(The following statement was released by the rating agency)
-- Vallourec , a France-based producer of premium seamless steel pipes for the oil and gas industry, benefits from high profitability and strong market position, in our view. The company's major expansion in Brazil and the U.S. should boost its EBITDA from 2013.
-- Vallourec has demonstrated a conservative financial policy, funding large investments while keeping net debt low to moderate.
-- We are assigning our 'BBB+/A-2' long- and short-term corporate credit ratings to the company.
-- The stable outlook reflects our opinion that Vallourec will maintain its conservative financial policy and supportive liquidity.
Standard & Poor's Rating Services said today it assigned 'BBB+/A-2' long- and short-term corporate credit ratings to France-based seamless steel tube producer Vallourec. The outlook is stable.
The ratings reflect our view of Vallourec's business risk profile at the high end of the "satisfactory" category and its financial risk profile as "modest."
Vallourec reported sales of EUR4.5 billion in 2010, with 52% coming from the oil and gas industry, 17% from power generation, 8% from petrochemicals, 7% from transportation, and the remaining 15% from construction and others. In the first nine months of 2011, EBITDA rose 3% to around EUR0.7 billion, and the EBITDA margin stood at 18%.
Adjusted debt was EUR1.4 billion on Sept. 30, 2011, up from EUR0.6 billion at the end of 2010, with a moderate net financial debt of EUR1.1 billion.
Vallourec's business risk profile is supported by its strong position in the premium seamless pipes and joints market for oil, gas and energy production, where most of its profits come from. The premium pipes and connections market, which accounts for about 55% of Vallourec's revenues, is dominated by three companies: Tenaris (not rated), Vallourec, and Sumitomo Metals (not rated). This market benefits from high barriers to entry, in our view, as product failures can lead to huge losses.
Another of Vallourec's key strengths is its high level of steel production, which supplies 80% of its needs. Its core Brazilian plants are fully integrated through the ownership of iron ore mines and forests for charcoal production. These factors underpin Vallourec's strong profitability, as its favorable and resilient EBITDA generation and margin across cycles and during the 2008-2009 crisis showed.
We assess sales by country, customer and asset diversification as favorable.
Vallourec is well-positioned in key growth markets, like oil and gas and power generation, in our view. Growth prospects in oil and gas should remain solid given more complex and increasing hydrocarbon production in the world, especially off-shore. Vallourec has major ongoing expansion projects, notably in Brazil, the U.S., and China. While this expansion is not likely to boost EBITDA in 2012, given the ramp-up phase, it should be a significant spur by 2013-2014, leading to EBITDA above EUR1.3 billion.
The stable outlook reflects our opinion that Vallourec will maintain a conservative financial policy, as demonstrated by moderate net debt, ample covenant leeway, and robust liquidity. It also factors in continued high capex in the oil and gas industry, amid strong oil prices. The rating exhibits a fair degree of financial headroom. Vallourec's adjusted FFO to debt stood at around 48% on Sept. 30, 2011, compared with at least 40% that we view as commensurate with the rating.
We might consider a negative rating action if we saw a significant and lasting drop in cash flows, or if adjusted FFO to debt fell substantially below 35%-40% in a cyclical downturn without near-term recovery prospects. We currently view this scenario as unlikely.
We might consider a positive rating action if we saw, with a strong visibility, largely positive free cash flow generation in 2013 after the large investment phase. A positive action would also hinge on continued commitment to maintain a conservative financial policy.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology and Assumptions: Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- General: 2008 Corporate Criteria: Analytical Methodology, Apr. 15, 2008