Investing.com -- Moody’s Ratings has upgraded the long-term corporate family rating (CFR) of Vallourec (EPA:VLLP) S.A. to Ba1 from Ba2. The probability of default rating (PDR) has also been upgraded to Ba1-PD from Ba2-PD, and the rating of the $820 million backed senior unsecured notes maturing in 2032 has been elevated to Ba1 from Ba2. The outlook for Vallourec remains positive.
The rating upgrade is attributed to Vallourec’s successful transition towards higher value products and a decrease in its industrial fixed cost base by nearly €200 million since 2022. In 2024, the company achieved its zero net debt target and improved its conservative credit metrics, with gross debt/EBTDA estimated at 1.4x at the end of 2024, a drop from 1.7x at the end of 2023.
Despite a 20% revenue decline to about €4 billion due to its focus on premium products and a leaner cost base, Vallourec improved its EBIT margin to approximately 16.1% from 14.9%. This occurred despite a roughly 30% average decline in 2024 US seamless OCTG pipe prices, which account for about 41% of Vallourec’s revenue.
For 2025, it is anticipated that Vallourec’s credit ratios will remain solid at around 1.5x gross debt/EBITDA, as demand for its products remains strong. The introduction of US tariffs on steel could positively impact the price of its pipes produced in the United States, given that some of Vallourec’s competitors supply customers from plants outside the US.
Vallourec intends to distribute 80%-100% of its total cash generation starting in 2025, as long as liquidity remains at above €1 billion and its net debt to EBITDA remains within a corridor of (0.5x) – 0.5x. In 2025, Vallourec plans to make dividend payments at €1.50 per share (about €350 million).
Vallourec’s Ba1 CFR is supported by its leading global market position in the global market for seamless steel tubular solutions, mainly servicing the oil and gas industry, its solid profitability and cash generation, good momentum in its main end market for oil & gas production, and a conservative financial policy with a commitment to maintain a net zero debt target.
However, the rating is constrained by the company’s limited track record of operating under the revised operating model since its default in Q2 2021, significant exposure to the volatile exploration & production spending of the oil and gas industry, medium to long term pressure on its oil and gas end market due to declining hydrocarbon demand, and exposure to volatile and potentially large working capital swings.
Vallourec’s liquidity is very good, with €1,083 million cash on balance and access to a fully undrawn €550 million revolving credit facility as well as an undrawn committed ABL of $350 million by the end of December 2024. Cash on balance and estimated operating cash flow of about €500 million will easily cover day to day cash needs, capex of around € 200 million, and dividends of €350 million in 2025.
The positive outlook reflects the expectation that Vallourec will continue to generate positive free cash flow before dividends throughout the business cycle, maintain a close to zero net debt position, and take measures to protect its cash generation ability in case of a downturn.
An upgrade of Vallourec’s rating could occur if the company continues to structurally improve profitability under the new operating model, sustain a zero net debt position, maintain leverage at below 2.5x gross debt/EBITDA and maintains EBITDA/interest expense ratio at well above 7.0x, and maintain ample liquidity and meaningful free cash flow generation at all times.
On the other hand, a downgrade of Vallourec’s rating could occur if its new business model fails to structurally improve profitability at times of lower end market demand and pricing, its gross debt/EBITDA rises above 3.0x times, EBITDA/interest expense is sustained below 7x or there is a deterioration of its liquidity or meaningful negative free cash flows.
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