Troubled steel tube maker Vallourec has agreed a financial restructuring with its main creditors, allowing it to proceed with a strategic plan as it glimpses a slow rebound in demand from the oil and gas sectors following the oil market and COVID-19 crises.
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"This agreement meets the company's objectives to rebalance its capital structure by reducing its debt and securing the necessary liquidity that will enable the company to implement its strategic plan in a volatile market environment," the tubemaker, with production facilities in locations including France, Brazil, the Middle East and the US, said in a Feb. 3 statement.
The Agreement in Principle, to be finalized in H1 2021, is with a group of lenders representing 65.1% of the total amount of the company's financial debt, including commercial banks and investment funds.
It involves a EUR1.8 billion ($2.16 billion) debt reduction via a shareholders' rights issue, creditors taking equity stakes and a write-off by commercial banks of EUR169 million in debt.
Investment funds Apollo Global Management, Inc., holding between 23.2% and 29.3% of the share capital, and Strategic Value Partners, LLC (SVPGlobal), holding between 9.7% and 12.3% of the share capital, will become Vallourec's two largest shareholders.
Steelmaker Nippon Steel will reduce its holding in Vallourec's share capital to 3.4% from the current 14.56% and will also sell back to Vallourec the 15.4% stake held by itself and Sumitomo Corp. in Brazilian joint venture Vallourec Soluções Tubulares do Brasil (VSB). Termination of this joint venture will end the supply agreement between Nippon Steel and VSB for a volume of 300,000 mt/year of pipes manufactured at the Jeceaba site in Brazil, which will gradually decrease until mid-2022.
Vallourec estimated its sales revenue at EUR3.24 billion in 2020, down from EUR4.17 billion in 2019.
EBITDA fell to an estimated EUR258 million, from EUR347 million.
Pipes still needed despite energy transition
Vallourec said in a presentation that while the energy sector is transitioning, oil and gas activity is still needed in the medium term.
"After the sharp fall in 2020, the consensus is that oil demand will rebound to approximately 100 mbpd and remain at this level in the medium term," the company said.
This will require E&P capex and tubes supply: however, market shares of production zones will be different from the pre-crisis, with the Middle-East and Offshore Brazil being winning regions while US Unconventional should remain below 2018-2019 levels, it said.
In the North American market, drilling activity is expected to restart progressively over coming years, but not to return to 2019 levels, while moderate price recovery is seen from 2021. A welded pipes capacity reduction is seen positively impacting the company's seamless market share, it said.
Europe, the Middle East and Africa are seen strongly impacted from the crisis in 2020-2021, with market recovery in volume expected to take place as from 2022 especially in winning regions (Middle-East and East-Africa), and intense competition keeping pressure on prices, Vallourec said.
Brazil industry, iron ore mine
In its general industrial sales sector, Vallourec forecasts that Brazilian industry will recover moderately, with long-term growth at a lower pace than pre-crisis expectations.
The company is expanding capacity at its iron ore mine in Minas Gerais state, Brazil, by 3 million mt/year as from 2022, involving construction of a new ore treatment line, budgeted at EUR60 million, already underway, and with a payback estimated in 2.5 years, it said. This will expand production at the mine to 8.7 million mt/year. The mine, which is highly profitable, sells most of its production to the local market and supplies Vallourec's blast furnace and pellet plant, it said.