Drilling Down the Outlook for Oil and Gas Pipes
Supply trends are worrisome despite robust demand; narrow-moat producers are the most likely to benefit.
OCTG --oil country tubular goods--refers to the steel tubes and casings used primarily for drilling and producing oil and gas. This niche market has seen a stronger recovery since the 2009 trough than any other steel-consuming sector, particularly in North America, which consumes 40% of all OCTG used globally. The rig count, an important indicator of OCTG demand, has pedaled back in recent months just when the domestic supply of OCTG is poised to accelerate. We have examined the changing landscape and believe the market is still very promising for producers of premium OCTG, which are highly specialized for drilling and extraction in harsh conditions. A consolidated market and the specialized nature of these products give structural competitive advantages to the key players, namely Vallourec (VK) and Tenaris (TS).
What Is the Outlook for OCTG Consumption?
OCTG consumption in the United States is already back to prerecession levels of more than 6 million tons per year with the rig count in the 1,700-2,000 range for the past two years after bottoming below 900 in 2009. We are unlikely to see a higher average rig count in 2013 than in 2012 given exploration and production budget uncertainty, but this should be somewhat offset by greater E&P spending elsewhere, with Vallourec projecting a 9% increase in oil and gas exploration outside North America in 2013. Also, the composition of oil and gas rigs and what it means for OCTG consumption is changing.
Bridget Freas does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.