Post on 26-Dec-2021
TMK CAPITAL MARKETS DAY
LondonOctober 17, 2016
Disclaimer
No representation or warranty (express or implied) is made as to, and no reliance should be placed on,
the fairness, accuracy or completeness of the information contained herein and, accordingly, none of the
Company, or any of its shareholders or subsidiaries or any of such person's officers or employees accepts
any liability whatsoever arising directly or indirectly from the use of this presentation.
This presentation contains certain forward-looking statements that involve known and unknown risks,
uncertainties and other factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed
or implied by such forward-looking statements. PAO TMK does not undertake any responsibility to
update these forward-looking statements, whether as a result of new information, future events or
otherwise.
This presentation contains statistics and other data on PAO TMK’s industry, including market share
information, that have been derived from both third party sources and from internal sources. Market
statistics and industry data are subject to uncertainty and are not necessarily reflective of market
conditions. Market statistics and industry data that are derived from third party sources have not been
independently verified by PAO TMK. Market statistics and industry data that have been derived in whole
or in part from internal sources have not been verified by third party sources and PAO TMK cannot
guarantee that a third party would obtain or generate the same results.
2
Russian Market Update –Sustainable Demand and Complex Opportunities
Sergey Alekseev Director for Marketing
Executive Summary
Russian oil production is increasing, up 1.9% YoY in Sep 2016, with brokers predicting continued growth
Field-level activity is strong and growing. Drilling is up by 16% YoY in 1H 2016, led by Rosneft (+50% YoY) – total drilling in Russia may grow by 12% YoY in 2016
In 2015 and 2016 Russia was the only region globally to maintain healthy drilling activity and stable OCTG demand
Russian tubular market is becoming more and more self-sufficient, dominated by local integrated producers
Russian seamless OCTG market increased by 3% YoY in 9M 2016, with TMK remaining a leader in production
Increased share of the Russian domestic market as a result of import substitution program
Mid-term forecast for Russian OCTG demand is stable
4
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
11.0
11.1
11.2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 2015 2016
Russian Oil Production Hits Record High…Russian total oil output, mmbpd
Source: CDU TEK
1H2016 Russian oil production growth broken down, mmbpd
Source: Interfax, Info TEK
10.6510.83
+8.2% +10.3% +5.4% +4.3% (0.3%) (1.0%) (4.2%)
1H2015 Others Bashneft Gazprom Neft Tatneft SurgutNG Rosneft LUKoil 1H2016
+4% y/y
On 5 September 2016, Russian production set new record breaking 11 mmbpd
5
30
35
40
45
50
55
60
65
70
2010 2011 2012 2013 2014 2015 1H2016
827
932
+71% +44%+33%
+24% +9% (14%)(38%)
1H2
015
Ta
tnef
t
Ba
shn
eft
Ro
snef
t
Ga
zpro
m
Ga
zpro
mN
eft
Lu
ko
il
No
vate
k
1H2
016
10,696
12,450+50%+22% +5% +47% +10% (4%) (20%)
1H2
015
Ro
snef
t
Oth
er
Su
rgu
tNG
Ba
shn
eft
Ta
tnef
t
Ga
zpro
mN
eft
LU
Ko
il
1H2
016
… Supported by Strong Drilling Activity
Source: CDU TEK
Russian drilling activity is strong and growing, km/d
Source: Companies’ data
Upstream CAPEX budgets respond to profit resilience, RUB bn
+13%
1H2016 Russian drilling growth broken down, km
Source: CDU TEK
Horizontal drilling keeps growing in absolute, km/d
Source: CDU TEK
+16%
0
5
10
15
20
25
2010 2011 2012 2013 2014 2015 1H2016
6
22.115.2 15.1 18.4 13.6 10.6 7.5 12.8
52.1
42.9
17.817.9
17.612.6
7.59.2
74.2
58.1
32.936.3
31.3
23.2
15.022.0
102.0
72.7
55.0
62.5
49.643.1
35.3
47.7
3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
MET Export Duty Brent Price
… Underpinned by Flexible Fiscal Regime…
Historical MET and export duty, US$/bbl
The main factor supporting upstream margins is the flexible tax regime which absorbs the significant part of oil price drop
The two major Upstream taxes in Russia – Mineral Extraction Tax (MET) and Export Duty – are directly linked to oil price and provide amortizing effect when crude price goes down
Source: Public Information, companies data
7
And Floating Exchange RateRouble devaluation with oil price drop, US$/bbl
Average upstream Opex and Capex of Russian oil companies, US$/boe
Source: FactSet as of 28 September 2016
Source: Public Information, companies dataNote: Opex and Capex were calculated based on Rosneft, Lukoil, Tatneft, Gazprom Neft and Bashneft figures weighted by their hydrocarbon production.
8
0.000
0.005
0.010
0.015
0.020
0.025
0.030
0.035
0
30
60
90
120
150
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
US
D/R
UB
Bre
nt,
US
$/b
bl
Brent USD/RUB
8.98.0
5.6
7.1
5.9 6.15.1
6.1
4.94.0
2.93.5
3.1 3.22.6
3.0
3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Capex Opex
Broker Consensus Predicts Brent Price Recovery to US$70-80/bbl levels in 2018-2020
Brent historical and forecasted prices, US$/bbl
Oil price started to rebound in January 2016 and is currently stabilized at US$40-50/bbl with declines in supply from US, China, Colombia and Mexico being countered by improving prospects in Russia and Kazakhstan
Brokers estimate oil price to recover to US$70-80/bbl levels in 2018-2020
Source: Brokers consensus as of September 2016. Brokers include Citi, BAML, JPM, Credit Suisse, MS, Barclays, DB, UBS, Goldman Sachs, Wood Mackenzie
9
111 112109
100
54
45
55
6975
45
70
9085
42
50
5258
0
20
40
60
80
100
120
2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E
Brent price (Historical) Brent price - Median (Brokers Consensus)
Brent price - High (Brokers Consensus) Brent price - Low (Brokers Consensus)
Russian Oil & Gas Market OverviewGrowing drilling activity (footage) in selected regions 2016E/2015
Source: CDU TEK, Spears & Associates, ТМК
Russia is expected to be the only region with footage growth this year
Russian oil companies are among the lowest cost producers
Ruble depreciation offers TMK’s Russian division new opportunities in export and domestic markets
Enhanced oil recovery from conventional fields
-48%
-0.3%
-19%
12%
-60% -50% -40% -30% -20% -10% 0% 10% 20%
Russia
SEA
Middle East
NAFTA
10
TMK32%
TMK26%
Russian Tube & Pipe Market
Source: TMK estimates
Source: TMK estimates, based on 9M2016 numbers
#1 on the Russian tube & pipe market 37% market share of energy pipe demand (+5% YoY)
Source: TMK estimates, based on 9M 2015-2016 numbers
Non-Energy
Energy
0
1
2
3
4
5
6
7
8
9
10
11
12
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017F
Mln
to
nn
es
9M 2015 9M 2016
TMK37%
11
Russian Market Share Positions
Source: TMK estimates, based on 9M2016 numbers
Premium
Premium connections are proprietary value-added products used to connect OCTG pipes and are used in sour, deep well, off-shore, low temperature and other high-pressure applications.
Premium Connections
(TMK UP)
81%(+9% YoY)
Welded
The short-distance transportation of crude oil, oil products and natural gas.
Line Pipe 20% (-2% YoY)
Construction of trunk pipeline systems for the long distance transportation of natural gas, crude oil and petroleum products.
Large-Diameter
21% (+4% YoY)
Wide array of applications and industries, including utilities and agriculture.
Industrial 8% (-2% YoY)
Seamless
Threaded pipes for the oil and gas industry including drill pipe, casing and tubing.
OCTG 68% (+2% YoY)
The short-distance transportation of crude oil, oil products and natural gas.
Line Pipe 63% (+1% YoY)
Automotive, machine building, and power generation sectors.
Industrial 38% (0% YoY)
12
61% 65% 68%
23% 9%10%
17%27% 23%
0%
25%
50%
75%
100%
2014 2015 9M2016TMK Import Other local producers
8.4 9.3 11
.6
13.3
14.3
14.4
16.5 18
.7
20
.5
22
.2
20
.8
22
.0 25
.3
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
0
5
10
15
20
25
30
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16E
Un
its
Mln
met
ers
Annual development drilling volume
Total new wells drilled (rhs)
Strengthening Position on the Domestic Market
Source: TMK estimates
TMK share of seamless OCTG is growing
Seamless OCTG market shares, %
Growing oil drilling market in Russia
Development of conventional andunconventional reserves will require the useof non-conventional drilling techniques andreliable OCTG products
Russian seamless OCTG market is up by 3%YoY in 9M2016
TMK is a leader in production of seamlessOCTG on the Russian market with around68% market share in 9M 2016
13
Source: CDU TEK
Development of fields with hard-to-recover reserves
Directional drilling
Drilling with liner in tough conditions
Drilling with casing in tough conditions
TMK UP Connections for all Conditions
Extreme torsional resistance for high operational torque
Ability to
withstand high tension, compression and bending loads
Easy and reliable make-up
Higher resistance to torque for casing while drilling and rotating
Lite Series Classic Series
Pro Series Torq Series
TMK’s share on the premium market
Source: TMK estimates
Key premium supplier for the Russian independent and state owned oil & gas companies
Leader in the production of premium tubular products on the Russian market with around 81% market share in 9M 2016
In 2016, we expect TMK premium shipments to grow by 8%
65%73%
81%
35%27%
19%
0%
20%
40%
60%
80%
100%
2014 2015 9M2016
%
TMK Others
14
Current market challenges
55%44%
54%
65%
66%
60% 61% 60%
14%26%
26%
20%
13%
16%18%
17%
31% 30%
20%
15%
21%
24% 22%23%
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
2012 2013 2014 2015 2016E 2017E 2018E 2019E
Th
ou
san
d t
on
nes
Gazprom Transneft Others
Normal market
LDP Demand in Russia
Source: TMK estimates
Annual LDP demand for the next three years could amount to approximately 1.9 million tonnes
Major projects planned: Power of Siberia (GAZP), Power of Siberia-2 (GAZP), Nord Stream-2,maintenance needs of Transneft and Gazprom
Booming market
LDP demand in Russia, 2012-2019E
15
The Way to Strategic Cooperation
Newly signed long-term agreements with key customers to develop and supply innovative premium products with related services will strengthen TMK’s position
Import substitution programs guarantee purchase of tubular products and related services
TMK is a provider of steel pipes and efficient solutions, focused on innovations and oilfield services
TMK’s innovative products are able to improve the energy efficiency of wells considerably, as well as safety and environmental impact
Partnership memorandum
Scientific and technological cooperation
Technology partnership program
Strategic cooperation withkey Customers
16
Conclusion
Russian oil production and drilling activity growing due to favorable tax regime andsharp ruble depreciation
TMK is the leader in OCTG and premium connections markets and is growing itsmarket share
TMK predominately focuses on products for the oil & gas industry. OCTG is a keyproduct along with seamless line pipe and other mechanical seamless pipes
TMK is moving down-stream and developing its own oil & gas services to supporttubular products with after sales services
Gazprom and Transneft pipeline projects will be the main drivers of the Russian LDpipe market for the next three years. TMK is well positioned to participate in theseprojects
In the mid-term, premium connection market growth will be mostly driven by naturalgas field development and growth of directional and horizontal drilling
Premium solutions, oilfield services and high-value added products are an integralpart of the Company’s Russian operations. TMK is able to improve profitability of itsRussian division, particularly through its focus on import substitution
17
Executive Summary
19
The longest and deepest drop ever in the sector…
…beginning to give way to a slow, but sustainable, recovery in oil pricing and rig
count
Inventory still high, but benefiting from well string design standardization in
USA
Invigorating sales through new go-to-market model…
…and invigorating production through continuous improvement in yield, costs,
Right First Time and make-to-order
TMK Integrated Well Solutions continues to win new customers
0
20
40
60
80
100
120
0 3 6 9 12 15 18 21 24
US
Rig
Co
un
t In
dex
Ba
se 1
00
= L
ast
pee
k b
efo
re d
ecli
ne
Months after last peak
1986-1988 2008-2010 2014-2016
2016 Industry Performance Review: a Challenging Year
20
Rig count reached bottom in May at 404 units, but grew by more than 100 rigs since then
Average number of rigs in 3Q2016 increased by 14% QoQ, following the recovery in oil prices
Low-breakeven Permian basin has concentrated most of the rigs added since the trough
U.S. domestic crude production continues declining and averaged 8.5 mb/d in September, down 1.1 mb/d from the peak reached in April 2015
Henry Hub Natural Gas prices experienced a strong rally during the summer 2016 rising from a 17-year low of $1.64/MMBtu in early March to a high of $3.07 in mid-September
This downturn has been longer and tougher…
…but the rig count has started recovering
Source: Baker Hughes
0
20
40
60
80
100
120
-
400
800
1,200
1,600
2,000
2,400
Oct-09 Dec-10 Feb-12 Mar-13 May-14 Jul-15 Sep-16
Cru
de
Oil
Pri
ce (
$/B
bl)
US
rig
co
un
t
Oil Gas Crude Oil WTI Spot
Source: Baker Hughes, Bloomberg
0
100
200
300
400
500
600
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Mo
nth
ly U
S O
CT
G c
on
sum
pti
on
, kt
TMK Operates in Regions with Low-cost Oil Production
21
OCTG consumption dropped sharply but has already reached bottom and started recovering
Inventory levels showed a steep decline but the market is still oversupplied
US consumption of OCTG is expected to decline to 2.2 million tonnes in 2016, 43% lower than in 2015
US OCTG inventories not yet back to normalized level but down from 11.6 months to 9 months in 3Q
Following the rig count evolution, a gradual recovery of the North American pipe market started in 2Q 2016 and is expected to continue, subject to oil and gas price stabilization and growth
Source: Preston Pipe & Tube ReportSource: Preston Pipe & Tube Report
0
3
6
9
12
15
1.0
1.4
1.8
2.2
2.6
3.0
3.4
Jan-10 Dec-10 Nov-11 Nov-12 Oct-13 Sep-14 Aug-15 Aug-16
Mo
nth
s o
f in
ven
tory
Ab
solu
te in
ven
tory
, mln
to
nn
es
Monthly absolute inventory Months of inventory
OCTG Prices also Reached Bottom during 2Q and Stabilized
22
US distributor welded OCTG vs. HRC prices(monthly average)
Source: Pipe Logix, HRC Midwest CRU Prices
US distributor seamless OCTG vs. scrap prices(monthly average)
Source: Pipel Logix, AMM
According to Pipe Logix, OCTG seamless and welded prices have been stable since they reached bottom in April 2016
In 3Q 2016, HRC prices weakened and reached $557 per tonne by the end of September (19% lower than at the end of June 2016). Scrap prices followed a similar trend and decreased 11% during the quarter ending on average at $271 per tonne
0
400
800
1,200
1,600
2,000
0
400
800
1,200
1,600
2,000
Jul-12 Mar-13 Dec-13 Aug-14 Apr-15 Jan-16 Sep-16
HR
C $
/ t
on
ne
Wel
ded
OC
TG
$ /
to
nn
e
Welded OCTG price, US$/tonne HRC price, US$/tonne
0
480
960
1,440
1,920
2,400
0
480
960
1,440
1,920
2,400
Jul-12 Mar-13 Dec-13 Aug-14 Apr-15 Dec-15 Sep-16
Scr
ap
$ /
to
nn
e
Sea
mle
ss O
CT
G $
/ t
on
ne
Seamless OCTG price, US$/tonne Scrap price, US$/tonne
US Natural Gas Consumption and Price Outlook
23
US natural gas consumption by sector, 2014 –2040E (quadrillion Btu)
Consensus points to higher Henry Hub natural gas prices in 2017
Industrial and electric power sectors are driving demand for natural gas
In early 2000, electricity was generated by 16% by natural gas and by 52% - coal, while in 2016 it is expected that electricity will be generated by already 28% by natural gas and 37% - coal
Henry Hub Natural Gas prices expected to gradually rise in 2017 with falling supply and rising export demand
Major players in the Marcellus are expecting an average of $3.25/MMBtu in 2017 and $4.50/MMBtu in 2018, which would lead to higher drilling activity and stronger OCTG demand
2.0
2.5
3.0
3.5
1Q-1
5
2Q
-15
3Q
-15
4Q
-15
1Q-1
6
2Q
-16
3Q
-16
4Q
-16
1Q-1
7
2Q
-17
3Q
-17
4Q
-17
2015 2016 2017
US
na
tura
l ga
s ($
/MM
Btu
)
Source: EIA
0
2
4
6
8
10
12
14
2010 2015 2020 2025 2030 2035 2040
qu
ad
rill
ion
Btu
Industrial
Electric Power
Residential
Commercial
Transportation
Source: EIA
U.S. Exploration & Production CAPEX Recovery in 2017
24
North American E&P CAPEX
Rig Count outlook
Driven by higher crude oil and gas prices, NAM E&P CAPEX expected to grow in 2017 and beyond
Consensus forecast indicates that rig count will average in the mid-600s during 2017
Rig count recovery forecast to be moderate until mid-2017 as a consequence of price volatility and an abnormally high level of drilled but uncompleted (DUC) wells inventory
Starting in 2H 2017, rig additions should accelerate, driven by higher crude oil and natural gas prices
Low break-even Permian and Marcellus in a better position to benefit from higher E&P spending
Source: Baker Hughes
Source: Citi Research and Corporate reports
0
50
100
150
200
250
3002
00
0
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16E
20
18E
20
20
E
N.A
mer
ica
n E
&P
CA
PE
X (
US
$b
n)
0
500
1,000
1,500
2,000
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
US
Rig
co
un
t
0
10
20
30
40
50
60
70
80
90
100
0 2 4 6 8 10 12 14 16
Bre
ake
ve
n,
(Bre
nt
US
$/b
oe)
2022E Production, mmboed
Shale Assets on Cost-curve
25
Source: Company Reports, Citi Research Estimates
Despite a wide variation between plays, US shale producers require the oil price to remain at US$50/bbllong-term for sustainable growth
At the same time, some shale plays like Eagle Ford and Permian are profitable at below or around US$40/bbl
Miss Lime
Vaca Muerta
Strategy 2020
26
Profitably grow share in core seamless, Premium connections and import business, while operating welded business at the more efficient mills
─ Go-to-market model:
• Sales focus on providing broader technical solutions to reduce E&Ps costs, increasing the American division’s market share
• Work closely with end users and distribution partners, while increasing technical sales efforts
─ Overall production philosophy:
• Modify production to a make-to-order approach, with planned tonnage linked to actual purchase orders
• Manage operations on a regional basis and reduce time and expense of shipping product between plants.
Last nine months: broad-based, structured approach to make major reductions in spending and employment levels, while continuing cost-cutting programs and developing new approaches to the market
Integrated Well Solutions: TMK IPSCO and TMK Completions
27
Provide customers with creative solutions by leveraging the strengths of TMK IPSCO and TMK Completions
Develop proposals to meet the unique requirements of each customer by linking products and services with innovative technology to ensure customer satisfaction
Bundling pipe, Premium Connections and Completions
TMK OCTG Tubulars: Casing and tubing API and Proprietary Sizes 2-3/8” to 16” Seamless and welded
TMK UP ULTRA™:Some of the strongest and most efficient premium connections available on the market
TMK Completions:Innovative multi-stage fracturing systems and tools for cemented and uncemented designs
New customers
28%
Established customers
72%
OCTG Sales in 2016E (tonnes)
Results of New Go-to-Market Model in 2016
28
Source: Company results
Shipments growing since February in the context of weakening market, with other competitors seeing lower volumes in general
Successful implementation of new go-to-market model in most U.S. regions driving recovery in sales and growth in market share: new customers account for 28% of overall OCTG volumes in 2016
Source: Company results
New go-to-market model is driving growth… …increasing customer base and market share
0
5
10
15
20
25
30
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16
Am
eric
an
Div
isio
n s
ale
s, '0
00
to
nn
es
Cost Reduction in Operations
29
Majority of welded mills are temporarily idled, awaiting repositioning/upturn
Downward trend of conversion cost per ton produced, - 34% during 2016
Contributing factors: matching labor, aggressive performance targets, lean manufacturing techniques, campus mentality (production consolidation) and “make to order” approach
─ Matching labor to the utilization of operating facilities, this allows us to control labor cost in
both low and recovering scenarios – total employment costs reduced by 46%
─ Variable cost is improving: -26% in 2016. Fixed cost downward trend: -16% in 2016
─ Process Engineering function installed at each operating facility to ensure implementation of Lean Manufacturing. Lean manufacturing techniques support variable cost and capacity improvements
─ Campus mentality: consolidation of the South Production Campus. Moving Houston Ultra lines to Baytown
Conclusion
30
Making progress amid the chaos
─ New go-to-market model:
• Growing customer count significantly
• Growing market share sustainably
─ Continuous improvement in:
• Ongoing yield/Overall Equipment Efficiencies (O.E.E.) improvements
• Will manage operations on a regional basis and reduce the time and expense of shipping product between plants
─ Started down-sizing early on, now growing production employee count again
─ Make-to-order approach on both seamless and welded
─ Continue R&D in both premium and semi-premium connections and completions
"Lower for longer" becoming “recovery and ramping up"
Sustainable Performance in Turbulent Times
Vladimir ShmatovichVice President for Strategy and Business Development
Fundamentals
GLOBAL COMMITMENT
32
DOMINATING RUSSIA
OIL PRICE
Company’s assets located in some of the largest oil&gas regions in the world –Russia and the US
The US remains the largest OCTG market in the world, and starting to show signs of improvement
Prominent market leader in seamless OCTG in Russia with 68% market share in 9m 2016
Import substitution program drives further development: TMK’s Russian enterprises offer solutions for complex oil&gas projects
Russian division EBITDA margin remains at a level of more than 20% for the third consecutive quarter
Regions with low- and mid-level production costs to account for the majority of global drilling
At the current oil price Russian oil production remains profitable, supporting growing drilling activity in Russia
Key factors behind the resilient upstream profitability in Russia are an automatically-adjusting tax regime and a freely floating RUB, which cut OPEX of Russian oil companies by almost 40% since 3Q 2014
Fundamentals – Oil Price
GLOBAL COMMITMENT
Company’s assets located in some of the largest oil&gas regions in the world –Russia and the US
The US remains the largest OCTG market in the world, and starting to show signs of improvement
33
DOMINATING RUSSIA
Prominent market leader in seamless OCTG in Russia with 68% market share in 9m 2016
Import substitution program drives further development: TMK’s Russian enterprises offer solutions for complex oil&gas projects
Russian division EBITDA margin remains at a level of more than 20% for the third consecutive quarter
OIL PRICE
Regions with low- and mid-level production costs to account for the majority of global drilling
At the current oil price Russian oil production remains profitable, supporting growing drilling activity in Russia
Key factors behind the resilient upstream profitability in Russia are an automatically-adjusting tax regime and a freely floating RUB, which cut OPEX of Russian oil companies by almost 40% since 3Q 2014
TMK Operates in Regions with Low-cost Oil Production
34
4020 60 80
Eu
rop
e
Asia Conv.
Asia DW
GTL
CTL
NA conv.
Aus. and Pacific
EO
R
Arc
tic
Global oil production supply curve
August 2014 Brent price
Ca
na
dia
n
Oil
Sa
nd
s
VZ
ex
tra
hea
vy
NA
DW
Ea
gle
Fo
rd
Permian tight
Bakken
SA
DW
(pri
ma
rily
Bra
zil)
Production (MBD)
Note: Breakeven price assumes a 10% return, and NPV of 0; *includes Azerbaijan, Kazakhstan, Turkmenistan and UzbekistanSource: IEA World Energy Outlook; EIA International Energy Outlook; EIA Annual Energy Outlook; Morgan Stanley; Bain
September 2016 Brent price
Low-cost supply completely in the money at current Brent price
Afr
ica
Off
sho
re
OPEC, Middle East and AfricaRussia
Caspian region S.
Am
eric
a
(No
n-
OP
EC
) Asiaconv.
Robust Upstream Economics in Russia
35
Despite 50% drop in oil price since 3Q 2014, Russian upstream remains profitable with stable EBITDA margin per bbl and significantly increasing EBITDA margin (to 20-25% range)
Strong upstream EBITDA margin despite oil price collapse
Source: Public Information, companies data.Note: EBITDA was calculated based on Rosneft, Lukoil, Gazprom Neft and Bashneft figures weighted by their hydrocarbon production.
102
73
5562
5043
35
48
157 10 13 10 9 8
11
14%10%
19%21% 21% 20%
22%25%
3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Brent price (US$/bbl) EBITDA (US$/boe) EBITDA margin
Fundamentals – Dominating Russia
GLOBAL COMMITMENT
Company’s assets located in some of the largest oil&gas regions in the world –Russia and the US
The US remains the largest OCTG market in the world, and starting to show signs of improvement
36
DOMINATING RUSSIA
Prominent market leader in seamless OCTG in Russia with 68% market share in 9m 2016
Import substitution program drives further development: TMK’s Russian enterprises offer solutions for complex oil&gas projects
Russian division EBITDA margin remains at a level of more than 20% for the third consecutive quarter
OIL PRICE
Regions with low- and mid-level production costs to account for the majority of global drilling
At the current oil price Russian oil production remains profitable, supporting growing drilling activity in Russia
Key factors behind the resilient upstream profitability in Russia are an automatically-adjusting tax regime and a freely floating RUB, which cut OPEX of Russian oil companies by almost 40% since 3Q 2014
Others; 19%
Others; 32%
Dominating Russia
37
TMK solutions for complex projects Prominent market leader
68% of seamless OCTG market
81% of premium OCTG market
TMK
TMK
Source: TMK estimates, based on 9m2016 numbers
Long-term agreement to supply premiumproducts to Gazprom
Supplies to Prirazlomnoe oil field (GAZP) andSouth-Tambeyskoye gas field (Yamal LNG)
Premium solutions, oilfield services and highvalue added products allow TMK to improveprofitability of the Russian division
Solid EBITDA margin
Source: TMK data
15.6%
14.3%
14.9%
17.1%
19.4%18.7%
18.3%
22.7%
22.2%
22.1%
10%
14%
18%
22%
26%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Fundamentals – Global Commitment
GLOBAL COMMITMENT
Company’s assets located in some of the largest oil&gas regions in the world –Russia and the US
The US remains the largest OCTG market in the world, and starting to show signs of improvement
38
DOMINATING RUSSIA
Prominent market leader in seamless OCTG in Russia with 68% market share in 9m 2016
Import substitution program drives further development: TMK’s Russian enterprises offer solutions for complex oil&gas projects
Russian division EBITDA margin remains at a level of more than 20% for the third consecutive quarter
OIL PRICE
Regions with low- and mid-level production costs to account for the majority of global drilling
At the current oil price Russian oil production remains profitable, supporting growing drilling activity in Russia
Key factors behind the resilient upstream profitability in Russia are an automatically-adjusting tax regime and a freely floating RUB, which cut OPEX of Russian oil companies by almost 40% since 3Q 2014
Focus to Remain a Global Company
39
Source: Spears & Associates
2016E global drilling activity by geography(number of wells drilled)
Note: Excluding China and Central Asia. Onshore and offshore drilling
US + Russia & CIS + Middle East + Canada= 81%
US40%
Russia & CIS19%
Canada11%
Middle East11%
South America
7%
Far East6%
Africa4%
Europe2%
Responding to Challenges
HIGH LEVERAGE
Strong commitment to deleverage through: working capital improvement cost cutting limiting CAPEX
T0 get to below 3.0x Net Debt/EBITDA in 3 years period, while 2.5x Net Debt/EBITDA remains a longer-term target
40
AMERICAN DIVISION
Cost cutting program implemented
Majority of welded mills are temporarily idled, awaiting repositioning/upturn
Losses are getting several times lower
SANCTIONS AGAINST RUSSIAN OIL&GAS
Import substitution programs by Russian oil & gas companies
Drives development of premium products and oilfield services
sale of non-key assets potential SPO
Responding to Challenges –Sanctions against Russian Oil & Gas
HIGH LEVERAGE
Strong commitment to deleverage through: working capital improvement cost cutting limiting CAPEX
T0 get to below 3.0x Net Debt/EBITDA in 3 years period, while 2.5x Net Debt/EBITDA remains a longer-term target
41
AMERICAN DIVISION
Cost cutting program implemented
Majority of welded mills are temporarily idled, awaiting repositioning/upturn
Losses are getting several times lower
SANCTIONS AGAINST RUSSIAN OIL&GAS
Import substitution programs by Russian oil & gas companies
Drives development of premium products and oilfield services
sale of non-key assets potential SPO
Premium Products and Services
42
TMK to maintain its share of premium connections market with greater focus on sales of 2nd and 3rd generation premium connections to improve sales efficiency and enhance competitive advantage
TMK is actively developing HI-TECH products (high-tech pipes for unconventional reserves, including offshore deposits):
OCTG: with Premium threading, Cr13, GreenWelltechnology, alloy OCTG (L80, С90, Т95, Р110) mostly with Premium threading
Stainless steel pipe Pipe with increased corrosion resistance Vacuum insulated tubing LDP
Currently, HI-TECH products comprise around 50% of Russian division’s total revenue*. By 2020 the Company plans to increase HI-TECH product sales to 70% of Russian division’s revenue
Annual revenue from sales of newly developed products amounts to c. US$100 mln
* TMK estimates for 8 months 2016
Development of HI-TECH Products
43
Import substitution program: 8-years contract with GAZP for a total amount of more than RUB 50 bn and pipe volumes of more than 100 thousand tonnes.
In 2016, TMK developed and started shipments of stainless steel and hi-alloy pipe with specially designed premium connections for operations in areas with extreme conditions (high hydrogen sulphide, low temperatures, helium content) at Chayanda, Astrakhan and Urengoy gas fields
Premium connections for all applications including SAGD technology
Shipments of premium connections to South Kirinskoye, Prirazlomnoe, Filanovsky and Yurkharovskoye
TMK’s HI-TECH products are fully compliant with strict requirements for Lukoil’s offshore projects in the North Caspian, Gazpromneft projects in the Arctic and Gazprom projects on Sakhalin Island, bringing share of the Russian products to 100%
Responding to Challenges – American Division
HIGH LEVERAGE
Strong commitment to deleverage through: working capital improvement cost cutting limiting CAPEX
T0 get to below 3.0x Net Debt/EBITDA in 3 years period, while 2.5x Net Debt/EBITDA remains a longer-term target
44
AMERICAN DIVISION
Cost cutting program implemented
Majority of welded mills are temporarily idled, awaiting repositioning/upturn
Losses are getting sequentially smaller
SANCTIONS AGAINST RUSSIAN OIL&GAS
Import substitution programs by Russian oil & gas companies
Drives development of premium products and oilfield services
sale of non-key assets potential SPO
Responding to Challenges – High Leverage
HIGH LEVERAGE
Strong commitment to deleverage through: working capital improvement cost cutting limiting CAPEX
T0 get to below 3.0x Net Debt/EBITDA in 3 years period, while 2.5x Net Debt/EBITDA remains a longer-term target
45
AMERICAN DIVISION
Cost cutting program implemented
Majority of welded mills are temporarily idled, awaiting repositioning/upturn
Losses are getting several times lower
SANCTIONS AGAINST RUSSIAN OIL&GAS
Import substitution programs by Russian oil & gas companies
Drives development of premium products and oilfield services
sale of non-key assets potential SPO
Net Debt Dynamics
46
Net debt decreased by more than US$1 bn since 2012
High visibility for the leverage - till the year end 2016 it will stay at the current level or lower
Compliant with current covenants
Net debt decreased by more than US$1 bn since 2012
Source: TMK data and estimates
3.66 3.60
2.97
2.50 2.50
3.5x
3.8x3.7x
3.9x
4.6x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 30 Jun 2016
US
$ b
n
Net Debt Net Debt/EBITDA
0.0x
1.2x
2.4x
3.6x
4.8x
1,500
2,000
2,500
US
$ m
ln
Net Debt Debt reduction Net Debt/EBITDA
Pro-forma Example of TMK Deleveraging
47
Source: TMK estimates
Deleveraging schedule* EBITDA growth in 2017E-
2019E
Target to get to below
3.0x Net Debt/EBITDA
in 3 years – focus on cash
generation:
Limited capex and
improved working
capital
Disposal of non-key
assets
Potential SPO
2.5x Net Debt/EBITDA
remains a longer-term
target
Key assumption –
reasonably stable macros,
including gradual US
recovery
Op
era
tin
g C
F 2
017
E
CA
PE
X
Inte
rest
pa
id
Div
iden
ts
De
bt
re
du
cti
on
Op
era
tin
g C
F 2
018
E
CA
PE
X
Inte
rest
pa
id
Div
iden
ts
De
bt
re
du
cti
on
Op
era
tin
g C
F 2
019
E
CA
PE
X
Inte
rest
pa
id
Div
iden
ts
De
bt
re
du
cti
on
0
150
300
450
600
750
US
$ m
ln
2017 2018 2019
2018E 2019E2017E2016E
Below 3.0x
* DOES NOT REPRESENT A GUIDANCE
3412 3 3 3
235
84
4 4
154
59 65
500
400
50
13 3571
23
23
23 23
165
165
23
79
269
237 237
13
24 11
1
14
333
50
50
76
40
235
106
26 26
319
224
88
79
500
400
269
400
0
100
200
300
400
500
600
4Q2016
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2020 2021 2025
US
$ m
ln
USD RUB RUB to be refinanced EUR USD refinanced in 3Q16
USD55%
RUB43%
EUR2%
Comfortable Maturity Profile with Ongoing Refinancing
48
Source: TMK management accounts (figures based on non-IFRS measures), TMK estimates
Debt maturity profile as at September 30, 2016 As at September 30, 2016,
net debt amounted to US$2,564* mln
Weighted average nominal interest rate decreased by 9 bps compared to June 30, 2016 to 9.00% as at Sep 30, 2016
Credit Ratings:
− S&P: B+, Negative;− Moody’s: B1, Negative
Debt currency structure
Source: TMK management accounts
US$ 237 mln of RUB loans to be refinanced in November 2016
2017 2018 2019
US$ 400 mln loans has already been refinanced in September 2016
*TMK estimate
Strict Control over CAPEX
49
Limited CAPEX for 2016E-2018E
Upper limit of US$200 mlnannual CAPEX (growth & maintenance) for 2016E-2018E reconfirmed
Strategic investment program completed in Autumn 2014
Strict control over maintenance costs
No M&A’s planned
Source: TMK estimates
208
170190 190
2015 2016E 2017E 2018E
EBITDA effect c. US$121 mln2014
EBITDA effect c. US$115 mln2015
EBITDA effect c. US$140 mln2016E
Ongoing Cost Cutting Program
50
Cost cutting program breakdown
Source: TMK estimates
Salaries13%
Maintenance12%
Production yields22%Spare
parts11%Volumes
6%
Logistics6%
Energy7%
Other23%
Salaries25%
Maintenance23%
Production yields14%
Spare parts13%
Volumes 5%
Logistics4%
Energy3% Other
13%Salaries18%
Maintenance26%
Production yields20%
Spare parts15%
Volumes 2%
Logistics8%
Energy6%
Other5%
Goals
51
DELEVERAGING Target to get to below 3.0x Net Debt/EBITDA in 3 years
2.5x remains a longer-term goal
FOCUS ON CASH GENERATION
Continue optimizing working capital
Ongoing cost cutting
Limited CAPEX
No M&A activity planned
Disposal of non-key assets and potential SPO
MAINTAIN LEADERSHIP
Continue dominating Russian market
Remain among top 3 US OCTG producers
Increase HI-TECH product sales to 70% of Russian division’s revenue by 2020 and maintain our share of total premium connections market in Russia
US$100 mln revenue from newly developed products annually
Q & A