TMK Revenue at $853m in 2Q 2016
2Q and 1H 2016 Review
2Q 2016 vs. 1Q 2016
In 2Q 2016, the Russian pipe market contracted by 8% compared to the previous quarter, mostly due to weaker LDP demand as a result of lower purchasing activity by Gazprom. The OCTG market decreased by 16% quarter-on-quarter, predominantly due to the structural changes in OCTG demand, weighted more towards smaller diameter pipes specifically supplied for horizontal drilling in existing vertical wells.
In the US, the average number of rigs in 2Q 2016 fell by 24% compared to the prior quarter (Baker Hughes). OCTG shipments decreased by 43% quarter-on-quarter (Preston Pipe Report). At the same time, OCTG inventories increased to an average 10.8 months compared to 9.5 in the previous quarter.
In 2Q 2016, the European pipe market remained nearly unchanged compared to the previous quarter, with low pipe consumption, strong competition and high import volumes, which continued to put pressure on prices.
1H 2016 vs. 1H 2015
The Russian pipe market decreased by 6% year-on-year, due to weaker LDP demand in 1H 2016 compared to the record high volumes in 1H 2015. OCTG consumption increased by 6% compared to the same period of 2015, supported by the growth of drilling activity in Russia by 17% year-on-year.
In the US, the average number of rigs in 1H 2016 fell by 57% compared to 1H 2015 (Baker Hughes), following a continued decline in oil prices. OCTG shipments decreased by 66% year-on-year (Preston Pipe Report). OCTG inventories increased to an average 10.2 months compared to 8.2 in 1H 2015.
There were no major changes in the European market in 1H 2016 compared to 1H 2015.
2Q 2016 vs. 1Q 2016
The Company’s strong performance in 2Q 2016 reflected stable results at the Russian division and improved conditions at the American division as well as a positive impact of currency translation, which resulted from rouble appreciation against the US dollar.
Revenue increased by $91 million compared to 1Q 2016, mostly due to a positive effect of currency translation.
Adjusted EBITDA grew by $23 million compared to the previous quarter, largely due to a positive effect of currency translation at the Russian division and lower selling expenses. The adjusted EBITDA margin improved from 16% in 1Q 2016 to 17% in 2Q 2016.
In 2Q 2016, net profit was $57 million compared to $14 million in the previous quarter, as a result of stronger results overall.
Total debt decreased marginally from $2,838 million as at March 31, 2016, to 2,829 million as at June 30, 2016.
Net debt decreased by $110 million compared to March 31, 2016, and amounted to $2,497 million as at June 30, 2016. Net repayment of borrowings amounted to $55 million in 2Q 2016 compared to $37 million in the previous quarter.
1H 2016 vs. 1H 2015
For 1H 2016, revenue fell by $682 million year-on-year, mostly due to a negative effect of currency translation and weaker sales at the American division, as a result of falling US drilling activity and low E&P spending.
The same factors affected adjusted EBITDA for 1H 2016, which fell by $93 million compared to the same period of last year. The adjusted EBITDA margin remained flat at 16%.
Total debt increased from $2,801 million as at December 31, 2015 to $2,829 million as at June 30, 2016, as a result of rouble appreciation against the US dollar. The weighted average nominal interest rate increased by 3 bps to 9.09% as at the end of the reported period.
Net debt remained marginally flat as at June 30, 2016 compared to December 31, 2015, and amounted to $2,497 million. Net repayment of borrowings amounted to $91 million for 1H 2016 compared to $228 million for 1H 2015.
Capex for 1H 2016 was reduced to $63 million, compared with $98 million for 1H 2015.
In Russia, TMK anticipates 3Q 2016 sales to be lower compared to 2Q 2016, mostly due to seasonally weaker OCTG demand and pre-planned maintenance works at TMK’s Russian plants. In 4Q 2016, the Company expects seasonally strong OCTG demand as the Russian oil and gas majors begin to stock up on pipes. Margins at the Russian division are expected to be similar to FY 2015, supported by strong OCTG demand and TMK’s ongoing cost-cutting program.
In the US, TMK expects a moderate increase in drilling activity during the second half of the year. The Company anticipates demand for new production and shipments to be somewhat dampened by the large distributor inventories built up during 15 months’ worth of declining rig count. As such, TMK expects demand from oil and gas companies to continue to improve in the fourth quarter of the year, to coincide with the start of a gradual recovery in prices.
Industrial pipe consumption in the European pipe market will somewhat decline in 3Q 2016, affected by the holiday season and a seasonal slowdown of business activity, while prices are expected to remain nearly flat quarter-on-quarter. In 4Q 2016, the Company expects an improvement in its sales and financial performance at the European division.
Overall, TMK anticipates an improved EBITDA performance in 2H 2016 driven by a gradual improvement at the American division and stable results at the Russian division. The Company expects the FY 2016 EBITDA margin to remain flat compared to FY 2015.