Good day, ladies and gentlemen, and welcome to the Second Quarter twenty nineteen Tenaris S. A. Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Giovanni Sardega, Investor Relations Officer.
You may begin.
Thank you, and welcome to Tenaris twenty nineteen 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 CEO Edgardo Carlos, our Chief Financial Officer Guillermo Fogel, Vice Chairman and Member of our Board of Directors German Cura, Vice Chairman and Member of our Board of Directors Gabriel Podcusca, 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 $1,900,000,000 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 $370,000,000 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 $15,000,000 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 $245,000,000 as we continue to reduce our working capital in the amount of 147,000,000 Following a dividend payment of $331,000,000 in May, we maintained a net cash position of $7.00 $6,000,000 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, and 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 upset 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. The rest of the world sales rose, notably in the North Sea and in the Asia Pacific region. We continue to reduce working capital and our free cash flow remained strong at 45,000,000 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 the strong recovery over the past two years is adjusting, while operator focus on improving cash flow and generating returns 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. And there has been significant consolidation among the large independents. Tenaris is well positioned in this environment, supplying only 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 part management and administration. The acquisition of IPSCO, which would expand our U.
S. Domestic manufacturing capability, will enable us to provide 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 ONGC 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 Sevastar in Russia. Activity levels continue to grow throughout the region and we are well placed to participate in these growth. With the recovery in offshore and gas development, we recorded quarterly records for sales of Doppler connection and 13 chrome steel alloy grades. We have recently introduced a new and improved version of our Doppler 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 using 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 quarter. 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. And 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, Pablo. Good morning, Igor. Indeed, we have some positive cylinders supporting a positive momentum in Eastern 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 a 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. So we expect that 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 NRC. As you have pointed out, we have had a record revenues in the North Sea in the second quarter.
And this is a demand increase coming from both The UK and Norway. And interaction 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 dopless technology that Paulo 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. But the interaction with our customers and new FID is telling us that into 2020, this might also become an engine of growth for the Easter Hemisphere.
And 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 where we participate in highly differentiated niches, Also some shipments associated with LNG in Australia that will stop in the second half, but we're resuming to 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 twenty twenty two. But in general, we are in line in Asia Pacific to post a third year of consecutive growth.
So this gives you some color about which are the cylinders and engines that are supporting this positive momentum.
Yes. Thank you, Gabriel. I would just add that in the offshore, we also see the contract with drilling ship and semi sub drilling rig. But we expect that this will drive demand highly in 2020. We see the contract that start, but probably this engine is starting to fight to fire, but we will see some more activity in 2020.
Thank you. And our next question comes from Frank McCann from Bank of America. Your line is now open.
Hi, thank you very much. Yes, 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. But 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? And 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 do you how is that affecting your capital allocation decisions?
Thank you, Frank. Well, I think it's not easy to have a medium 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. But at the same time, 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'll 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. And I don't think we have a clear view or visibility on how this trend will unfold in 2020. In my view and this is 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 and not only in The United States, but also outside The United States in all of the region, including offshore, just to face a worldwide demand that may be increasing 900,000 barrels or 1,000,000 barrels per year, but is basically picking up even in an environment of subdued growth.
We cannot I wouldn't say this rebound of investment may happen in the beginning 2020 later on. But I think that this is inevitable. And in some moment, the level of activity drilling and production will need to step up. And this will be in every sector and in many of the region, not only in Shales.
Okay. Thank you very much. Appreciate that.
Thank And 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 kind of 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? And maybe if you could just provide some of the details behind that because we see where welded pipe is going and HRC costs have been coming down. There's a lot of inventories out there. Can you just kind of walk through some of the dynamics that you see there on the pricing front? I'm really kind talking about The U.
S. Side, of course.
Yes. Thank you, David. Well, on pricing, you follow the dynamics of the Pipe Logix in the recent 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 pipes.
Now I think this trend, at least for the hot rolled coils is reversing now, reach a level at which there will be there is underway 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 these because of the reduction in the rig count And probably during the next six months, rig count will stay there or remaining or going down slightly, but we do not expect that these 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 will be the prices will reflect the situation of limited demand.
This is in our view. That's the reason why we are perceiving this pricing pressure. Now, 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 forming Rig Direct. So we are compounding the price with the level of service we can defend a little better the price our level of price.
But we do not see so much pricing power in the coming six months of this. Then 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 coil, but some recovery. I mean, the strong price for iron ore is also putting pressure on some of the players here in term of this pressure to contain price reduction.
Paul, on a related question there, all of the kind of trade rulings we've seen over the last six to twelve months, whether it's Section two thirty two or USMCA, they've pretty much all worked in your favor. Pretty much everything that you could have hoped for happened. Yet we haven't really seen any impact to the market itself. And obviously part of it's got to be The U. S.
Kind of slowing down here a little bit. But did we 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 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 or 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 ten forty five rigs. Today, are in the range of nine forty 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 reduction in the duty in our pipe, because the pipes that paid 25% duty coming into The States will be delivered to the market during the third Q. So 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 stoppages, some reduction in our capacity, because of the big intervention we are doing in. So 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.
And we think that we will this will enable us to defend our margin and to enhance our free cash flow in the coming quarter.
Thank you. Thank
you. And 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? That's the first question, please. Thanks.
Well, we expect the stoppage to have an impact in the range of $50,000,000 on the third Q. And some impact in limiting our capacity is a very extensive intervention. As I mentioned, for environmental reason, for reorganization of some of the production line to increase productivity, efficiency, automation. I mean, are intervening in the plant in Tamsa, in Romania, in Italy. So this is something that we do every not every year in the case of Tamsa is a large intervention that the last time we did this was three years ago.
So this has been 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. And so otherwise I suppose without the intervention, without the $50,000,000 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. Terms of margin, remember, there will be also probably with the margin will be defended a little better.
Understood. Thanks. I wanted to ask as a follow-up, how business is tracking in Argentina? And I think it's been your biggest Latin America revenue driver. The past couple of years, the momentum has been positive.
But 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 and how you see it playing out next year, you could look out that far. Thanks.
As I mentioned in the last call in the last conference call, we have a stable level of drilling in Argentina in this in 2019. Operator had a basically waiting for the election, Argentina. The election will be hold 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. I mean, there is a huge potential for development of this, but we will see this in 2020 in my view, from the outcome of the election. Also for Tenaris, this is important. Recently, there has been launched a tender for a large pipeline. This will be an essential component of the development of Agamemta, 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. And 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 and 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, German, you can update 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 statue and conversations we have that the DOJ team highly likely will take something around forty five to sixty days to process the information and to come out with ultimately a position or a view. We're expecting to close these towards the end of the year, most likely end of Q2. And we remain very confident about the outcome.
Thank you.
Q4.
Sorry, it's Q4. I'm sorry.
Okay. Is there just a follow-up on that, Hermann. Is there any view that kind of the market conditions now versus when the deal was discussed in Q1 have changed? And do you feel how do you feel about the deal now and the price paid?
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 you all we all recognize that U. S.
From our point of view a substantial market, the center of the energy metrics. So I think on this consideration, we have exactly the same view of this acquisition that we had six months ago. This is will create a structure of our operation in The U. S, supported by steel shop in the region, which we consider extremely important. This level of integration is essential, will allow us to support also part of our Canadian operation.
It will integrate the range of our seamless pipe region. So I mean, we see this as a very important step in defining our position for the very long term in The United States. The second question on pricing Mr. In the
Gabriel?
Yes. You are. Yes. Thank you, Paulo. 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 starting to see some tightness. So we're having some price increases, there is some pricing power back to the manufacturers there as well. So that is going to be having a positive impact with the rest of the most complex mix into the Eastern Hemisphere.
Having said that, also it's important to consider that compared to a year ago, we didn't have SSP. And SSP is a contributing factor in the Eastern Hemisphere that has an average price lower than the typical average price of Eastern Hemisphere. So that's another component to factor into the growth and pricing dynamics into Eastern Hemisphere.
All right. That's very helpful, Gabi. Thank you. I'll turn it over.
Thank you.
Thank you. And our next question comes from Mark 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 percentage margin basis for the company?
Well, you, Mark. As I mentioned before, in 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 on prices. But then in the 4Q, there are factors that are contributing. First of all, we will no longer have to pay the duty of the two thirty two. 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.
And third, we should start to see the impact of the action plan for improving our productivity, our efficiency. I expect this overall to give us around two points of margin gradually during the next 4Q. We will, let's say, this action plan is affecting not only the plant, but also our supply chain system. We expect also to reduce our inventory so to be able to contribute the figure around in the range of $150,000,000 of additional cash flow 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 United States.
Okay, that's excellent. Thank you. And just the follow-up on the working capital, dollars
150,000,000
that's between
now and year
end or
is that to be realized in the third quarter?
Sorry, can you repeat because we have an interference?
Sorry, yes. The inventory reduction of 150,000,000 is that 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. Okay. Thank you very much. I'll turn it back.
Thank you. And our next question comes from Lillian Stark from Morgan Stanley. Your line is now open.
Hi. Thank you very much for taking my question. I just had, first of all, if you can provide a bit of color on how you're you mentioned sort of the recovery in the gas market in The Middle East, but with sort of what we're seeing in terms of offshore gas investments, is there anything that you have sort of seen of incremental demand going into 2020 or beyond that that you have firm visibility on? And then my second question was more on the trajectory of margins. It seems sort of we're moving around a similar or a somewhat restricted range bound more or less.
And 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, can give a view of the first question.
Yes, sure. 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.
So this is a trend that we expect to continue, and we are well positioned to supply for the pipes to support that drilling activity. And also there is a bigger 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. And this is driving a big push for drilling activity in these countries as well. So these two components are giving us a midterm positive outlook on gas.
Yes. Well, I think on the margin, we're commenting which are the main driver downside and upside. And as I mentioned in third quarter, that will be more critical for us. And in the fourth quarter, in which many of these factors will reverse. This is the these are our basic comment on this.
It will 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 and we perceive this. But as I mentioned before, there are factors that will gradually compensate this in the 4Q. And by the way, even in this environment, Tenaris is a very 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 of margin that we expect after the third Q.
Okay, perfect. And then 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, Pablo. Yes, we really as we said in the last conference call, we are and Pablo has just mentioned, we are going to be generating free cash flow in the third and the fourth quarter of this year. So we are aiming to target probably slightly above $1,000,000,000 free cash flow for the whole year, which will turn into our basically, if we consider paying probably in the last quarter, the acquisition of IPSCO, we're going to be very much breakeven or slightly below with net debt, very small one. So 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 ASCO acquisition.
Okay, perfect. Thank you very much. I'll hand it over.
Thank you. And our next question comes from Vlad Sergievskiy 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're talking about volumes recovering to, let's say, the average level of the first half? Thank you for the answer.
From what we can see today, we 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. And 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? Well, I think the also in North America, the fourth Q will be possibly the highest in the 2019.
It depends on how we are able to maintain our differentiation. Because in the end, our point is that the major are more stable in their planning in the plans. So the market is going down before the rigs reduction, but the rigs of the major are more stable. I mean, in this environment, the last quarter also for us in The U. S.
Should be highest. But 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, Paulo. Good morning, Vlad. Yes, I believe I don't have much to add to your point because you fairly represented. But the only point that I would add is that different from any other players in The U.
S, we are going through redirect. So this shield us from inventory dynamics that there are suffering based on the approach they take to the market. This is my only point that I would like
to Yes. Got a more driven by the real consumption. Consumption rather
than the upper end demand.
Then from the upper end demand. And we think that this should shield us in the 4Q more than other player. That's great. Thanks very much.
Thank you. And our next question comes from Alessandro Pozzi from Medalbanca. Your line is now open.
Yes. 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. So I was wondering maybe can you give us a sense of how important is Mexico right now for Teneris? And also following from that, I was wondering, is the rig count still the best proxy for your sales? Because what we've seen is a falling rig count, but the number of completed wells is actually not too bad. So I was wondering whether we should focus on the completed wells rather than rig count.
Thank you.
Yes. Before passing to Guillermo for some comments 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. And also the drill and completed well are going down, but there are no substantial variations would affect our market. So in this moment, reggae count is a relatively good indicator for the size of the market.
Guillermo, you may comment on Mexican recovery, how you see this.
Yes, Pablo. Hello, Alejandro. Well, Mexico has been recovering very nicely since the end of twenty seventeen. If you compare the first quarter or the second the first quarter of this year versus that, we have had a nice increase, mainly driven by a higher activity of Pemex. But looking forward to the market, we see three engines that are going to contribute to, I would say, gradual increase.
One is Pemex and a higher activity of Pemex. Secondly, that we are already seeing, but we're going to continue to see an increase in terms of the activity of derived from the rounds that we're giving because of the energy reform. And 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. So second quarter was 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. And then moving forward into 2020, I think we're going to continue to see a gradual increase.
So Mexico is becoming a nice driver. And you have also to consider that because of the geological condition, Mexico requires a richer product mix, which also benefit our operation.
Yes. Thank you, Guillermo. Also, I mean, this quarter, we had a good important pipeline in our sales. This will not repeat in the third quarter in Mexico. So the increase in the rig will bring an increase in the volume, but we will not repeat the pipeline for the in the next.
And hopefully, Pemet will have the financial strength to support this expansion. Development really determined to have.
Okay. Thank you very much. Thank you. And our next question comes from Kevin Roger from Kepler Cheuvreux. Your line is now open.
Good morning, everyone. Thanks for the questions. They have all been answered already, so that's fine for me. Thanks a lot.
Thank you, David.
Thank you. And our next question comes from Rodrigo Almeida from Santander. Your line is now open.
Hi, everyone. Good morning. I have a couple of questions from my side here. The first one is regarding the contracts, the recent contract in the Equatorial Guinea. I know it's a small contract, but I just wanted to get some color if that will impact margins anyhow or by when?
And also if you expect any other projects to come from the region? I think you guys gave some color on that, but if you could get some more color, it would be nice. And 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 African Equatorial Guinea and on the African project, Gabriel, you can give us some additional color on this.
Yes. This was one of the good morning, Rodrigo. This was one of the big incoming orders of the pipeline division of quarter, which has been announced. This is a deepwater pipeline in the range of 20,000 tons plus that we will deliver during the first half of twenty twenty. We'll be manufacturing in confab, so similar to that growth of manufacturing in Brazil like confab like we have with Zor.
Clearly, it's not in the same size range of pipeline, but it starts to show the development activity for in Sub Saharan Africa that has been pretty much subdued. So we haven't had a pipeline of this size in Sub Saharan Africa. So I think this is a positive sign.
The rest of the region, Gabriel, you see that activity in Angola and because I have some good expectation on that project for 2020.
Yes. Sub Saharan Africa is an area where we expect some growth into 2020. There is projects that need to be sanctioned, but there is a positive momentum. We are perceiving this the different operators that we're 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.
So after some of these rigs addition come on stream and the inventory being worked out, I think that Africa is going to give us some good growth into the portfolio for the future.
Yes. 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 semi subs for performing drilling activity in the result and not only in the result. And activity may pick up will pick up we think in 2020. You do not see so much increase in the 4Q. Maybe we will have some of these projects that will fire pipes before the end of the year.
But I think most of the activity will happen in 2020.
Yes. Thank you very much guys. Very clear. Thank you very much.
Thank you. And we do have a follow-up question from Frank McGann from Bank of America. Your line is now open.
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. So I was wondering, do you think that's the case? And 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 this case, if the price of oil remain in the range of Brent in the range of $60 to 65 There will be activity on oil on a much higher scale. And also there will be a lot of project for developing gas. It could be that gas may require might have a longer time because it requires a more complex infrastructural work. But I'm very confident that Vaca Muerta is an absolutely relevant play by world standard in shales And is a great opportunity for development of a chain of value, supply and use of gas and product for the country. So I think that with a consistent government, there should be a relevant investment pipeline in treatment facilities, in development of use on the value chain and also preparing expert for sure for oil, but also gradually for gas.
Okay, great. Thank you very much.
Thank you. And our last question comes from Stuart Joyner Your line is now open.
Yes, 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. And just wondered if you could be a bit more specific about confirming that if that does complete as of first Jan twenty twenty, 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. And then just in terms of what that means on a guidance perspective, I think we're now looking at something like a €1,500,000,000 EBITDA baseline for 2019. So if we were to think about the business in pro form a terms, we've got obviously IPSCO giving you EBITDA of about 120,000,000 synergies from the deal of about 40,000,000 and tariff removal on a half year of about 70 Is that where we should be thinking about the pro form a baseline of the business in EBITDA terms going into 2020? Thanks.
Well, on the first question, yes, we have no reason to think We mentioned something around 100 basis point of margin that we can reach on a 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 one hundred days for integration. This is our standard program to materialize and to implement gradually the synergies.
They will affect 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 the what we could be the EBITDA in 2020. I think it's too far away. We have no full visibility in 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 see you there.
Okay. Thanks very much.
Thank you. And 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, Liz, again, Paolo. Before closing, let me extend all my thanks to Edgardo Carlos. Edgardo will be leaving the company on the August 5, has been CFO of Tenaris for many years. He worked thirty two years with the group, has given a substantial contribution to our company, not only in Tenaris, but before in Interium. So we are very grateful of his contribution.
He is going to work in a challenging role in another company, listed company. So we'll probably continue to see him around in different occasion. So thank you very much. I want to wish all the best for your future, Ricardo. 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. So will be an excellent CFO and will also enhance our diversity. Thank you very much. Thank you, Bob.
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.