Decarbonization Will Squeeze Oil Revenues And Margins

Key Takeaways

• Decarbonization trends and ESG pressures are weakening Tenaris's long-term prospects by eroding demand and limiting access to capital.
  
• Intensifying competition, industry overcapacity, and volatile input costs threaten profitability, increasing earnings uncertainty and exposing the company to margin pressure.
  
• Diversified project backlog, premium product focus, financial strength, and operational efficiencies position the company for resilient margins and growth despite industry cyclicality.

Catalysts

Manufactures and supplies steel pipe products and related services for the energy industry and other industrial applications in North America, South America, Europe, the Middle East and Africa, and the Asia Pacific.

• The accelerating global transition towards renewable energy and stricter government policies promoting decarbonization will likely keep reducing the long-term demand for oil and gas infrastructure, eroding Tenaris's core sales pipeline and constricting future revenue growth.
  
• Heavy dependence on the oil and gas sector exposes Tenaris to increased cyclicality and sustained demand volatility; as major energy producers reduce capital expenditures in response to sub-$60 oil prices, the company is likely to experience more pronounced margin compression and potentially significant declines in earnings from late 2025 into 2026.
  
• Growing ESG investment mandates and ongoing capital reallocation away from fossil fuel suppliers threaten to restrict access to financing for companies like Tenaris, which could raise its future cost of capital and constrain expansion, contributing to lower net income over the long run.
  
• Tenaris faces mounting competitive pressure from low-cost Asian seamless pipe manufacturers amid potential industry overcapacity, which may undermine the company's pricing power and compress gross margins even as volumes stagnate or fall.
  
• Advancements in alternative materials and drilling technologies, coupled with persistent tariff and regulatory uncertainty in key markets such as the U.S., increase the risk of input cost spikes and market share erosion, likely resulting in unpredictable cash flows and diminished long-term profitability.

Tenaris Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tenaris compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tenaris's revenue will decrease by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 15.0% today to 12.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.4 billion (and earnings per share of $1.46) by about July 2028, down from $1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 11.2x today. This future PE is lower than the current PE for the US Energy Services industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 4.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.76%, as per the Simply Wall St company report.

Tenaris Future Earnings Per Share Growth

Risks

• The company's strong backlog in offshore projects, long-term agreements with major oil producers, and leadership in high-specification OCTG and line pipe products signal that demand may remain resilient even during oil price downturns, supporting stable or improved revenues and earnings in the medium
• to long-term.
  
• Tenaris's Rig Direct model, built on long-term direct supply relationships with leading shale and integrated energy operators, gives it visibility and resilience against short-term swings in demand and price, helping to sustain margins and mitigate revenue volatility.
  
• Strategic expansion in premium, value-added product lines, investment in automation, productivity gains, and supply chain optimization are driving operating efficiencies, which could maintain or even improve net margins over time, especially in less favorable demand environments.
  
• Growth opportunities from global energy infrastructure replacement, new FIDs in deepwater and offshore, and government-backed energy security projects, particularly outside North America, suggest persistent long-term demand for Tenaris's advanced tubular solutions, supporting revenue growth.
  
• The company's robust net cash position, sizeable free cash flow, and active share buyback program provide flexibility to invest in growth, weather downturns, and enhance shareholder returns, which could help underpin or boost earnings and support the share price even if cyclical headwinds persist.

Valuation

• The assumed bearish price target for Tenaris is €12.95, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tenaris's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.04, and the most bearish reporting a price target of just €12.95.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.1 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of €16.43, the bearish analyst price target of €12.95 is 26.8% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.