Tenaris SA (TS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Tenaris SA Earnings Conference Call.

My name is Noelia, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

Giovanni Sardagna, Head of Investor Relations.

Please proceed.

Thank you, Noelia, and welcome to Tenaris 2010 third quarter results conference call.

Before we start, I would like to 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 SSC.

With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Vogel, Vice President of Finance and Member of our Board of Directors; Ricardo Soler, our CFO; German Cura, the Managing Director of our North America Operations; and joining us from Dubai, Alejandro Lammertyn, our Eastern Hemisphere Managing Director.

Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our results.

Notwithstanding the prolonged shutdown of our Italian plant and a major reduction of oil and gas activity in Mexico, 3Q sales increased to over $2 billion, or 14% compared to the third quarter of last year, and 2% sequentially, as we continued to benefit from the recovery in most of our main markets.

Our EBITDA reached 531 million, which was flat sequentially by 9%, higher than the corresponding quarter of 2009.

Sequentially, our seamless sales volumes decreased 4%, while our welded sales volumes, excluding Projects, increased 15%, as we continue to benefit from the increased demand in the United States.

Our average selling prices finally reversed the downturn trend and increased 3% sequentially, but were 21% lower than those recorded in the corresponding quarter of last year.

During the quarter, our sales of high-end seamless products were 47% of our total seamless volumes compared to 52% posted during the second quarter of last year, and 46% recorded in the second quarter of 2010.

The Board of Directors approved the payment of an interim dividend of $0.13 per share, or $0.26 per ADR, to be paid at the end of this month, in line with an interim dividend that was paid last year.

During the first nine months of the year, our capital expenditures increased to $561 million compared to $328 million recorded in the first nine months of last year, as we completed our new premium threading facility in Saudi Arabia, and we are advancing a schedule in the completion of our new rolling mill in Mexico and our investments in Italy.

Now I will ask Paolo to say a few words before opening the floor to questions.

Thank you, Giovanni, and good morning to all of you.

Our results this quarter provide a solid platform on which to build in the coming quarters.

In spite of an extended shutdown of our Dalmine mill and a sharp slowdown in activity in Mexico, we consolidated the improving trend started in the second quarter.

In the coming quarters, we can look forward to a strong Canadian winter drilling season, higher shipments in our Projects business and a consolidation of the recovery in oil and gas drilling activity and other market sectors worldwide.

At our Dalmine plant, we completed a major investment in our rolling mills, which extend their range of specialized high-end products and improve the cost competitiveness of our operations there.

Here in Veracruz, we are on course to complete the construction of our new rolling mill within the demanding 24 month schedule we set ourselves.

The mill will also be completed on budget, and will produce its first tube within a few days.

It will bring many benefits to Tenaris's entire industrial operations.

Incorporating state-of-the-art rolling mill technology, it will extend our product capabilities, it will increase capacity, improve the overall productivity of our operations and reduce costs.

Annual costs savings are expected to amount to $100 million once full operation is reached.

In the United States and Canada, our sales continued to increase.

In the shales, where we now have 40% of US OCTG sales, we are consolidating our position as a leading supplier of tubular solutions.

For Chesapeake, in the Haynesville we are supplying our Wedge 521 connections and developing a sour service grade.

Other customers include leading independents and majors operating in the Eagle Ford, Bakken and Marcellus plays in addition to Haynesville.

We are developing two new premium connections for use in shale and similar applications and we have received firm orders for one of these connections threaded on seamless and on ERW welded pipes from two independent companies.

Deliveries will be made before year-end.

We have also opened new technical service offices in Pittsburgh and Denver.

And as the shale developments begin to spread outside of North America, we are supplying P110 and 5 and one half production casing with TenarisHydril Blue connections to Lane Energy and ConocoPhillips for the first horizontal shale well in Poland.

In the Gulf of Mexico, although the deepwater moratorium has been formally lifted, drilling activity is expected to resume only gradually given continued uncertainty about the new regulations.

Nevertheless, Chevron has announced that it will go ahead with the Jack and St.

Malo Lower Tertiary development.

And we were awarded the deepwater flowlines and steel catenary riser package for this project.

The heavy wall product specified for this project was developed in close collaboration with Chevron, and will be produced in our Dalmine plant following the completion, and thanks to the completion of our recent investments.

We're having good success with the rollout of our Dopeless technology.

This technology offers outstanding operational and environmental benefits for a wide variety of drilling operations.

Today 40% of our OCTG sales in the North Sea are with Dopeless technology, and we expect this figure will continue to increase.

Elsewhere, our Dopeless products have been tried and tested by customers and proved their worth in a wide variety of applications including thermal wells in Canada, deepwater wells in Angola, jungle wells in Peru and arctic applications in Russia, as well as desert conditions in Libya.

In the Emirates, it has been applied with our Wedge connections in an ambitious offshore project involving artificial islands and extended reach wells.

We're investing in our facilities worldwide to meet the expected growth in demand for Dopeless products.

Our strategy of strengthening our support for customers through local services and content is also delivering results.

In October, we concluded a Vendor Managed Inventory agreement with OMV Petrom under which we will manage their tubing and casing requirements in Romania, delivering to their rigs on a just in time basis.

We will invest in a state of the art service center and take on several Petrom employees to provide this service.

In Equatorial Guinea, we've formed a joint venture with GE Petrol to provide pipe management services from Luba to the operators in this country and the surrounding region.

The first sales from joint venture have already been made.

All around the world we continue to implement our strategy consistently and actively.

In short, we're focusing on industrial excellence, on development and deployment of new products, and in strengthening the regional service and local content worldwide.

In the coming quarters, we expect to see the fruits of this effort reflected in a growing trend in our sales and operating results.

We can take now questions on this.

(Operator Instructions).

Your first question comes from the line of Ole Slorer from Morgan Stanley.

Thank you very much.

I have a few different questions here.

And Paolo, I wonder whether you could share with us your thoughts on Mexico.

Mexico has been very weak for all the oilfield services companies that have reported so far.

You guys are very strong and connected in Mexico, so can you give us your view of the kind of rollback for Mexico?

How long time will it take before Mexico normalizes?

And what will the shape of it be?

Will it be back to more deepwater?

Will it be to Chicontepec, or how do you expect Mexico to shape up over the next 12 months?

Well, thank you, Ole, for your question.

As you say, Mexico this year had not only strong reduction in its activity, but also has been affected by the hurricane season very heavily.

And you know the hurricanes provoked reduction in activity of Pemex, and also affected our activity.

But the main issue is the budget concern and the strategy for Chicontepec.

Maybe, Guillermo, you can comment on what we know about the program --

Surely.

The size of the reduction and the shape of the recovery, because in general, we think recovery will come, but will probably be quite slow.

Sure, Paolo.

Hi, Ole, how are you?

Hi, Guillermo.

Hello.

Yes, as has been commented in other conferences, Pemex make a strong halt in terms of the drilling activity, mainly in Chicontepec and in the gas associated areas of the north.

To give you an idea, the information we have for September is that there were no rigs operating for Chicontepec at that time.

The operation has improved and today, we have 16 rigs operating, and the main reason for the reduction was that Pemex is re-evaluating the Chicontepec field in order to define the strategy for next year.

What they have told us for next year is that they expect to drill around 350 wells, and we see a coming back -- we have seen a coming back of Chicontepec in November, and we have seen a -- we expect probably to see 22 rigs to 25 rigs operating in -- on average for Chicontepec next year.

In terms of the rest of the region for Pemex, we have seen a very stable drilling activity in the south, in the Region Marina, in the south east areas, and we expect that to happen.

When you see what that has meant for us in the third quarter is that we have seen a reduction in shipments, which has been a little bit above the 20% level for the third quarter, which was the combined effect of what I just mentioned on Chicontepec, and also the effect of the hurricane and -- that affected some of the drilling areas in Pemex.

And that mainly affected the September and the October drilling.

So we're going to see probably shipments for the fourth quarter for Pemex very much in line on the fourth quarter that what we experienced on the third quarter.

And we expect from those levels an increase in next year for the coming back of Chicontepec probably by 10% or 12%, because we don't see Chicontepec coming strong next year.

We think we're going to start to see that up to 2012.

Thank you very much for that, Guillermo.

My second question is if you could just talk a little bit about pricing trends.

I was a little -- positively surprised actually by seeing that the average revenue per ton increased by 3% sequentially in the Tubes segment, but your seamless was down volume-wise by 3.6%, and your welded was up 14.5%, suggesting that the mix is more welded, therefore, pricing mix weaker, yet you increased your price -- your revenues.

And could you talk what is that driving this?

And is it that you're now putting premium connections on welded?

Have you added value to your welded product in the way that you haven't done before?

Well, I don't think this is so much the reason for the slight price variation.

In general, I would say that prices touched the lowest level maybe five months or six months ago and then they started to recover.

And this has been to some extent also reflected in the Pipe Logix trend, with some delay in seamless internationally because of the delay between the booking and the shipment of different orders.

But in the end, we saw a slight recovery.

Now recently, as you see, the Pipe Logix became stable, and what we couldn't repeat is stable pricing [leads] for a while.

Some of the operators are waiting the perspective for gas.

There will be some reduction in rigs.

This may affect pricing in North America.

So we would expect only a slight increase in pricing during 2011.

We will have an improved mix.

As we were saying, our mix will get gradually into more complex product and the investment we are doing will help in this direction, and we expect the market to recover in some of the areas that demands complex projects, the gas in the Middle East (multiple speakers).

Just to clarify, you're talking about developing premium connections for your welded product offerings.

Is that something that will differentiate your welded offering to that of the rest of the market?

Or is it something that everybody has?

No, this is something that we are promoting.

I will ask German to comment on this specific issue, but I would say that you will see the effect of our increase, new premium developed for shale, for instance, during 2011; I mean, in the coming quarter.

But, German, you can comment on this, on welded with premium mainly for shales?

I think that's correct.

Only we have developed particularly premium products which today are in fact cut on welded pipe consistent with what we had announced in the past; that we have booked the first two orders.

It's a product that could go both seamless and welded, and we are now in fact deploying it with the welded application and one of the shales, Eagle Ford in particular, and this is something that we have, and is, if you will -- at a margin naturally improving overall, the welded price impact, it has only been introduced and it will be gradually developed, so it's not really reflected on this quarter's results, on pricing results.

Thank you very much, German.

That is the first time I've heard of this type of development.

So anyway, thank you very much for answering my questions.

Thank you.

Thank you, Ole.

Ladies and gentlemen, we ask that callers limit their questions to one question and one follow-up question for a broader participation.

Your next question comes from the line of Michael LaMotte from Guggenheim Partners.

Thanks, and good morning.

Morning.

Paolo, first of all, let me just say congratulations on executing in a tough quarter with a number of headwinds that you all faced this quarter.

I think that a flat EBITDA is actually quite an accomplishment.

And thank you too for going in on the technology information.

I think just a couple of quick follow-ups on that, if I may.

First, if I look at Wedge in particular and the opportunity to grow in the shales, and perhaps use Dopeless in the North Sea as a benchmark, how fast do you think we could see the penetration rate in terms of the acceptance of that technology, given the North American market's reliance on shales?

Well, as you say -- as we say in the opening remarks, today 40% of our sales of OCTG goes to the shales.

So for us, following the development of shales with our seamless welded premium product is essential.

Now I will ask German to answer the question on how fast we think that this technology could penetrate and the new development product could get in.

Good morning, Mike.

I think we're very confident about the degree of penetration once the products are fully tested, field tested, and ultimately formally introduced and deployed.

During the quarter, we have somehow reached the first milestone, which is our XP Connection, compression-resistant connection which is used in the upper part of the wells.

During 2011, we will introduce an integral connection which has unseen compression-resistant values and bending values which are in the end shale-specific, if you will.

We believe that this would be later 2011/2012 deployment, and we are very, very confident based upon initial reception, technical discussions which we're using with our alliance customers in the shales.

That's great, German.

Thank you for the color.

Maybe just a second question, maybe unrelated, I apologize for it, but I want to try to better understand what happened with receivables this quarter and the uptick in working capital.

Could you maybe expand upon that briefly?

Yes.

In this quarter, we have an increase in the receivables.

Part of this has been due to the fact that we shipped more in September than during July and August.

As we were saying at the beginning, this quarter is usually seasonally low for us because we have -- August is a weak month in this.

But in this quarter, we overcome.

We have been able to ship in September, but this increased our ratios.

But anyway, I will ask Ricardo maybe to comment if there is something to add on this.

Thank you, Paolo.

Just one comment in order to clarify our level of receivables.

Our ratio over new receivables is at the same level of last quarter.

Therefore, as Paolo mentioned, it's only an issue of clients and shipment distributions along the quarter.

Thank you, Ricardo.

Hi.

Hi.

Okay, so just to be clear, it's not an issue of mix shift and term changes and different clients; it really is just scheduling September versus July/August?

Yes, there is nothing extraordinary.

We didn't change terms, we are not modifying, or there have not been change in mixes that may continue or affect our working capital situation in the coming quarter.

Very good.

Thanks so much.

I'll turn it back now.

Your next question comes from the line of Stephen Gengaro from Jefferies.

Thank you.

Hello, gentlemen.

Two things; I guess I'll start with the mix.

You mention in the comments 47%.

I guess the seamless was premium, so it was a little bit of an uptick sequentially; still sort of behind where we were a year ago.

Can you give us a sense for how you see that evolving over the next couple of quarters as far as that mix shift back towards maybe a higher percentage of premium, and what will ultimately drive that for you?

Well, we expect the share of high-end product to increase slightly, because you take also into consideration that we expect increase in volumes; not so strong in the next quarter, but in the first part of 2011 we see an increase in our shipments.

This will be driven by premium, but also by some of the domestic market in which service is supporting API products, like in part of the US for this.

So the share will increase slightly; absolute volume should increase a little more.

What is driving this?

The focus on gas in the Middle East, in the States for the shales is a driver for this.

There is also deepwater activity outside the Gulf of Mexico in which our high-end products are getting -- for instance, the Jack and St.

Malo example, like the riser and the flowlines in deepwater, this is something that we see moving in West Africa, in South East Asia, and to some extent to pick up again in Gulf of Mexico.

This is also another driver of the mix.

We will not change dramatically, but we have more capacity now because of the investment.

We have more products because we will introduce new products from now in the coming months, and so this will contribute to a more rich mix over time during 2011.

And would you hazard a guess when you get to 50/50?

Well, I think we can during 2011, in the end we will be there.

Great.

And then just my second question has to do with the fourth quarter tends to be a little softer for volumes because distributors tend to liquidate some inventory, but your model of direct sales, how should we think about how that mitigates the distributor inventory issue?

And is that any different this year with the Gulf of Mexico issues?

Well, this is mainly something that could affect our position in North America.

You're right in saying that our model of relation to the client is gaining a slightly different pattern compared to some of the other of our competitors.

For instance, in this quarter, our sales in the US are more or less in line with previous quarter.

But going up, let's ask German to be more precise on how we can [compare this] in the fourth quarter.

Thank you.

Thank you, Paolo.

You are right, Stephen; we are I think through the alliances and programs more aligned to what we call the operitive consumption and mitigating the so-called intermediate stock in a really pronounced way.

So when we look at what we've done volume-wise in the States, third quarter to second quarter our sales have increased.

And we'd expect in the fourth quarter to be around the same levels in terms of volume, consistent with the view that rig count -- may also stay about the same level going into the fourth quarter as well.

Very good.

That's very helpful.

Thank you.

Your next question comes from the line of Blake Hutchinson from Howard Weil.

Hello, gentlemen.

Hello, good morning.

Morning.

First question, you mentioned that the rolling mill, the new rolling mill in Mexico will be spitting out the first production within the next few days, but you won't necessarily be at full production.

Can you just walk us through the process of from first production, how much capacity you immediately have, and then the steps that still need to be taken to get to full capacity, and the timing of getting to full capacity at this point?

Well, thank you for the question.

Really, we are very proud of the performance in startup of mill.

We started designing mill two years ago.

We started moving steel works one year ago, and we completed the mill today within budget.

We were supposed to spend around $840 million, and we are there in this.

The first pipe, we plan to be able to produce first pipes within November.

It means that we test all of the equipment from the cutting line, to the rotary furnace, to the piercer, to the --.

These are mainly -- the production of the first pipe is mainly a test of the efficiency of the installation, the automation and so, but it's the first step in a ramp-up curve that will affect the first quarter of next year.

We start testing all the equipment.

We have always the initial failure; we have to adjust, change, make improvement while the production goes up gradually.

We think that by April, when the part of the finishing facility will be completed, we expect the new heat treatment to be operational in April.

We expect the threading line to be operational in April.

We will be not at full capacity, but we will be operational of all of the line basically entire product range of the mill, and then we will ramp up the level of utilization of the mill during 2011.

It's a process; it will take time.

In the period between January and April, we will be finishing some of the pipes in the existing facility, finishing facility in Tamsa, so we will perceive limited effect or benefit of the mill in this period of time.

But gradually, this will come in.

Great, thank you.

Just to say about the -- you were asking when full capacity.

Well, it will depend also from the market, from different consideration, but we may expect that by the end of 2011 the mill was running at substantial high level of utilization and capacity.

Great, that's very helpful.

Thank you for that insight.

And then just, if I recall correctly, the volume hit that you expected from the reconfiguration in Italy from Q2 to Q3, I believe it's 50,000 to 60,000 tons of seamless product.

Now that you're reconfigured there, normally you would have a more immediate snap-back from the downtime in these operations, seasonal downtime in those operations.

Does it take a little while longer to reintroduce those volumes now that you're targeting different markets with them?

Or should we expect that to be a pretty quick volume recovery from that facility?

No, I think that the stoppage that has been almost two months has mainly affected our production of seamless for this period.

But the ramp-up of the plant is much faster than for instance the ramp-up in Mexico.

We can expect the mill to recover a level of utilization by the end of November/beginning of December, so we will be in a position to -- with an increased production capability by basically November or December.

For instance, the Jack and St.

Malo product will be produced in Dalmine, and will be produced there thanks to the expansion and increase in the product range.

It will be produced in the coming months.

So I do not expect any limitation; on the contrary.

Gradually, in February, in Dalmine, we will complete the investment in the finishing facility.

And also our costs will go down because we are gradually reducing our workforce according to the agreement signed with the union.

So this cost during 2011 will gradually go down.

Great.

Thank you for that.

And then just if I can get in one more or less housekeeping-type question.

For the first half of the year you had raised concerns that raw material costs had gone up, and then the back half of the year we would be impacted by the FIFO accounting.

Have we realized the full impact of FIFO in 3Q so we can view that as at least a flat issue or a non-issue going forward from here?

Well, basically, you see our costs went up a little, but the big effect should be in our accounting now.

There will be no big difference in the reflection on the FIFO for the coming quarter.

As you know, the performing -- from our point of view in the costs, iron ore went up substantially between the beginning of this year and now, then it came down slightly for the quarter, the present quarter, and this has also had an impact on scrap.

So I think that during the first part of 2011, we should be able to have slightly lower level of cost of metallics.

Great, that's helpful.

I'll turn it back.

Thank you.

Your next question comes from the line of Frank McGann from Bank of America Merrill Lynch.

Hello.

Good day, everyone.

Just a kind of a broader question.

Looking at the global competitive environment, the oil markets are heating up; there's been it seems a fair amount of excess capacity, a fair amount of import competition in North America and some other markets, and I'm just wondering how you see the competitive environment currently and what you think the upside would be if we continue to see the oil market stay strong.

How much excess capacity is there in the system?

And what -- how would that affect long term pricing potential?

Well, thank you, Frank.

There is clearly excess capacity worldwide in the low-end product.

This is capacity coming from China.

Even if China is reducing substantially its export, still on the low end, the excess capacity in China is putting pressure on this in the market worldwide for the low end.

If you look at the high-end product, I think gradually the increase in the more demanding application from the oil company, and increased activity in some of the more demanding areas, should gradually increase the demand for these products, reduce excess pressure from the supply part of this.

And this to some extent should help consolidating a little the pricing power on these more demanding products.

Also, exchange rates are important.

The level of the yen is very strong.

Some of our competitors are based in Japan.

Euro is also very strong and this may have also an effect on this.

Okay.

If you just think about it in broad terms and look at history and the kind of pricing that was being seen several years ago, are you optimistic that the relative prices can recover to that level?

I don't think that this is something that we have in our horizon in 2011, because we see that the demand even for high demanding products, differentiated products is increasing, but is not exploding.

It's increasing at a pace that is not, let's say, so fast as what we have seen in some moments in 2007/2008.

Now it will depend on the overall economy.

If we expect stronger recovery during 2011, then the price of oil could consolidate slightly higher.

The metrics of gas in the US was gradually changing.

This could also drive some increase in gas.

And at that point the need for drilling in non-conventional and in more difficult fields may shift into the much higher gear in some moment, because the world will need for size, will need to develop new resources worldwide, and some of these resources will require the products that we produce worldwide.

So this could happen maybe, but we don't see now in our horizon for 2011.

Okay.

Thank you very much.

Your next question comes from the line of Alessandro Abate from JPMorgan.

Hi, Paolo.

Hi to everyone.

Paolo, just one quick question.

Listening basically, you aim basically shift the mix of products towards the high-end.

Clearly, this puts you in a safe haven relative to the import competition low-end.

If we take look basically at the US market, what is the risk the current import flow can actually undermine the sustainability of the capacity utilization rates of domestic OCTG producer?

Yes.

Thank you, Alessandro.

Again, I will ask German to comment on how the impact of the imports, because it's clear that we have seen some of the imports, particularly in North Korea, to increase fast.

But maybe, German, you can give us some precise view on this.

Thank you, Paolo.

Alessandro, the view -- we share the concerns, to tell you truth, despite the notions of (inaudible).

I think it's important to highlight that inventories continue to stay at around 5.5 months, 5.7 months.

So imports are growing.

Inventories, vis-a-vis the level of activity, continues to be at a, I would say, historic level.

Now we're concerned about imports from Korea; there's no question about it.

Korea today runs at about 15% market share, by and large concentrating in the low-end pipe applications that are ultimately aiming at inventories.

And this is creating some low end pricing pressure that is being reflected in the Pipe Logix in the last couple of months.

So we are evaluating options looking at the records closely.

But then from the demand perspective and activity perspective and potential impact, at least on our plants, and I will comment about ours, again I'll go back to the Stephen question of alliance and programs that allows us to synchronize drilling programs to production programs, staying a little bit away from potential inventory implications.

Hopefully that answers the question.

Yes, it does perfectly.

Just one follow-up.

If you just can give us a little bit more color about the possibility that we might be seeing a switch from coal-fired plants to gas-fired plants in the near future, basically in 2011.

What kind of implication this can have on the supply side as far as Tenaris is concerned.

Thank you.

Well, I imagine that this will depend also on the debate in the new Congress, and which will depend on the US Energy Policy for promoting gas.

The shales create a -- change completely the landscape.

Gas could be not only transition fuel, but could also be a destination fuel to some extent for a long period of time as least.

It will depend.

If there is a change, the Energy Policy will set the frame for the Company to decide what to do upon a change in the metrics.

Personally I think that the metrics will change.

I'm not -- it's difficult to understand how fast.

We have seen the gas demand increase by 2%/3% during 2010.

The metric is gradually shifting.

It could be that by the end of 2011 we will see some of the power production based on coal to shift into gas, and then maybe more could come.

But it is also some of the gas could enter into the transportation sector to some extent in the medium term.

This will be a substantial change in the metrics.

I think it would be reasonable in logic, but we will see the debate in the Congress to perceive relevance of CO2 reduction.

Gas-based economy is clearly environmentally more sound for the long run, but it will depend on this.

Thank you very much, Paolo.

Thank you, everybody.

Your next question comes from the line of Sergio Torres from JPMorgan.

Gentlemen, good afternoon to all.

In your recent presentation in London, you revealed how important Brazil is in your deepwater market sales; 40%, if I remember correctly.

Could you please elaborate on your new initiatives there, including your new plant for connections that I think will start up in next year?

When we mentioned the importance of the offshore, the development of Brazil for us, as you know we have a share in oil country tubular goods that is in the range of 25% in Brazil.

Our products, mainly welded products, are used extensively in the new development in Brazil, in Petrobras, but also in the private companies.

For instance, we recently sold 18 inches with TenarisHydril 521 to (inaudible) for its development.

We did the same to Repsol with 16 inches, and I think the thread was 511 for the offshore use.

These are the integral joints that are so popular in environment in which you need -- in offshore environment in which you need high torque in some cases, lean well design.

We are strengthening our plan.

We're doing basically three things.

On one side, we are expanding our equipment fabrication.

We're building a new space, a new plant for equipment fabrication for Petrobras.

This is mainly used in refinery.

We are strengthening our capability there.

Second, we are building our resource center in (inaudible) together in an area in which Petrobras is searching for partner for R&D work.

Our R&D will be focused on welding and also on premium connection for the offshore activity.

Third, we are strengthening our capability of finishing for different products that goes into the offshore, and we want to be able to thread a little more of our integral joints in Brazil.

This could be done on welded or on seamless, our product or third party product.

The important thing for us is to establish our technology, and our 25% share allows us to be a player on the technological game in offshore Brazil, not only for the flowlines but also for the drilling.

Great, Paolo.

Thank you.

And last a follow-up.

A little bit of also a big picture question.

Could you please share with us your stance on the potential for unconventional gas exploration in Europe and the Middle East?

I think Germany issued licenses for relatively large acres recently with potential for coal-based methane, and also Saudi Arabia has stated that it's also interested in unconventionals.

Thank you.

Well, this is a huge area of opportunity.

It will come.

It will resolve, because I think that environmental concern at the level of population and how populated the areas are in Poland, or in the areas in Europe that are suitable for shales development will slow down this process.

It will not be fast.

But still we sold the first product for horizontal well to Lane Energy and to Conoco.

We are there.

I think we are very strong in technology.

These are the two new premium connections that we developed that are today one is in the market, starts to be the market.

The second will be in the market in a few months, and we are completing the test, are really a superior product for shale.

So our portfolio, from a technology point of view for shale will allow us to be positioned in Europe, even in China.

You know China is looking at this.

We hope that if they have development there, international oil company or domestic oil company, we could be a player with our plant in China for supplying high technology products for shales.

But in my view, outside the US this will be slow.

We will see these in 2012/2013.

I don't think these will move too fast.

Thank you.

(Operator Instructions).

Your next question is a follow-up question from the line of Michael LaMotte from Guggenheim Partners.

Thank you.

German, if I could just follow up on the US import and inventory situation quickly.

With respect to inventories, we've been hearing anecdotes of process regards having a lot of smaller de-casing and tubing on the ground.

But the overall inventory data seems to suggest that the market's okay, as you say, with a 5.5 month inventory level.

Can you talk about whether might be disconnects or mismatches with respect to specific product and supply, and how that might impact Tenaris?

I'm trying to get a sense as to following macro indexes like Pipe Logix relative to how it's no longer really tracking Tenaris's performance.

German, please.

Thank you, Michael, for the question.

It is in fact the case; inventories reflecting on average 5.5 months.

But when you come down to mix specifics, which we don't really talk publicly about it, you get to see precisely that view, that a lot more of low commodity welded imported pipes, which are not by and large shale quote-unquote product specific, if you will.

And that is creating some obvious opportunities for us, both in the form of premium connection products which are not widely available in the inventory, and to some, probably lesser, but to some extent, alloy material that is not widely available in the inventory as well.

And that it seems is somehow reflected with what you've seen on our sales when you compare second quarter to third quarter and the guidance we indicated on stable volume of sales into the fourth quarter.

Overall, it is in fact all associated.

As I was trying to say, we kind of positioned the Company not so fully exposed to the inventory dimension.

And that's how we (inaudible).

Can those markets really move in opposite directions for -- is there some point where perhaps the high-end does get dragged by perhaps excess inventories at the low-end?

Or is there a true disconnect and -- we're seeing bifurcation, for example, in land rigs and other segments of the market.

I'm just wondering if that's a trend that's actually happening in this market as well.

No, short answer, Mike, I think is no.

Overall dynamics of low-end versus the high-end behavior is fairly different in the US market.

Okay.

That's great.

Thanks, German.

Thank you.

Your next question is a follow-up question from the line of Ole Slorer from Morgan Stanley.

Thank you.

Yes, following up on Iraq, you moved your headquarters to the Middle East, and presumably there's some kind of business sense behind that too.

So assuming political stability, of course, which is a very big if when it comes to Iraq, what are your thoughts about the opportunity there?

Well, you're right.

Iraq's very important for us.

It represents now maybe around 25% of our sales in the Middle East.

It's not -- it's an area that is growing.

But anyway, I will ask Alejandro -- Alejandro is in Dubai at this moment -- if you can comment on perspectives for Iraq.

Yes.

Thank you, Paolo.

Hi, Ole.

As you said, for us it's very important what is going on in Iraq.

In fact, this week I'm staying here because it was ADIPEC Congress here in Abu Dhabi, and all the discussions were around the growth in UAE and the growth in Iraq.

As you know, in Iraq we are on the second phase or the second round where there are the definitions of the service companies that will accompany the major oil companies that are participating in the field.

And we expect that once these definitions are done, we will have a very good perspective of accompanying the service companies in the requirements of IPM in Iraq.

We expect a volume that will be growing in 2011.

And when it comes to the volume, what is the competitive landscape like there?

I imagine that if the Chinese mills can no longer sell to the US, so you're facing a lot of competition in Iraq.

Or how do you see your market share opportunity and type of products you'll sell going forward?

Well, in the case of Iraq you know that so far, the Chinese are not present, are not approved, mainly by the national oil company and then cannot be used by any of the players.

That's why even when there are operating Chinese companies, we are supplying the materials.

So in this regard we don't see for the time being competition coming from China.

Also if I may add, Ole, in Iraq, we have market share that is well above 50%.

We are the major player there.

We are very close there.

And all the contracts that the service company has tend to have delay penalties that are quite strong.

This has been the way the tender went.

So when they have delay penalty, they really like to have reliable supplier.

Reliability.

When the contract's so tight, the contract that the service company has in the -- the contract for the service company, the fact that there is absolute reliability on supply is a big differentiation against the Chinese supplier, even if the material is not always demanding.

In some cases we are selling API products there.

In a way, you're using the same strategy that you're using in Mexico where you are taking control of the whole supply chain, the logistics, everything.

Is that fair to think about it that way?

We would like, but I think it would not be possible to do it.

Security reasons and so on are making the situation on the ground in Iraq much more difficult.

So in the end, it will not be possible to do that.

We can support the oil company.

We can do a lot, and this will be recognized and will contribute to differentiation.

But in -- I don't think it will be possible for a while at least to have a full service position in Iraq.

What we can assure is to comply with time, quality and performance of our products, but this is a big differentiation.

My second question to German, pre-salt Brazil is, of course, getting a lot of focus on new technologies, new steel, new alloys, but what are your thoughts about pre-salt in other parts of the world, most notably Angola or Ghana or Guyana or Surinam?

There seems to be this big 2011 push all around the Atlantic rim for this type of an effort.

And is that an opportunity for you at any point over the next two years/three years?

Or how do you intend to position yourself if that's the case?

Well, Ole, I think this is an opportunity but I would like to ask Alejandro if -- Alejandro Lammertyn from Dubai if actually we see these technology developments for the pre-salt that could be applied in some of the deepwater developments worldwide.

Yes, and particularly also -- given VAM's strong position with their technology in Brazil, do they have a lock from that market, or do you have other competing products that you can bring to market?

I frankly think that in this segment we probably have a very strong position and in all of the products that solve the technological challenge of these kinds of ways.

But anyway, Alejandro, could you comment on where the perspective could be interesting for us.

Well, part of our move to the eastern hemisphere is also to concentrate our efforts in Africa.

We have been supplying in West Africa a lot on the pipe lines deep offshore, and now as you've seen what we are doing in Equatorial Guinea, we are setting up a base there, and we are setting up the infrastructure to serve the market.

We know that there are similar characteristics on the Brazilian pre-salt and we are working there.

Thank you very much.

Ladies and gentlemen, this concludes our question and answer session.

I would now like to hand the call over to Mr.

Giovanni Sardagna for closing remarks.

Well, just thank you all for joining us to the conference call and see you next quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.

Have a great day.