Vallourec maintained its guidance for 2013, even after a meaningful margin increase in the first quarter. The company generally reports lower profitability in the first quarter, with meaningful improvement in the second and third quarters. But with a 15.7% EBITDA margin to start the year, the company could be tracking well ahead of our fullyear forecast of 16.5%. Management was mum on whether the typical seasonal pattern would play out this year, only reiterating their forecasts of higher full-year volumes, sales, and EBITDA margin than 2012. This should not be a high hurdle considering volumes dropped 7% in 2012 and EBITDA margin slid to a paltry 14.8% for the year. The ramp-up of the new capacity projects in the U.S. and Brazil remain on track as well. Management attributed the year-over-year 300-basis-point improvement in EBITDA margin during the first quarter to a higher proportion of sales to the oil & gas markets as well as cost-cutting efforts. Vallourec still has little visibility in the non-oil & gas side and has yet to see any significant signs of improvement in these markets, expecting the majority of the volume/profit increase to stem from continued E&P spending growth in oil & gas. At this time we are leaving our forecasts and fair value estimate unchanged.

A lower oil rig count, a drop in natural gas production, and a decline in energy tubular prices in recent months induce caution, particularly with new OCTG supply coming online from several producers. However we still expect unconventional drilling activity to increase at a faster pace than total E&P activity, demanding more premium tubes and connections produced by a small subset of OCTG participants, including Vallourec. The company’s position in premium-grade OCTG enjoys structural advantages that underpin the company’s narrow economic moat. The company continues to operate at full capacity in the U.S. and demand for premium products for deep offshore drilling in Brazil remains strong, both trends bode well for the rampup of the V&M and VSB projects this year.