Good day, ladies and gentlemen, and welcome to the second quarter 2019 Tenaris S.A. earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. Instruction will follow at that time. If anyone should need operator assistance at any time, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I will now like to turn the conference over to your host, Giovanni Sardagna, Investor Relations Officer. You may begin.
Thank you. Welcome to Tenaris 2019 second quarter results conference call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call, and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and Chief Executive Officer, Edgardo Carlos, our Chief Financial Officer, Guillermo Vogel, Vice Chairman and member of our Board of Directors, Germán Curá, Vice Chairman and member of our Board of Directors, Gabriel Podskubka, President of our Eastern Hemisphere Operations, and Luca Zanotti, President of our U.S. Operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results. Our second quarter sales at $1.9 billion were up 7% compared to last year and 2% sequentially.
Sales rose in Mexico, in the North Sea, and other Eastern Hemisphere markets, but were partially offset by a seasonal decline in Canada. Our quarterly EBITDA at $370 million was 2% higher than the corresponding quarter of last year, but 5% lower sequentially. Our EBITDA margin at 19% was slightly lower than the one of the previous quarter, mainly due to the non-repetition of the $15 million tariff recovery recorded in the previous quarter and higher extraordinary maintenance costs in Mexico. Average selling prices were up 6% compared to the corresponding quarter last year, but flat sequentially. During the quarter, our free cash flow was $245 million, as we continued to reduce our working capital in the amount of $147 million. Following a dividend payment of $351 million in May, we maintained a net cash position of $706 million at the end of this quarter.
Now, I will ask Paolo to say a few words before we open the call to questions.
Thank you, Giovanni. Good morning to all of you. In the second quarter, we were able to consolidate the good performance we show in the first quarter. In North America, we were largely able to offset the impact on our sales from the Canadian seasonal downturn through higher sale in Mexico, where Pemex and the private operators have been advancing with their drilling plans and activity has increased significantly in the year to date. In the rest of the world, sales rose, notably in the North Sea and in the Asia Pacific region. We continue to reduce working capital. Our free cash flow remained strong at $245 million. In the next quarter, we will be affected by major maintenance stoppages in Europe and in Tamsa.
After three years, we are having a substantial intervention in the steel shops and rolling mill in Tamsa, focused on reducing our environmental footprint and introducing further automation and process control. At the same time, we will be making an important investment in our steel shop in Romania. These stoppages will have an impact on our operation and cost in the third Q. The U.S. market, after a strong recovery over the past two years, is adjusting while operator focus on improving cash flow and generating returns for investor. This has resulted in a slowdown in activity and pressure on prices for suppliers of equipment and services. In this challenging market, the major have been leading consolidation initiatives, increasing investment, and accounting for a larger share of overall activity level. Since 2017, the majors have increased their share of U.S. operating rigs from 9% to 16% today.
There has been significant consolidation among the large independents. Tenaris is well positioned in this environment, supplying wholly or partially all of the major and many of the large independents. Here, our Rig Direct service alternative is considered a solid platform for collaboration in improving drilling efficiency, allowing flexibility in adapting to change in well design, and introducing digital integration for simplifying pipe management and administration. The acquisition of IPSCO, which would expand our U.S. domestic manufacturing capability, will enable us to provide more flexible and cost-competitive solution and expand our customer base. We are working diligently to obtain the requisite clearance from the U.S. antitrust authorities and expect to close the transaction before the end of the year. In the Eastern Hemisphere, where demand for natural gas is growing rapidly, we are participating in major development in the Middle East and LNG offshore gas development in India.
We are also working on our expansion initiatives with the integration of Saudi Steel Pipe in Saudi Arabia and our joint venture with Severstal in Russia. Activity levels continue to grow throughout the region. We are well placed to participate in this growth. With the recovery in offshore and gas development, we recorded quarterly records for sales of Dopeless connection and 13 chrome steel alloy grades. We have recently introduced a new and improved version of our Dopeless technology, which is used mainly in offshore operation, while our 13 chrome steel grade products, which are produced in our facility in Japan, are mainly used in corrosive gas wells. Considering the ongoing uncertainty and difficult market environment, we have set an ambitious agenda for improving our cost competitiveness and the service level for our customer.
We are focused on execution, improving efficiency and productivity in our plants, reducing working capital, and enhancing capital efficiency. We can now take any question you may have.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your key touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you mute your line once your question has been stated. As a reminder, that is star then one to ask a question. Our first question comes from Igor Levi from BTIG. Your line is now open.
Good morning, guys. I'd like to ask you about the Eastern Hemisphere a bit. It appears that's the one part of the world that's firing on all cylinders. There's strength in MENA. It's compounded by solid results in North Sea and Asia. Could you provide some more color on which of these markets is seeing the strongest growth? What is driving their growth, and whether you see risk to any of these markets over the coming quarters?
Thank you, Igor. I will ask Gabriel to give an overview of all of the cylinder that are supposed to be firing.
Yes. Thank you, Paolo. Good morning, Igor. Indeed, we have some positive cylinders supporting a positive momentum in this hemisphere. In general, rig count year-on-year has already increased 10%, and we expect that trend to continue. Middle East continues to be, as I have mentioned before, as the leading region. Gas developments targeting domestic consumption and exports are the main driver of this. Important activity in UAE, Saudi, Kuwait, India, and Qatar, in which all we are very well positioned with differentiated products and services. Based on this, we expect an increase in our revenues in the second half versus the first half in the Middle East. The second area that is also showing positive signs is the North Sea. As you have pointed out, we have had a record revenues in the North Sea in the second quarter.
This is a demand increase coming from both U.K. and Norway. Interactions that we have with our customers tell us that this is a momentum that will continue also into 2020. This is a sophisticated customer base for which Rig Direct services and also the Dopeless technology that Paolo mentioned in his opening remarks are becoming a strong industry standard. Sub-Saharan Africa is starting to pick up, but so far this is a contained increase. The interaction with our customers and new FIDs telling us that into 2020, this might also become an engine of growth for the Eastern Hemisphere. Last but not least, as you pointed out also, Asia Pacific has been having a very strong quarter. Demand for gas in China, in which we participate in highly differentiated niches.
Some shipments associated with LNG in Australia that will stop in the second half but will resume into 2020. These are areas that are driving the growth into Asia Pacific. The soft area in Asia Pacific is a reduction expected in drilling activity in Thailand associated with a change in concessions that will happen in early 2022. In general, we are in line in Asia Pacific to post a third year of consecutive growth. This gives you some color about which are the cylinders and engines that are supporting this positive momentum.
Yeah. Thank you, Gabriel. I would just add that in the offshore, we also see the contract with drilling ship and semi sub drilling rig. We expect that this will drive demand highly in 2020. We see the contract that start, but probably this engine is starting to fire, but we will see some more activity in 2020.
Thank you. Our next question comes from Frank McGann from Bank of America. Your line is now open.
Hi. Thank you very much. Yeah, just if I could take a little bit longer-term view. I was just wondering, obviously the rest of this year, based on your commentary, seems to be quite subdued with the Eastern Hemisphere being a little bit more robust. As you look out to 2020, after a difficult year this year with the majors particularly being much more cautious in terms of use of capital, how do you see 2020 developing? As you look out longer term, given what seem to be major changes that have taken place in the oil markets, what is your outlook and how is that affecting your capital allocation decisions?
Thank you, Frank. Well, I think it is not easy to have a medium to long-term overview of the oil market today, because factors like election in 2020, trade conflict, are casting some shadow on the level of activity worldwide in 2020. You see this every day in the newspaper. There are pressure for the central banks in the different regions to support expansion. At the same time, there are factors that may indicate that after many year of positive growth, the momentum could be reduced in 2010. I think this is important for the medium-term, long-term vision of the oil and gas market. You see this reflected in the limited increase in the world demand. The world demand for oil is showing slightly lower than expected because of this concern about growth.
I don't think we have a clear view or visibility on how this trend will unfold in 2020. In my view, and it's a personal view, I think that the reduction in the investment in oil exploration and development in the last three years has been so big that in some moment, the system will require an increase in investment. Not only in the U.S., but also outside the U.S., in all of the region, including offshore, just to face a worldwide demand that may be increasing 900,000 barrel or 1 million barrel per year, but is basically picking up even in an environment of subdued growth. I wouldn't say if this rebound of investment may happen in the beginning first half of 2020 or later on.
I think that this is inevitable, and in some moment, the level of activity, drilling, and production will need to step up. This will be in every sector and in many of the region, not only in shales.
Okay. Thank you very much. Appreciate that.
Thank you.
Thank you. Our next question comes from David Anderson from Barclays. Your line is now open.
Thank you and good morning. Just a question on pricing. Pricing has been quite weak all through the year. You guys are guiding to a recovery in the fourth quarter. I was just wondering if you could talk about how pricing is embedded in your outlook for the rest of the year. Do you expect it to get better? Maybe if you could just provide some of the details behind that, because we see where welded pipe is going, HRC costs have been coming down. There's a lot of inventories out there. Can you just walk through some of the dynamics that you see there on the pricing front? I'm really talking about the U.S. side, of course.
Yes. Thank you, David. Well, on pricing, you followed the dynamics of the Pipe Logix in the last six months. Pipe Logix went down, up to now, including yesterday. There has been a decline for it. Pipe Logix has also been driven by the decline in price of hot-rolled coils that drove down the price for welded pipes. Now, I think this trend, at least for the hot-rolled coils, is reversing now. It reached a level at which there is underway a rebound, and it's very likely that this rebound will slowly continue in the coming months. Even in this environment, the demand for pipes in the United States is to some extent subdued. You can see this because of the reduction in the recount, and probably during the next six months, the recount will stay there or remaining or going down slightly.
We do not expect that this will rebound in the next six months. In this environment, in the second semester compared to the first semester, the market and the demand for pipes will be lower, and the prices will reflect the situation of limited demand, this in our view. That's the reason why we are perceiving this pricing pressure. This is the pricing pressure in the market. I would say that for Tenaris, the situation is slightly different. We, as we mentioned in the opening remark, are very much focused on client, on the major, that are relatively more stable, and so we think that we can, thanks to the service, to the high level of Rig Direct. This moment, we are in the U.S., more than 17% of our sales is forming Rig Direct. We are compounding the price with the level of service.
We can defend a little better our level of price. We do not see so much pricing power in the coming six months of this. In 2020, as I was mentioning, I expect some recovery in the rig count, and this may change the dynamics of pricing. Keep in mind also that there are some of the factors that are affecting are also on the cost side, not only the recovery in the hot-rolled costs, but some recovery, I mean, the strong price for iron ore is also putting pressure on some of the players here in terms of this pressure to contain price reduction.
Paolo, on a related question there, all of the kind of trade rulings we've seen over the last 6 to 12 months, whether it's Section 232 or USMCA, they've pretty much all worked in your favor. Pretty much everything that you could have hoped for happened. Obviously, part of it's got to be the U.S. kind of slowing down here a little bit. Do you think we underestimate how long it would take for those changes to work through the system? Do you think it's just kind of a question of working through inventories before you start seeing improvement? Kind of what's your take?
Obviously, there's kind of big kind of secular trends, but what's your take on why it's taking so long to show up in either the numbers or the inventories or I'm not sure exactly what you're looking at for improvements, but maybe just reflect a little bit on that, please?
Well, in general, as I mentioned before, this is an environment in which the level of the rig count in the first quarter was around 1,045 rigs. Today, we are in the range of 940 rigs. This is a substantial reduction. You can imagine that with this reduction in demand, we perceive that also the level of inventory went up slightly up to now, and this is the adjustment in the market we are referring to. This as far as the market is concerned. When we look at our situation, in this quarter and in the third quarter, we still will not see a reduction in the duty in our pipe, because the pipes that pay the 25% duty coming into the States, will be delivered to the market during the third Q. We are not really seeing a reduction in the duty in our profit and loss now.
In the third Q, we'll be also affected, as I mentioned, by the stoppages. The cost of the stoppage is a reduction in our capacity because of the big intervention we are doing. This is affecting particularly our third Q, but will reverse going on in the fourth Q. On top of this, we are executing a plan for acting on our cost that gradually will have an impact in our margins, a positive impact, in the coming quarter, starting for the fourth quarter on. We think that this will enable us to defend our margin and to enhance our free cash flow, in the coming quarter.
Okay. Thank you.
Okay.
Thank you. Our next question comes from Ian Macpherson from Simmons. Your line is now open.
Hey, thanks very much. I wanted to ask if you would be willing to quantify or even just provide a ballpark estimate of the impact of the maintenance in Q3, so that we can have a sense of the magnitude of that as we interpret the Q3 and the full-year updated guidance, as the first question, please. Thanks.
Well, we expect the stoppage to have an impact in the range of $50 million on the third Q. Some impact in limiting our capacity. It is a very extensive intervention. As I mentioned, for environmental reason, for reorganization of some of the production line to increase productivity, efficiency, automation. We are intervening in the plant in Tulsa, in Romania, in Italy. This is something that we do every year. In the case of Tamsa, it's a large intervention. The last time we did this was three years ago. This is the impact. Direct impact in this around the figure that I mentioned, and some instantly lower volume. This is what you can consider for your account.
Good. Thanks, Paolo. I suppose without the intervention, without the $50 million, your third quarter outlook would otherwise be higher than Q2, not necessarily by a lot. Is that a fair interpretation?
This is a fair assumption. This will be in absolute term. In term of margin, remember, there will be also, probably with margin will be defended a little better.
Understood. Thanks. I wanted to ask as a follow-up, how business is tracking in Argentina. I think it's been your biggest Latin America revenue driver the past couple of years. The momentum has been positive. I think you mentioned some potential for deceleration or flattening in the region. I wanted to drill in specifically on the outlook there in Argentina for the rest of this year, how you see it playing out next year, if you could look out that far. Thanks.
As I mentioned in the last conference call, we have a stable level of drilling in Argentina in 2019. Operator are basically waiting for the election in Argentina. The election will be held in October and then a possible ballotage in November. This is an important issue for Argentina, and some of the operator will take this into consideration in defining their plan for the development, especially in Vaca Muerta, for oil and for gas. My sense is that there are very high potential for increased activity in Argentina. This is development of oil and the development of gas, not only for Argentina, but for export to the country like Chile or Brazil. There is a huge potential for development of this. We will see this in 2020, in my view, depending from the outcome of the election. Also for Tenaris, this is important.
Recently, there has been launched a tender for a large pipeline. This would be an essential component of the development of Vaca Muerta, but could also be a big opportunity, not only for our participation eventually in the tender for pipes, but also for the activity that this could trigger in the region in 2020. Argentina has a great potential.
Very helpful. Thank you, Paolo.
Thank you.
Thank you. Our next question comes from Amy Wong from UBS. Your line is now open.
Hi, good afternoon. A couple of questions from me, please. The first one relates to the IPSCO transaction. You gave a very high-level comment in the prepared remarks, but just if you can give us a bit more detail on kind of the milestones that we're going to be looking for to see the completion of IPSCO, a bit more kind of detail what needs to happen there. Secondly, there's been a lot of questions around the pricing in the U.S. I'd like to ask about kind of the pricing on the tenders that you're seeing in the Eastern Hemisphere, please. Thank you.
Thank you, Amy. As far as IPSCO transaction, Germán, you can give an update on where are we now?
Sure. Thank you, Paolo. Good morning, Amy. Very briefly, Amy, we are working very closely with the case team at the DOJ. We are in the process of completing the submission of all the requested information. We naturally are working with our team. We know IPSCO is obviously also doing their part. We're expecting, based upon statute and conversations we have, that the DOJ team highly likely will take something around 45-60 days to process the information and to come out with ultimately a position or review. We're expecting to close this towards the end of the year, most likely end of Q2. We remain very confident about the outcome.
Thank you.
Q4. Sorry, it's Q4. I'm sorry.
Okay. Just to follow up on that, Germán, is there any view that kind of the market conditions now versus when the deal was discussed in Q1 have changed? How do you feel about the deal now and the price paid?
I think for us, the project, the proposal, and the merger is a very structural, long-term view. I don't think the changing market condition of one quarter against the other is changing the substance of it. The shale will be an essential component of the energy metrics of the world for the foreseeable future. U.S. will be at the center of this. It's very important. It's not the only place. Middle East also, Russia or China also, but we all recognize that U.S., from our point of view, will be a substantial market, a substantial center of the energy metrics. I think that on this consideration, we have exactly the same view of this acquisition that we had six months ago. This will create a structure of our operation in the U.S., supported by a steel shop in the region, which we consider extremely important.
This level of integration is essential. It will allow us to support also part of our Canadian operation. It will integrate the range of our seamless pipe in-region. We see this as a very important step in defining our position for the very long term in the United States. There is a second question.
Yes.
On pricing in the Eastern Hemisphere. Gabriel?
Yes.
You are.
Yeah, thank you, Paolo. Good afternoon, Amy. Regarding pricing in the Eastern Hemisphere, the truth of the matter is that for the large volume tenders, pricing remains competitive. There is a positive momentum, as we talked about before, on the demand, but still there is available capacity from the bulk of our competition in the carbon space. Having said that, there are some niches and product lines associated with the demand for pipes with special grades, 13 chromium or even higher chromium, associated with corrosive gas, where we are start to see some tightness. We're having some price increases. There is some pricing power back to the manufacturers there as well. That is going to be having a positive impact with the rest of the most complex mix in today's Eastern Hemisphere.
Having said that, also it's important to consider that compared to a year ago, we didn't have TenarisSaudiSteelPipes, and TenarisSaudiSteelPipes is a contributing factor in the Eastern Hemisphere that has an average price lower than the typical average price of Eastern Hemisphere. That's another component to factor into the growth and pricing dynamics into Eastern Hemisphere.
All right. That's very helpful, Gabby. Thank you. I'll turn it over.
Thank you.
Thank you. Our next question comes from Marc Bianchi from Cowen. Your line is now open.
Thank you. Paolo, you mentioned some cost benefits that you're instituting, part of the major interventions, and I was hoping you could talk a little bit more about that and perhaps give us some idea of how impactful this could be on a dollars of profit or % margin basis for the company.
Thank you, Marc. As I mentioned before, this third Q will be affected, as I mentioned, by the stoppage, by the fact that we still have the duty, and by the existing pressure from prices. In the fourth Q, there are factors that are contributing. First of all, we will no longer have to pay the duty of the 232. Second, we will not feel the impact of the cost of the stoppage, but we will be operating, hopefully, at full capacity, or at least in the mill in which we intervene. Third, we should start to see the impact of the action plan for improving our productivity and our efficiency. I expect this overall to give us around two points of margin gradually during the next four Q. We will, let's say, follow this action plan.
It is affecting not only the plant, but also our supply chain system. We expect also to reduce our inventory, to be able to contribute a figure around in the range of $150 million of additional free cash flow from reduction in our working capital. Mainly in our inventory and some in our receivable. These two actions should bring us in 2020 with, let's say, improving our efficiency, to some extent, compensating for the pricing pressure that we are perceiving today when the market went down. There is some inventory overhang, and we feel the pricing pressure, especially in the U.S.
Okay, that's excellent. Thank you. Just the follow-up on the working capital, $150, that's between now and year-end or that to be realized in the third quarter?
Sorry, can you repeat because we have an interference?
Oh, sorry. Yeah. The inventory reduction of $150, that's between now and year-end. That's for the second semester?
Yes. This is what we plan to execute overall in the coming fourth quarter.
Okay. Thank you very much. I'll turn it back.
Thank you. Our next question comes from Lillian Starke from Morgan Stanley. Your line is now open.
Hi. Thank you very much for taking my question. If you can provide a bit of color, you mentioned the recovery in the gas market in the Middle East, but with what we're seeing in terms of offshore gas investments, if there's anything that you have seen of incremental demand going into 2020 or beyond that you have firm visibility on. My second question was more on the trajectory of margins. It seems we're moving around a similar, or a somewhat restricted range bound. I was just wondering if you could maybe give a bit more color on whether there's anything else aside from these maybe temporary factors that you think are holding back margins.
Thank you, Lillian. Gabriel, you can give a view on the first question, no?
Yes. Sure. Good morning, Lillian. In fact, gas developments continue to be very important in the different areas of the Eastern Hemisphere. There are expected waves of FIDs already going on or projected to be sanctioned soon on LNG regarding gas. There's going to be activity into that in Mozambique, in Qatar, in Australia. This is a trend that we expect to continue, and we are well positioned to supply for the pipes to support that drilling activity. Also there is a big push for domestic gas in China, in India, in Saudi, UAE, in Kuwait, in Egypt. These are countries that are starting to be trying to shift some of their energy metrics into gas for different economic and environmental reasons. This is driving a big push for drilling activity in these countries as well.
These two components are giving us a midterm positive outlook on gas.
Yep. Well, I think on the margin, we're commenting which are the main driver, downside and upside. As I mentioned, in third quarter, that will be more critical for us. In the fourth quarter, in which many of these factors will reverse. These are our basic comment on this. It is inevitable that in the market in which the demand go down because of the reduction of the rig, there is pressure on our price, we perceive this. As I mentioned before, there are factors that will gradually compensate this in the fourth Q. By the way, even in this environment, Tenaris is a company with a very strong cash flow.
We expect the free cash flow to remain strongly positive in the third Q and in the fourth Q of this year because of the different action we are taking and also because of the recovery margin that we expect after the third Q.
Okay, perfect. Just on that point of the free cash flow, with the previous comment you had mentioned that you might end up with a somewhat small net debt position following the IPSCO transaction. With such a strong cash flow generation in the remaining part of the year, could we maybe see Tenaris still at a net cash position even after the acquisition of IPSCO?
Well, let me ask Edgardo to comment on the various factors that are affecting our cash flow and.
Thank you, Paolo. Yes, we really, as we said in the last conference call, we are, and Paolo has just mentioned, we are going to be generating free cash flow in the third and the fourth quarter of this year. We are aiming to target probably slightly above $1 billion free cash flow for the whole year, which will turn into our, basically, if we consider paying probably in the last quarter, the acquisition on IPSCO, we're going to be very much breakeven or slightly below, and with net debt, very small one. Very much the cash that we're going to be generating from now until the rest of the year, we'll be able to pay with cash in our hands to the IPSCO acquisition.
Okay, perfect. Thank you very much. I'll hand it over.
Thank you. Our next question comes from Vladimir Stojkovski from Bank of America. Your line is now open.
Thank you, gentlemen. A very small question left. Given all the drivers for volume in the fourth quarter of the year, is there any chance that volumes in Q4 will be the highest in 2019, or we are talking about volumes recovering to, let's say, the average level of the first half? Thank you for the answer.
Well, from what we can see today, you're right. We expect that in the 4Q, we should be able to have the highest quarter in terms of volume of 2019.
That's great. In terms of drivers, is it fair to assume that volume drivers behind that would be primarily outside North America, and therefore, the product mix will be supportive as well?
I think also in North America, the 4Q will be possibly the highest in 2019. It depends on how we are able to maintain our differentiation. In the end, our point is that the major are more stable in their planning, in the plans. The market is going down before the rigs reduction. The rigs of the major are more stable. In this environment, the last quarter also for us in the U.S. should be highest. I will ask Luca if this is the view of the region and if you think that this is something that we can achieve.
Yes. Thank you, Paolo. Good morning, Vlad. Yeah. I believe I don't have much to add to your point because you fairly represented. The only point that I would add is that, different from any other players in the U.S., we are going through Rig Direct, so this shield us from inventory dynamics that are suffering based on the approach they take to the market. This is my only point that I would like to add.
Yeah. We are more driven by the real consumption.
Consumption rather than the upper end demand.
Than from the upper end demand. We think that this should shield us in the 4Q more than other player.
That's great. Thanks very much.
Thank you. Our next question comes from Alessandro Pozzi from Mediobanca. Your line is now open.
Thank you for taking my two questions. The first one is on Mexico. I believe you mentioned that Mexico is offsetting the weaker sales in U.S. and Canada. I was wondering, maybe can you give us a sense of how important is Mexico right now for Tenaris? Also, following from that, I was wondering, is the rig count still the best proxy for your sales? What we've seen is a falling rig count, but the number of completed wells is actually not too bad. I was wondering whether we should focus on the completed wells rather than rig count. Thank you.
Yes. Before passing to Guillermo for some comment on Mexico. It's clear that on the medium term, the volume of pipes processed by every rig per year has increased by in the range of 30% in the last two years. My sense is that today, technology has stabilized the length of lateral, and the productivity of the rig is more stabilized compared to the past. Also, the drill uncompleted well are going down, but there are no substantial variations which would affect our market. In this moment, rig count is a relatively good indicator for the size of the market. Guillermo, you may comment on Mexican recovery, how you see this.
Yes, Paolo. Hello, Alessandro. Well, Mexico has been recovering very nicely since the end of 2017. If you compare the first quarter of this year versus that, we have had a nice increase, mainly driven by a higher activity of Pemex. Looking forward to the market, we see three engines that are going to contribute to, I would say, a gradual increase. One is Pemex and a higher activity of Pemex. Secondly, is that we are already seeing that we're going to continue to see an increase in terms of the activity derived from the rounds that we're giving because of the energy reform. Thirdly, now Pemex has assigned five contracts of integral services, which are going to cover 22 fields, which also we're going to start to see coming into our portfolio.
Second quarter continued to grow nicely, and we see a jump also in terms of rig count, probably above 20% from the second quarter into the third quarter. Moving forward into 2020, I think we're going to continue to see a gradual increase. Mexico is becoming a nice driver. You have also to consider that because of the geological condition, Mexico requires a richer product mix, which also benefit our operation.
Thank you, Guillermo. Also, in this quarter, we had a good, important pipeline in our sales. This will not repeat in the third quarter in Mexico. The increase in the rig will bring an increase in the volume, but we will not repeat the pipeline for the next quarter. Hopefully, Pemex will have the financial strength to support this expansion.
Exactly.
The government is really determined to have.
Okay. Thank you very much.
Thank you. Our next question comes from Kevin Roger from Kepler Cheuvreux. Your line is now open.
Good morning, everyone. Thanks for the question. They have all been answered already, so that's fine for me. Thanks a lot.
Thank you, Kevin.
Thank you. Our next question comes from Rodrigo Almeida from Santander. Your line is now open.
Hi, everyone. Good morning. I have a couple questions from my side here. The first one is regarding the recent contract in the Equatorial Guinea. I know it's a small contract. I just wanted to get some color if that will impact margins anyhow or by when. Also, if you expect any other projects to come from the region. I think you guys gave some color on that. If we could get some more color, it would be nice. The second question from my side is regarding Brazil. If you guys see any improvement in drilling activity here for the next year, both for the pre-salt areas and also for maybe redevelopment works in mature fields. If you have any view on that side, it would be great to have. Thank you very much.
Thank you, Rodrigo. On the Equatorial Guinea and on the African project, Gabriel, you can give us some additional color on this.
Yes. Good morning, Rodrigo. This was one of the big incoming orders of the pipeline division of the quarter, which has been announced. This is a deep water pipeline in the range of 20,000 tons plus that we will deliver during the first half of 2020. We'll be manufacturing in Confab. Similar to that route of manufacturing Brazil, like Confab, like we have with Zohr. Clearly, it's not in the same size range of pipeline, but it starts to show the development activity in Sub-Saharan Africa that has been pretty much subdued. We haven't had a pipeline of this size in Sub-Saharan Africa. I think this is a positive sign.
The rest of the region, Gabriel, you see that activity in Angola, because I have some good expectation on that project for 2020, no?
Yes. Sub-Saharan Africa is an area where we expect some growth into 2020. There is projects that need to be sanctioned. There is a positive momentum. We are perceiving this from the different operators that we are engaging into discussion with. There is an inventory situation as well, because believe it or not, some of the pipes that we sold in 2013 and 2014 are still being inventoried in different parts of Africa as well. After some of these rigs addition come on stream and the inventory is being worked out, I think that Africa is going to give us some good growth into the portfolio for the future.
Yeah. As far as Brazil is concerned, we see that Brazil is not only Petrobras, but also the major oil companies that are operating are contracting drilling ship and semi-subs for performing drilling activity in the pre-salt and not only in the pre-salt. Activity will pick up, we think, in 2020. We do not see so much increase in the fourth Q. Maybe we will have some of these projects that will require pipes before the end of the year. I think most of the activity will happen in 2020.
Yes. Thank you very much, guys. Very clear. Thank you very much.
Thank you. We do have a follow-up question from Frank McGann from Bank of America. Your line is now open.
Yeah, thanks again. If I could follow up on the question on Vaca Muerta. Assuming that the election results lead to a desire to invest from majors, there seem to be a lot of projects that are on the cusp of some pretty important potential ramp up. I was wondering, do you think that's the case? Do you think there could be a major acceleration in 2020 if we get an environment that companies are more comfortable investing in?
Well, I'm very confident that in that case, if the price of oil remain in the range of Brent, in the range of $60-$65, there will be activity on oil on a much higher scale. Also there will be a lot of project for developing gas. It could be that gas might have a longer time, because it requires a more complex infrastructural work. I'm very confident that Vaca Muerta is an absolutely relevant play by world standard in sales, and is a great opportunity for development of a chain of value, supply, and use of gas and product for the country. I think that with a consistent government, there should be a relevant investment in pipeline, in treatment facilities, in development of use on the value chain. Also preparing export for sure for oil, but also gradually for gas.
Okay, great. Thank you very much.
Thank you. Our last question comes from Stuart Joyner from Redburn. Your line is now open.
Yeah, good afternoon, gents. Thanks for taking my question. I just wanted to come back to the IPSCO guidance that you gave, the updated IPSCO guidance that you gave. Just wondered if you could be a bit more specific about confirming that if that does complete as of 1st January 2020, that the synergies number that you gave at the time of the deal will be captured in full in 2020, or does that sort of slight slip back in terms of timetable mean that those synergies are going to be slower in terms of delivering through 2020, we may not get that full benefit in 2020? Just in terms of what that means on a guidance perspective, I think we're now looking at something like a $1.5 billion EBITDA baseline for 2019.
If we were to think about the business in pro forma terms, we've got obviously IPSCO giving you EBITDA of about $120 million, synergies from the deal of about $40 million, and tariff removal on a half year of about $70 million. Is that where we should be thinking about the pro forma baseline of the business in EBITDA terms, going into 2020? Thanks.
Well, on the first question, yes, we have no reason to think that there are no synergy. We mentioned something around 100 basis points of margin that we can reach on the consolidated company between Tenaris and IPSCO. Well, we hope to conclude the deal before the end of the year. It will take, you can assume, 100 days for integration. This is our standard program to materialize and to implement gradually the synergies. They will not affect the entire 2020, but will gradually roll in during the year. As far as the evaluation of the EBITDA, well, I wouldn't enter into what we could be the EBITDA in 2020. I think it is too far away. We have no full visibility on what could happen.
You mentioned the 1.5, and we mentioned also in our statement that basically we think that overall in 2019, we should be close to the level of margin that we had in 2018, and I will stay there.
Okay, thanks very much.
Thank you. There are no further questions at this time. I would like to turn the call back to Giovanni Sardagna, Investor Relations Officer, for any further remarks.
Well, thank you. It is again Paolo. Before closing, let me extend all my thanks to Edgardo Carlos. Edgardo will be leaving the company on the 5th of August. He's been CFO of Tenaris for many years. He worked 32 years with the group, has given a substantial contribution to our company, not only in Tenaris, but before in Ternium. We are very grateful of his contribution. He is going to work in a challenging role in another company, listed company, we'll probably continue to see him around in different occasion. Thank you very much. I want to wish all the best for your future, Edgardo, and also I want to give the warm welcome to Alicia Mondolo. Alicia also has extended experience in working in different companies, groups, knows very well also Tenaris. Will be an excellent CFO, and will also enhance our diversity.
Thank you very much.
Thank you, Paolo.
Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.