.

Well, as you know, the Mexican Reform was just approved, was just approved in October, so it's a very recent event.

But I think it has a couple of very good things for us.

One is that there is a definite intention to give more funds to Pemex, to increase the investment in Pemex.

And secondly, it gives also Pemex more room to maneuver in terms of contracts and in terms of purchases.

So, I think those two effects will benefit our operation.

As you know, production is declining, so it's very important and that is their view.

And I think that Pemex has also got some hedges in terms of getting a price of oil that will sustain the investment.

So what we are seeing in Mexico is an increased level of investment for the next two years.

I think we are going to start to see it now, but we are going to see it more strongly by the second half of next year.

Okay, great.

Thank you very much.

And our next question comes from the line of Stephen Williams from Simmons.

Please proceed.

Yes.

Hello, gentlemen.

Can I just ask if you can help me understand how to think about the relationship between the North American rig count and the OCTG demand?

So if, for example, we see a 10% decrease in the rig count, do I expect to see a direct 10% decline in OCTG demand or is it less linear than that?

Well, I will ask to German to comment on this.

Well, there is not in fact a linear relationship.

I think it's fair to say that rig count adjustment one second after confronts the inventory positions in the marketplace.

And we've seen, in fact, this happening in the past.

So there is typically a transition time with respect to inventory overhang, as we typically call it.

So, short answer, not a direct, immediate, linear relationship.

For you to know, just to add to your details, today at the end of the quarter, in fact, the end of the fourth quarter, the US had about four months' worth of inventory, slightly higher than what we saw, the 3.7 months that we saw at the end of the second quarter, which is naturally consistent with the about 2,000 rigs, slightly short of 2,000 rigs, that we have operating in the country.

Okay.

Thank you.

But also, just taking the inventory issue aside, is there any case for saying that the kind of increase in complexity of drilling means that for a flat number of rigs you require an increasing amount of OCTG?

Well, this is having a, I think, direct relationship with the mix, more than naturally overall the quantity, given the size of the US market.

As we know, there has been a steady increase on directional drilling, by and large, associated to unconventional gas, particularly as part of the Shell developments.

That typically has called for a lot more heat-treated material, alloy material and, in some instances, also the use of premium connections as opposed to the standard API.

Okay.

That was great.

Thank you.

And our next question comes from the line of Cindy Du from Jefferies & Company.

Please proceed.

Thank you.

Good morning, guys.

I just had a quick question on the alliance programs in North America, specifically with the operators.

How much lead time do you usually typically get from them, in terms of their join plans or any possible cancellations?

And then, a follow-up on that, have you gotten any calls in the recent weeks on any cancellation plans?

Yes.

Also on this question I would ask German for a comment.

Cindy, we typically work under the alliance scheme with two to three months, depending on the customer, two to three months drilling program visibility.

Naturally, we -- given the circumstances, this present quarter is the one where they define specifically the E&P expenditures for next year and the volatility of the last few weeks have had a direct impact on the definition of the final plans.

What I am saying today is that everything that we know today may change, depending on how the circumstances go in the coming weeks.

But going specific to the answer, we have seen some -- in some of our alliances, we've seen some, if you will, delays or reductions when we compare the definitions that they are getting today vis-a-vis the ones that we had three months ago.

This will affect, particularly into the second -- first and second quarter '09, some of the OCTG volumes that we initially anticipated, say, three, six months ago.

We naturally need to see how this develops, but it is nothing else but consistent with the adjustments that we are foreseeing for the US market in general.

And then, in terms of any cancellation clauses in those contracts, are you made whole with whatever steel that's been procured or raw materials that have been procured so far?

No, we don't anticipate cancellations of the contract alliances.

In fact, the lead time for planning aims precisely as both adjust the level of production consistent with the level of activity.

As I said, I believe that we are going to see some activity reduction.

In generic terms, I would like to also say that we anticipate that, given the quality of our alliance customers, the cash or the cash flow situations and everything else should be to some extent less than what we see at the small independent segment.

But no, short answer is we don't anticipate contract cancellations.

We may see some volumes adjustments going forward.

Okay.

And then, following up on the international side, did you guys mention that all the international contracts have been renegotiated for 2009?

Well, this is -- you know international is a very differentiated, complex world.

For us, international means from all of the countries of Latin America, to Europe, UK, Norway, Romania, to Russia, to all the Asian countries, Turkmenistan, Azerbaijan, Kazhakistan, Middle East, West Africa, North Africa that is very important, Asia, China.

So this is a very huge and differentiated world.

For instance, in the case of Mexico, we are proceeding on a very business-as-usual relation, as Guillermo was saying.

The same is true for Latin American countries, in the end also in Venezuela with PDVSA.

We are consistently supplying their need and the level of demand is quite high.

The same is true for Colombia and Ecuador, Peru, Argentina.

Contracts are renegotiated.

There is no fixed date for it.

Some contracts are three-year contracts.

Some countries are related to projects, the development of one project.

For instance, in many areas, like West Africa, contracts are very much related to specific projects.

So, this is everyday events.

We see, as Alejandro was saying, some delays in the projects.

But when you have projects that have a 10-year or five-year or six-year lead time, we don't see really the company taking a, let's say, crisis decision.

We see every company look carefully after the inventories, the working capital, the same as we do.

We are also committed to reduce our working capital, to shorten the lead time.

All the industry is doing the same.

But we do not see, in this moment, in the international field, a big crisis.

I don't know, maybe, Alejandro, you can enlighten some of this, maybe concerning Russia and Kazakhstan or North Africa areas, in which we have a very strong position.

Well, Cindy, regarding the contracts we were mentioning was mainly with the alliances with majors worldwide, that I was referring before.

Now, what Paolo was saying is on the world we have different type of contracts, different types of relationships.

For example, in the Middle East we have not yet gone through the tendering process that is coming for the next year.

So KOC, Aramco, we expect them to come with a relative good volume because they have not been buying the last months.

But we have not yet a price definition for that because we have to poll for that.

In other areas like, as I just mentioned, Usan for Total, price has been defined some months ago and it's fixed and it's not going to be changed.

And most of our backlog for line pipe projects that we have till minimum middle of next year is already fixed and we don't see any renegotiation on that.

And orders are coming in, for instance, even in Russia, because Russia at the moment, the companies were affected by the financial crunch.

But still, we are getting order for Gazprom.

We have the Vankor project for Rosneft, an important project, 7,000 tonnes of premium dopeless.

We are in a segment of premium that apparently, as much as we can see and we can say today, is going on.

Gazprom in Azerbaijan, in Orenburg in Azerbaijan, in Astrakhan, and the Orenburg is going on and we are closing contracts.

Even in countries, I don't know, like Brazil, we recently received a 27,000 tonnes order for Tupi development in a very big important welded order.

The same -- Alejandro was mentioning the Usan project with Total has been closed also.

I mean companies are going on in this kind of project and contracts are coming.

As far as pricing is concerned, I think the level of pricing will more or less reflect the trend that you can see in the market.

And the effect of the United States movement will be relevant also for the international market to some extent.

Probably a lower extent in -- than -- because also in the past these contracts were moving more slowly in terms of pricing, compared to the US market.

In the downtrend or in any trend of change, they will also move slowly or more slowly than the US market.

Okay.

That was very helpful.

Thank you, guys.

And our next question comes from the line of Serge Escude from Cassa Lombarda.

Please proceed.

Yes, hello.

I would like to know, in your first scenario, what kind of action would you take to protect your margins?

If I understand clearly, the OCTG prices may fall, in your first scenario, around minus 10%, minus 15%, so what kind of action would you take in the next year, in this case of scenario?

Thank you.

Well, I think the cost reduction that we are achieving because of the change in the cost and the price of raw material will help us in preserving and defending our margin.

Nobody knows how good we will be in these events.

But I can tell you that our structure, our system is very flexible.

We use metallics from iron ore, from scrap, scrap from different regions.

We are buying in Europe, we are buying scrap in Latin America, we are buying scrap in North America.

We are also a big client of hot rolled coils.

So, in the end, the metallic component of our cost not only could reflect the reduction that you can see in the market, but also we could follow and adjust our system and, for instance, increase production from electric furnaces and reduce from integrated, if this would be required by the circumstances.

At the same time, we have a program underway.

I wouldn't call it an emergency program because, in the end, what we are facing is an adjustment and we have to react.

This program is focused on working capital reduction.

We are slowing down investment that we think may be postponed.

We are measuring again the profit and the return on all of our investments.

But also, we are delaying something just to be able to negotiate better some of the conditions.

As I was saying before, the same is true for the oil companies.

Some of the oil companies is delaying and trying to get some reduction in the rate of the rigs, in the cost of their projects.

We have to take this into consideration.

The exploration and production expenditure will go down, but the inflation on cost will also turn into some deflation for them.

We are also acting on our personnel.

As we said, for us, our people come first, our clients second and the cash third.

And we follow this in protecting our people even in the situation like an industrial system in -- in industrial is reducing shifts.

Okay.

We had some reduction, for instance, in Europe.

We are using cassa integrazione in some of our facilities that is supplying the industrial system.

I have a follow-up question.

In the -- just to understand, in your second scenario, in the more complex projects, what would be the time -- or the length that the price of oil should be around $50, to see some major projects in the complex areas to be canceled?

Is it 12 months, is it six months, is it 18 months?

This is the question.

Well, let me first ask to German to respond on this, at least which is from the point of view of North American operations.

Yes.

I tell you, it's a hard call.

In all honesty, we are in permanent contact with our customers.

We are planning on a $50 barrel as probably a game-changing value with respect to the scenarios we talked about.

But let me give you the example of the thermal development or SAGD development in Canada, which we know now is probably not going to go at the level industry anticipated six months ago, during the course of '09.

At these present prices, I think we are going to be seeing a delay on a good number of the Canadian SAGD thermal projects.

Overall, activity will not be drastically different than the one we saw during '08.

But it's naturally going to go at a different pace than initially anticipated.

Yes.

Also, the scenario of a severe recession, which is not something that we can rule out, we are associating this with an oil price below $50.

It could be.

But it means that the reduction in the consumption of oil and gas goes beyond the ability to reduce production from OPEC.

Because we think that OPEC will try to preserve price of oil and they will consider serious acts even beyond what they already did.

So, even in a severe recession, we assume that there could be some reduction, but I don't see it for a long period of time.

I think the reaction by the different players will be -- will come very soon.

Now, oil companies will measure this and they will try to understand how prolonged the situation like this could be.

If this is a short-term temporary issue, they will go on, or if this is something that really is -- or a medium-term scenario.

From our point of view, anyway, the rate of depletion in the field and the need of energy and the strategic relevance of energy do not really work in favor of a prolonged reduction in the price of energy.

I would say that we are quite convinced that the sector will have a different dynamic from many of the other sectors of the economy, even on a long -- medium, long-term scenario.

My question was -- okay, I understand.

My question was on specific more complex projects, such as deepwater, especially.

Do you think that the decision will be taken after six months at this level or 12 months or, as you said, maybe not at all affected?

Well, if you consider deepwater, for instance, Petrobras project, just us an example.

Yes.

Petrobras is contracting very -- a number of deepwater rigs.

I don't think that, for instance, Petrobras will reconsider.

The projects like the Petrobras project are based on an oil price that -- my understanding is it goes between $40 and $45.

So, for instance, this is a case in which offshore deepwater, you don't plan offshore deepwater on $80 a barrel.

You plan it on $40.

So I don't think this will be retrenched.

Now, different is the case for thermal, for instance.

Okay.

Thank you very much.

And our next question comes from the line of Rochus Brauneiser from Kepler.

Please proceed.

Yes.

Hi.

Good morning, gentlemen.

Some follow-up questions.

Can you become a little bit more specific on the inventory situation?

You mentioned that the inventory reach has climbed a little bit, from slightly below four months to more than four months now.

Is the increase more driven by a higher absolute tonnage of inventory or is that because there was already a shipment adjustment?

And do you already see any indication on the distributor side, with the spot price having topped, that they are now starting to move in a de-stocking environment?

And on the October data of the Pipe Logix data, which obviously went down slightly, is this more a reaction to lower raw material prices or is this more a reaction to the increased level of imports?

Could you maybe become a little bit more specific on that?

And coming back to the Chinese imports, what is your opinion in whether the financing of such exports are secured?

Or could some of these exporters also face financial difficulties in the months to come?

And in terms of the CapEx plan, for the two scenarios, has there been taken already measures to postpone any of the planned CapEx?

And in specific, the Mexican project, is that in the current environment continuing on schedule?

Well, many questions, a flash answer.

Inventory, we considered 50% of the increase in inventories due to volume and 50% is due to the price of the increase, if you are talking about the inventory of Tenaris, the one that you see in our balance sheet.

If you're talking about the inventory in the industry, German, maybe you can make a comment on this?

Sure.

Let's say the four months that we saw during -- by the end of the third quarter were by and large driven by a very, very important level of imports.

In fact, during the quarter, the inventories overall increased by, in absolute numbers, by about 300,000 metric tons.

Let's not forget, back to China, that only China during the month of September brought about 300,000 metric tons, an unprecedented number, translates in 1.2m tonnes for the first nine months of the year.

So a short answer to the question, the increase was by and large driven by increased ex -- imports than activity adjustment.

With respect to what we see going forward, as we have indicated, distributors and operators are all naturally looking at working capital very closely.

And as such, consistent also with the December tax effects, we might see some adjustments going forward.

Naturally, it will also depend on what happened with imports from China.

We believe they are not going to come down between now and the end of the year.

With respect to imports from China and the financial effect, yes, your indication is correct.

We are seeing that the type of customer that is engaging on that type of imports are in fact confronting some financial restrictions, so much that we have come to know that, for instance, some of the exporters are now requiring financial advancements, financial payments, which were not there before.

Okay.

One last question, about the CapEx.

As I stated in my opening remarks, we are confirming our investment in Mexico because also we were in the process of negotiating the contract, the -- some of the procurement of it.

So we see that we are -- really, we will be able to get favorable conditions from our suppliers and we have the time to do this.

So we are confirming our first pipe forecast by the end of 2010.

And this is a decision that is part of our strategy.

We are trying to define a strategy that is robust in the face of any or both scenarios.

And I think that the Tamsa investment is a good decision in both scenarios, whatever comes in front of us.

Can I ask a follow-up question on the North American tube consumption, 2009 and 2010?

When you come back to the scenario number one, where the rig counts might go down some 15%, what shall we expect in terms of tube consumption?

There are some chances that in a more tricky environment people are moving more to shale gas developments, due to faster payback periods.

In which way could this positively impact the mix and hence the -- maybe a smaller decline rate in the US tube consumption, as the shale gas developments are more tube-intensive?

Well, I don't think at this point we could be too precise on this.

We are trying really to associate, for internal and planning purposes, a rig decline to the two scenarios that we are managing.

And we are saying something in the range of 15% to 20% decrease in rig according to the first scenario.

It will be a more severe reduction for the tube sector.

Now, you can assume that the consumption of pipes will decline more or less with this level of approximation, accordingly.

Now, what we think we may be able to defend is our share in these markets because of the nature of the projects, the alliance program, we are involved in.

And you are right that some of the projects that require horizontal drilling, directional drilling, is requiring premium joints.

Hydril has a very interesting position there.

So we think that we can defend our share both scenarios in this market.

Okay.

That's great.

I think that we have just time for one more last question and then we will have to close the conference.

Not a problem.

Our next question comes from the line of Marcus Sequeira from Deutsche Bank.

Please proceed.

Thank you very much.

I just have one question.

Do you guys believe that the current crisis presents any opportunities for you guys?

Are you seeing the Chinese, Russian competitors facing more difficulties that could push them out of business?

Do you believe there's any possibility for M&A or it is just impossible due to low access to credit?

No.

I think that, as it happened in the past, crises always offer opportunities.

And I think that Tenaris is leader in our market and we should be following very carefully how the situation unfolds.

There will be opportunities.

And for further consolidation, there will be opportunities for upstream or downstream integration that could make sense.

We will always focus on our strategy, as we did in the past.

We will not move from the direction the Company has followed since long.

What we feel is that in the moment in which something of this kind comes out, if the projects are sound, we think we could find financing for it, if this would be the case.

There will be a flight for quality also in lending, on the part of any financial operator.

And it is very important for us to maintain open all of the channels of dialogue with our financial -- the financial institutions with which we work in the past, to be prepared for opportunities that could come out from this crisis.

Thank you very much.

Well, thank you very much for participating in the call and this is -- we will now close the conference.

Thank you very much to all of you.

Thank you.

Thank you for your participation in today's conference call.

This concludes today's presentation and you may now disconnect.

Have a great day.