June 10, 2014 / 4:31 PM / 4 years ago

UPDATE 1-Vallourec warns on profit as Petrobras cuts pipe stocks

(Adds chairman comment, Petrobras background, share price)

By Andrew Callus

PARIS, June 10 (Reuters) - Steel pipes maker Vallourec warned on Tuesday that core profit would drop 10 percent this year as customers - mainly Brazilian state oil company Petrobras - run down inventories to save money.

Petrobras alone will account for some 60 million euros ($82 million) of the slide in earnings before interest, tax, depreciation and amortisation (EBITDA), which Chairman Philippe Crouzet told reporters would amount to between 80 and 90 million. EBITDA was 920 million euros last year.

Crouzet said it would take Petrobras until about the end of the year to run its pipe inventories down to nothing.

He said Petrobras was still committed to all high-value deepwater oil projects and that the impact of the inventory run-down would be a “one-off” for Vallourec.

The French company said that throughout Europe, Asia the Middle East and Africa, the level of orders had also fallen as other exploration and production companies adjusted their inventories and delayed some tenders for premium products.

“This will impact deliveries through the end of the year and in the first half of 2015,” Vallourec said.

To mitigate the impact of both factors, Vallourec said in a statement it would cut capital spending for this year by some 100 million euros from an initially planned 500 million.

“The group is facing a more challenging environment mainly due to temporary adjustments by selected large customers, and has taken immediate measures to adjust to this new situation,” Crouzet said in a statement.

“Management remains convinced of the long-term attractiveness of the global oil and gas end markets the group serves.”

Vallourec depends on Brazil for about 25 percent of its sales, on Brazilian oil and gas for about 12.5 percent, and on Petrobras itself for between 5 and 10 percent.

Petrobras is undertaking a $221 billion five-year oil and gas capital investment programme but is struggling with high debts from the spending and a lack of cash flow as it waits for new production to come on stream.

Also weighing on its finances are the costs of state-imposed fuel price controls under the government of President Dilma Rousseff - a former Petrobras chairwoman - and a weakened real currency.

About a month ago, Petrobras pledged to keep investment at the same levels through 2014 and 2015 but to seek cost savings at the same time.

“Recently they added to that this plan concerning their stocks,” said Crouzet. “They appear to intend to function with minimum stocks.”

Vallourec shares closed down 1.6 percent at 39.445 euros ahead of the announcement on Tuesday. ($1 = 0.7345 Euros) (Editing by James Regan)

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