OREANDA-NEWS. February 23, 2016. Fitch Ratings has affirmed the Foreign Currency Long-Term Issuer Default Rating (IDR) for Tenaris S.A.'s at 'A-'. The Rating Outlook is Stable.

Tenaris' rating is driven by its conservative financial profile, geographically diversified revenues and strong business position, which has put the company in a solid position to withstand the current downturn in the global oil & gas industry.

The company's production facilities, revenues and EBITDA are geographically well diversified, reducing its exposure to any one single market. For the first nine months of 2015, the company's largest markets for its welded and seamless tubes were: North America (including Mexico) which accounted for 41% of tubes revenues, followed by South America (29%), the Middle East / Africa (16%), Europe (11%) and the Far East and Oceania (4%). This shift away from North America (sales as of September 2014 were approximately 47%) reflects the company's ability to shift its product offerings towards different geographies depending on their respective demand characteristics.

KEY RATING DRIVERS

Conservative Track Record Prepares Tenaris for Downturn: The company has a strong track record for maintaining a conservative capital structure. Since 2006, Tenaris' total debt to EBITDA ratio averaged under 1.0x, while its Net Debt has averaged below 0.5x. Tenaris has had a negative net debt figure since 2013, which is especially important given the current slowdown in the global oil & gas business. Tenaris plans to use its liquidity and capital resources to provide adequate flexibility when managing its planned capital spending programs, to service its debt, and to address short-term changes in business conditions.

Global Industry Decline Hurts Financial Performance: Tenaris was able to successfully adapt its capital structure when OCTG demand fell in 2009 and 2010 and maintained its low leverage ratios and strong credit profile. Together with further restructuring moves in 2014-2015, the company was prepared to sustain itself during the current downturn. After a strong performance in 2012, the company has seen slower premium OCTG demand, fierce competition in the low-end market segment, and now a large step-back in oil & gas industry spending.

Since the downturn in oil & gas prices began in the second half of 2014, net sales of tubular products have declined dramatically with 3Q15 sales of tubes 57% lower in North America and 16% globally. The company's adjusted EBITDA (adjusted for severance charges and write-downs) in the latest-12-months (LTM) September 2015 period was \\$1.9 billion, which is down 30% versus 2014 EBITDA of \\$2.7 billion. Fitch is projecting that Tenaris will generate EBITDA of approximately \\$1.3 billion in both 2015 and 2016, which is nearly half its annual EBITDA generation in 2013 - 2014. The 2016 forecast may prove optimistic, as it is reliant on the assumption that oil prices and drilling activity will rebound in the second half of 2016. If this assumption does to not materialize, Fitch would have to step back its 2016 forecast. In Fitch's stress case scenario, which assumes that prices and drilling activity does not recover, Fitch is projecting 2016 EBITDA of closer to \\$1 billion. However, even at these stress case levels, the company will retain among the highest margins in the oil services industry.

Successful Cash Preservation is Key Strategy: With its leaner cost structure, following the company's corporate restructuring efforts in 2014 and 2015, Fitch believes the Tenaris can maintain a large cash cushion of at least \\$2 billion in 2016. This means that the company should maintain a negative net debt figure. Fitch's Base Case assumes the company can maintain an EBITDA margin of 18% - 19% in 2016, with a recovery coming in the long-term as E&P prices recover over the medium term. Fitch's Base Case Oil & Gas price deck assumes West Texas Intermediate (WTI) average prices of \\$45/bbl in 2016, \\$55/bbl in 2017, \\$60/bbl in 2018 and \\$65/bbl in the long-term time horizon.

Fitch anticipates a gradual recovery in EBITDA generation beginning in 2016 as hydrocarbon prices slowly recover towards a long-term price of \\$65/bbl. Tenaris should be able to position itself to capture incremental market share during this recovery as its Bay City facility comes on-line in 2017. Long-term, Fitch is projecting that Tenaris' margins will return to the 23% level, with EBITDA generation in the USD2 billion level. These new projections are below prior expectations that margins would be in the mid-20% level, as reductions in the cost structure of the oil & gas industry are expected to reflect lower sustained long-term hydrocarbon prices.

RATING SENSITIVITIES

Negative: Future developments that could, individually or collectively, lead to a negative outlook or negative rating actions in the short- to medium-term:

--A prolonged downturn in the oil & gas industry that leads to a weakening of the company's capital structure and liquidity position, resulting in net debt to EBITDA exceeding 1.5x on a sustained basis;
--The continued deterioration of the credit quality of Tenaris' customer base in light of depressed hydrocarbon prices;
--An increase in dividend flows, on a relative and absolute basis, out of the company during times of decreased cash flow generation;
--A deviation from the company's conservative financial strategy.

Positive: A positive ratings action is unlikely in the near future, given expected continued pressure on the Oil & Gas industry at least through the end of 2016. The recovery of EBITDA generation to 2013-2014 levels, combined with the completion of the company's major capex projects would be seen positively.

LIQUIDITY AND DEBT STRUCTURE

Strong Capital Structure and Liquidity: For the LTM ending Sept. 30, 2015, the company had a total debt to EBITDA ratio of 0.5x and net debt to EBITDA ratio of -1.0x. Fitch expects low leverage levels to continue going forward with the company's total debt to EBITDA ratio remaining under 1.0x through 2019. FFO adjusted leverage currently stands at 1.0x and should remain at or near that level through 2019. Tenaris held cash and cash equivalents of USD2.8 billion as of Sept. 30, 2015, an increase on USD2.3 billion and USD1.8 billion at YE14 and YE13 respectively. The company's current cash holdings are 3x its short-term financial obligations. Fitch excludes \\$281 million of bonds and other fixed income investments designated as held to maturity and measured at amortized cost from its definition of cash and equivalents. Adding these short-term investments to Fitch's cash estimate, consistent with the company's view, would yield USD3.1 billion in cash and equivalents for Tenaris.

KEY ASSUMPTIONS
--Fitch's Base Case Oil & Gas price deck assumes West Texas Intermediate (WTI) average prices of \\$45/bbl in 2016, \\$55/bbl in 2017, \\$60/bbl in 2018 and \\$65/bbl in the long-term time horizon starting in 2019;
--EBITDA margins in the 18%-19% level during 2015 - 2016, increasing to the low-20% level beginning with a recovery of global hydrocarbon prices;
--The company to maintain cash cushions of at least \\$2 billion over the 2015 - 2016 time horizon;
--Total adjusted leverage under 1x in 2015 - 2018 and negative net debt during this same time period.

Fitch affirms the following ratings:

Tenaris S.A.
--Foreign currency Long Term IDR at 'A-';

The Rating Outlook is Stable.