OREANDA-NEWS. April 23, 2010. The following contains forward looking statements concerning future events. These forward looking statements are based on current information and assumptions of TMK management concerning known and unknown risks and uncertainties.


OAO TMK (“TMK” or “the Company”), one of the world’s leading producers of pipes for the oil and gas industry, announces its IFRS audited consolidated results for the full year 2009.
2009 Highlights

Financials:

• Revenue fell by 39.2% to USD 3,461.0 million as a result of a severe demand contraction across all key markets and unfavourable pricing in seamless and welded pipe segments.

• Gross profit amounted to USD 556.4 million, a decline of 61.3% compared to 2008 as a result of lower capacity utilization rates, lower volumes and prices for pipe products decreasing more than costs. Adjusted EBITDA decreased by 68.7% to USD 328.1 million.

• Net Debt, taking into account liability under call/put option for the remaining 49% of NS Group as at December 31, 2008, remained relatively flat year-on-year and amounted to USD 3,503.6 million as at December 31, 2009.

• The share of short-term loans and borrowings substantially decreased from 69.9% as of December 31, 2008 to 41.4% as of December 31, 2009. Efforts to lower TMK’s cost of debt in the second half of the year brought the average nominal rate to 10.7% as of December 31, 2009 as compared to 12.3% as of June 30, 2009.

Sales Volumes:

• Total pipe sales volumes decreased by 14.2% to 2,769.2 thousand tonnes, including 1,649.2 thousand tonnes of seamless pipes. Sales to customers outside Russia amounted to 916.1 thousand tonnes.

• Seamless pipe sales volumes decreased by 16.7% compared to the previous year. This decline in sales volumes was primarily driven by the contraction in demand in North America and the Middle East and the weak demand for industrial grades.

• Welded pipe sales volumes decreased by 10.2% to 1,120 thousand tonnes from weak demand for oil and gas and industrial welded products. However, large-diameter pipe sales grew by 19.8%, exceeding budget projections and mitigating the decline in welded products.

Seamless and welded OCTG sales volumes decreased by 15.6% to 1,037.2 thousand tonnes with demand from the Russian oil and gas sector lessening the effects of the declines observed in other markets.

Changes in the Group Structure:

• On January 30, 2009, ТМК exercised its call option to acquire the remaining 49% of NS Group Inc. shares from Evraz Group S.A. in accordance with the “Call/Put” option agreement concluded in March, 2008.

• In December 2009, TMK established ООО ТМК–INOX to enhance its premium business segments. This new subsidiary manages the production and sales of stainless steel pipes.

• During 2009 ТМК acquired an additional 1.21% of Sinarsky shares, 0.69% of Seversky shares, 0.12% of TAGMET shares and 0.51% of TMK-Resita shares. As of December 31, 2009, TMK’s effective equity share in Sinarsky, Seversky, TAGMET and TMK-Resita stood at 94.16%, 94.22%, 96.06% and 100.00%, respectively.

2010 Outlook


On the back of the current positive economic trends observed across the Company’s key markets and trends in energy prices, the Company expects pipe demand to continue to recover in 2010. The first quarter shipments, which grew by 60% year-on-year, highlight the improvements seen on both the Russian and the US markets. Given the current trends observed in the industry, TMK maintains its expectations of a 20% y-o-y increase in shipment volumes in 2010 and expects to sustain capacity utilization in the production of oil and gas pipes above 70% throughout the year.
Russia once again demonstrates moderate but steady growth for OCTG and seamless line pipe. Given this year’s favourable oil price outlook, Russian oil companies have considerably increased capital expenditure budgets. In response to increases in raw material prices and the higher utilization rates, prices across all small and medium-diameter oil and gas pipe segments will be increased from the second quarter by approximately 10-15% in Russia. Prices in the US have been following the US OCTG market trends.

With the continuation of such pipeline projects as the Bovanenkovo-Ukhta and Sakhalin-Khabarovsk-Vladivostok gas systems and the BТS-2 and ESPO-2 oil pipelines, TMK expects to sustain the 2009 fourth quarter large-diameter performance throughout 2010.
Despite the current uncertainties in natural gas prices in the US, the drilling activity remains strong and disproportionately driven by unconventional drilling. Demand for premium products to meet the requirements of these unconventional plays has kept its steady increase of the last months. The increase in demand and the shale gas success enjoyed by ULTRA premium products has prompted TMK IPSCO to build a new premium threading facility. The new facility, located in Brookfield, Ohio, will have an annual capacity of 100 thousand tonnes per year and is yet another example of our commitment to support our customers as they move to more complex and demanding operational environments. Together with Russia and the CIS our premium connections business is expected to grow globally by more than 60%.

As previously announced, the Company is also going ahead with the upgrade of Volzhsky’s continuous seamless rolling mill. The investments will provide Volzhsky with an additional capacity of 300 thousand tonnes per year of seamless pipe. The new capacity is scheduled to come online and begin ramp-up in July 2010.

TMK expects the demand for industrial pipes to improve in the second quarter of 2010, as a result of a general recovery in the economy and the re-emergence of demand. Pipe prices in this market segment are expected to correlate with market conditions.

TMK estimates that according to management reporting, revenue for the first quarter of 2010 came in at around USD 1,300 million, while EBITDA exceeded USD 200 million. Subject to raw material and energy pricing dynamics we expect the positive trends of the first quarter to continue throughout the year.
2009 Market Overview

TMK is a leading global pipe producer and the number one Russian supplier of steel pipe products to the energy industry with approximately 69% of the Russian seamless OCTG market in 2009. Globally, the Company finished 2009 with an estimated 13% market share in the seamless OCTG segment, its core business.

Although the global economic crisis led to a significant contraction of the Russian steel pipe market, TMK succeeded in increasing its Russian market share from 27.4% in 2008 to 29.8% in 2009. TMK’s share of the Russian seamless pipe market, the Company’s key business, amounted to 56.6% and its share of the seamless OCTG market constituted 69%. The Russian market is the Company’s main market and represented 66.9% of total sales volumes in 2009. Throughout the year, the Russian OCTG market proved to be the most resilient for TMK. Despite the cuts in E&P spending by Russian oil and gas majors, OCTG demand remained stronger than in any other markets due to the high tubing pipe consumption rates of the Russian oil production environment.

Following a dismal first half of 2009, the aggressive revival of the Russian large-diameter (LD) pipe market in the second half of the year remained a key volumes driver for TMK in 2009. While first quarter volumes were practically immaterial, demand for LD pipe began trickling back in the second quarter of the year. The successful ramp-up of Volzhsky’s longitudinal welded line allowed TMK to take full advantage of the market conditions in the second half of the year as fourth quarter volumes exceeded the most optimistic forecasts. The recovery in the LD market was driven by the construction of major Gazprom and Transneft pipeline projects such as the Sakhalin-Khabarovsk-Vladivostok, Eastern Siberia-Pacific Ocean (ESPO) and Baltic Pipeline System (BTS).

The North American pipe market reacted swiftly to the economic crisis as drilling activity practically came to a standstill early in the first quarter, only to see signs of recovery late in the year. The Company estimates that the US oil and gas pipe market contracted more than 40% year-on-year. As US natural gas prices declined throughout the first half of the year, operators shut down uneconomical drilling programs, preferring to keep activity going in areas demonstrating higher flow rates, such as gas shale plays, where hedging contracts and leasing obligations kept drilling strong. As the US rig count decreased substantially in the first half of the year, reaching a low of 876 rigs in early June (Baker Hughes), the levels of gas in storage continued to increase from a combination of lower gas demand from the industrial, commercial and residential sectors and the higher than average gas well flow rates from the unconventional plays. Early in the fourth quarter, a time when energy demand is traditionally at its highest, both rig count and gas prices started climbing back from their lows. Although encouraging, these levels were still well below historically normalized levels. While the fourth quarter improvements in rig count and gas prices, helped by abnormal cold weather patterns, permitted TMK IPSCO to significantly increase monthly production volumes, prices for pipe products remained depressed by the amount of pipe supply in the system, particularly bogged down by low priced imports from China.

Starting in April 2009, in their efforts to address and curtail the flow of low cost imported pipe material into the United States, TMK IPSCO and other US domestic steel pipe producers filed a series of trade cases against the unfair imports of pipe products from the People’s Republic of China, including OCTG, drill pipe and certain seamless carbon and alloy steel standard, line, and pressure pipe. Already from the second half of 2009, in anticipation of the final rulings, Chinese OCTG imports had practically vanished from the market. As demand started picking up late in the year, the void left by Chinese imports allowed a modest increase in shipments from other countries, including from foreign subsidiaries of domestic players, and provided additional rationale behind certain announced production expansions. Final OCTG anti-dumping duties are expected to be imposed in the second quarter of 2010.

The total share of pipe products sold outside Russia represented 33.1% of the Company’s total sales volumes as compared to 37.2% in 2008. ТМК exported a total of 443.4 thousand tonnes of steel pipe products from its Russian plants.

As previously stated, the Company observed increased competition in its export markets, mainly the Middle East and North Africa, as lower-grade pipe products were redirected to these unprotected markets following the collapse of the US market and the threat of trade barriers in North America.