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Russia's TMK prepares IPO for US division

The pipeline maker is seeking to capitalise on a profit recovery in its North American operations, driven by the upturn in the shale sector

TMK, the world's second-largest maker of steel pipes for the oil and gas industry, is considering an initial public offering (IPO) of its US division of its assets.

Russian billionaire Dmitry Pumpyansky, who controls TMK, told investors at a capital markets day in London in late October that he isn't ruling out a listing or a sale, as the company continues to deleverage.

The US unit, TMK IPSCO, began contributing to earnings before interest, tax, depreciation and amortisation (Ebitda) in the first quarter of this year after seven quarters in the red, helped by a strong recovery in shale drilling in North America. The US division, which saw its earnings double in the second quarter, is helping to compensate for a weaker performance by the core Russia operation.

"While the company considers different options, it is not currently planning to sell either production assets or a controlling stake in TMK IPSCO," Vladimir Shmatovich, TMK's vice president for strategy and business development, told Petroleum Economist.

TMK expects the US business will be running at full capacity next year, compared with between 50% and 95% now in some of the divisions. ТМК IPSCO, which was acquired in 2008, is worth around $1bn and comprises 10 plants in the US and two in Canada.

The company's fortunes were boosted by a rise in the US land rig count, which more than doubled to 940 rigs in September 2017 from 404 rigs in May 2016. The number of rigs used for horizontal drilling also continued to increase.

In Russia, Shmatovich said, development drilling activity is strong and continues to grow despite the Kremlin's ongoing cooperation with Opec to cut oil output.

"The deal is being observed by all the parties and it's good for oil price stabilisation and modest growth," said Shmatovich. "Which is positive for us because it opens up prospects for drilling, both in existing oilfields and maybe in new fields." Shmatovich dismisses concerns that an extension of the Opec deal will dampen drilling activity.

$1bn - TMK IPSCO's estimated worth

He added: "We are seeing more and more vertical and horizontal wells in Russia, with growth of these wells increasing in Russia four times over the past few years. More high-end pipes are needed for horizontal drilling, which is our main focus."

In the second quarter during the start of the drilling season, TMK reported a 23% rise in drilling activity compared to the previous quarter, while the share of horizontal drilling soared by 40%.

Setting out strategic targets for the next five years, Shmatovich said TMK wants to consolidate its position in oil country tubular goods (OCTG) and line pipe markets, reduce leverage and increase cashflow by optimising assets.

A key focus for management has been developing strategic partnerships with major customers such as Rosneft and Gazprom. In June this year, TMK and oil giant Rosneft signed a five-year contract for the supply of more than 3.5m tonnes of casing and tubing pipes. Shmatovich said the $3.5bn contract—which will run for five years—is "unprecedented in investment history" and "ensures our leadership" for that time period.

"It helps us hedge against a steel price increase," he said. "This will represent about 50-60% of our Russian OCTG capacity, which helps us to overcome volatility in commodity prices."

But analysts are warning that increasing global and domestic steel prices may hit the company's profitability over the next year.

"Domestic scrap prices increased 44% year-on-year on our estimates, which is inevitably going to affect TMK's profitability for the period," said Dmitry Loukashov, senior energy analyst at investment bank VTB Capital. "Increased demand may offset the profitability squeeze due to a rise in steel prices."

Demand for large-diameter longitudinal pipes (LDPs) amounts to 1.9m tonnes due to Gazprom's need to build major pipelines, such as the Power of Siberia, and maintenance requirements by pipeline operator Transneft.

"This year and last year were not the best years for LDPs but there were some improvements in the third quarter and this improvement is continuing," Shmatovich said. "This business has relatively low costs and very good potential for survival."

TMK, which hasn't been subjected to sanctions, is continuing its strategy of deleveraging by selling small "non-core" assets. Its net debt in January-June 2017 amounted to $2.6bn.

Shmatovich is sanguine about the effect of sanctions on its core Russian clients, who have been restricted in raising equity and debt on international capital markets.

"I don't think Russian oil companies have experienced any problems with funding," he said. "Based on our talks with investors, I don't think they seem scared but maybe there is a premium they expect from Russia due to the political situation.

TMK raised $170m in a secondary public offering in February last year and has no current plans to tap the markets.

"International investors accounted for 80% of the book and we think that international investors are quite agnostic about sanctions although they might expect a slight premium," said Shmatovich.

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