Vallourec - on value and recent strength on iron ore

All,

We have updated our model on Vallourec here.

We continue to monitor the situation and have been surprised by the recent strength in Vallourec bonds. Yes, we have seen a steady recovery in oil prices to just above $50/bbl and recovery in peer equity valuations have supported bond prices, raising them to mid 70's, we continue to struggle to project future recovery/cashflow to justify current valuations.

We have forecast the business in analogy with the 2015-18 oil slump, with some adjustments, and under various scenarios, we are struggling to create a defensible business case for any leverage to which we would want to be exposed. We acknowledge that the upcoming cycle is going to differ from 2014-18 period given we are starting from a lower base, but given the level of restructuring already undertaken at Vallourec, there is limited scope for further cost savings throughout the Company.

The recent market's bullish view on Vallourec bonds due to iron ore and Vallourec's vertical integration is overdone in our view. Iron ore 30% increase Q3 over Q2 2020, has limited impact on actual Vallourec numbers. South America revenue is up €20m Q3 over Q2, but this also coincided with an underlying increase in the Oil & Gas segment due to offshore deliveries. Moreover, we are reluctant to extrapolate earnings at current market prices given the volatility of the commodity and unknown share of sales at spot prices.

Happy to discuss further,

Tomás
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E: tmannion@sarria.co.uk
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