Tenaris SA

MIL:TEN

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Tenaris Fourth Quarter and Annual Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, Giovanni Sardagna, Investor Relations of Tenaris. Please go ahead, sir.

[Giovanni Sardagna, executive]

Thank you, Victor, and welcome to Tenaris 2019 Fourth Quarter and Annual Results Conference Call. Before we start, I would like to remind you that during this conference call, we will be discussing forward-looking information 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; Alicia Mondolo, 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.

I would like to start by mentioning that we will host an investor presentation in London on April 3, and we hope to see many of you there.

Before passing over the call to Paolo for his opening remarks, I would like to briefly comment our quarterly results.

During the fourth quarter of 2019, sales reached $1.7 billion, down 17% compared with those of the corresponding quarter of the previous year and 1% sequentially mainly as a result of a slowdown in activity in Argentina and lower prices in the Americas. Our quarterly EBITDA at $290 million was down 10% sequentially, and our EBITDA margin decreased to around 17% mainly due to a drop in average selling prices and higher professional fees mainly related to the closing of the IPSCO acquisition for around $10 million.

Average selling prices in our Tubes operating segment declined 3% compared to the corresponding quarter of '18 and 3% sequentially. During the quarter, cash flow from operation was $264 million. Our net cash position rose by $16 million to $980 million, following the payment of an interim dividend of $153 million in November last year and capital expenditure of $80 million.

The Board of Director has decided to propose for the approval of the Annual General Shareholders' Meeting to be held at the end of April the payment of an annual dividend of $0.41 per share or $0.82 per ADR, which includes the interim dividend of $0.13 per share or $0.26 per ADR that we paid at the end of November of last year. If approved, a dividend of $0.28 per share or $0.56 per ADR will be paid on May 20.

Now I will ask Paolo to say a few words before we open the call to questions.

[Paolo Rocca, executive]

Thank you very much, Giovanni. Good morning to all of you. 2019 was a more difficult year for Tenaris than we expected. The adjustment in drilling activity in the U.S. shales, in response to lower cash flow and a less accommodating financing environment, was prolonged. And only now as we begin 2020, we are starting to see activities stabilizing at a level, 25%, lower than it was a year ago. Pricing in the Americas was also affected by the drop in U.S. activity, coupled with the partial resurgence of U.S. domestic welded pipe production, following the steep fall in cultural steel prices in the first part of the year.

Meanwhile, in Argentina, political and economic uncertainty in the second half of the year has resulted in a sharp fall in investment activity in Vaca Muerta. In Saudi Arabia, Aramco started a lengthy destocking process, which may last through the end of this year. Against this background, Tenaris has achieved important milestone and strengthened this position in key markets.

On safety, we have made good progress over the past 2 years. Our lost time injury frequency rate has halved to an annual average of 1.2 lost time accident per million man-hour worked, including contractor. And in the fourth quarter of 2019, we were able to reduce it below 1. This reflect the constant and management focus over years and the cultural change that we've been able to extend to our 45 facility around the world.

Financially, we have worked hard to maintain the strength of our balance sheet. On sales of $7.3 billion, our free cash flow margin was 16% for the year as we reduced working capital by over $500 million. At year-end, our net cash position had risen by $495 million to $980 million after maintaining our annual dividend payments in $484 million over the year and acquiring 48% of Saudi Steel Pipe for $132 million in January.

Even with the acquisition of IPSCO, after the close of the year, we have a net debt-free balance sheet. We were finally able to complete the acquisition of IPSCO on January 2 after receiving clearance from the U.S. antitrust authorities in late December. This process lasted 9 months, much longer than we had anticipated.

During this time, the market deteriorated, and our Rig Direct competitors, the distributor, were able to switch their pipe purchases away from IPSCO to other producers. Consequently, we are now integrating a company operating at a loss with high inventory and with many production facilities shutdown. This will act as a drag on our first quarter results.

We're acting rapidly to reduce cost, to recover market share and implement the synergies we identify for the transaction. Despite the change in market condition and the lower activity level in the mills, all the assumptions that originally justified the acquisition remain valid as it will strengthen our commercial, industrial and technological leadership in the U.S. market.

With the Koppel electric arc furnaces steel shop, we now have our first steelmaking facility in the U.S., which will be able to supply with limited investment a significant portion of our steel requirement for the Ambridge and Bay City mills. The Ambridge's seamless pipe mill complemented the product range of our Bay City mill, and the geographical distribution of the acquired asset will help us to strengthen our Rig Direct service and reduce lead time, particularly in the northern part of the U.S. The contribution of the enhanced team and expansion of our technology portfolio will further strengthen our positioning in the U.S. market. Also, in the U.S., our Bay City mill has reached targeted levels of production and efficiency and is fully prepared to further enhance our competitive position.

During the year, we strengthened our position in Saudi Arabia through the integration of Saudi Steel Pipe even if in the current market condition, this is not yet fully reflected in our cash flow. In Abu Dhabi, we successfully won a long-term contract valued at $1.9 billion to supply the majority of ADNOC OCTG requirement over the next 5 years. This will start to be reflected in our cash flow from mid-'20s, 2020, I'd say.

We have a strong focus on reducing the environmental impact of our operation, whether locally in our communities or more globally through addressing the challenge of climate change. During 2019, we completed important investment to improve air quality and reduce our environmental footprint at our mills in Argentina and Mexico.

In other part of our industrial system, we also have industry-leading emission level. On Bay City mill, for example -- our Bay City mill, for example, is the only operation of its type qualified in the U.S. as a minor source of emission.

With respect to CO2 emission, we have relatively low levels of emission compared to our competitor and other steelmakers since we only use electric arc furnaces and gas-based direct reduction of iron for steelmaking.

We have also integrated gas-fired combined cycle power generation for a large proportion of our production. Over the past 5 years, we have reduced the CO2 emission intensity of our operation by 18% to 1.18 tons of CO2 per ton of steel. This is 35% below the global average for steelmaking reported by the worldsteel. This data is referring to the 4 major facility that also have steelmaking. As I mentioned before, we have, overall, worldwide, 45 facility operating, but the steelmaking operation are focused on 4 and now on 5, considering also the acquired asset [ income ].

Sustainability has long been embedded in our managing -- management practices, and we look forward to leading our industry response to the global climate challenge. During 2020, we do not expect a substantial change in the market environment, but it's still difficult to assess the impact of the coronavirus on the global economy and the oil prices. However, the repositioning in the U.S. with the integration of IPSCO, the action we are taking worldwide to reduce costs, to increase efficiency in our industrial system and to reduce lead time in our supply chain should allow us to recover our margins to around 20%.

I will stop here and leave the floor open for any questions you may have.

[Operator]

[Operator Instructions] And our first question will come from the line of Igor Levi from BTIG.

[Igor Levi, analyst]

So based on the North American numbers you reported being slightly up, assuming Mexico was up and Canada slightly seasonally up, it implies that the U.S. was only down marginally when the rig count was down more than 10% in the quarter. Could you talk about the reason for this outperformance of the rig count and just a bit more on the market in the U.S. and whether we've seen the trough in U.S. OCTG demand?

[Paolo Rocca, executive]

Well, thank you. I think spite of a reduction in the size of the market, we've been able to maintain our position, but I will ask Luca Zanotti to comment more deeply into the situation in the American market.

[Luca Zanotti, executive]

Thank you, Paolo. Good morning, Igor. As you certainly know this, international competitors that traditionally targeted the U.S. market eventually encountered difficulties to export on this market. And so as a consequence, imports dropped significantly to 35% of the demand in the fourth quarter of 2019. And leveraging our redirect model and our large manufacturing footprint in the United States, we were able to tap into this space, and therefore, we were able to maintain flat our sales.

Now looking ahead, what we see is that, given current circumstances, we don't see this situation to change. As a matter of fact, if we consider the import license of January 2020, they were pretty low. So we expect to be able to maintain our levels.

[Operator]

And our next question comes from the line of Ian MacPherson from Simmons.

[Ian MacPherson, analyst]

I was wondering if you could perhaps talk about the level of results that you saw from the IPSCO assets in the fourth quarter and maybe quantify for us how much of a drag it represents in Q1. Because I know that you have an objective to capture integration benefits and synergies as we march through the year, but maybe if you're talking about margins being flat from Q4 into Q1, how much of that is the impact of the IPSCO drag in Q1?

[Paolo Rocca, executive]

Well, you are right that due to the lengthy process to clear the transaction through the antitrust and the DOJ, the company has been subjected to important stress during 2019. So the EBITDA on the company stand-alone went down, became negative in the third Q and become even more negative in the fourth Q of 2019.

Now in the first Q, this will have a drag on our results because we could not turn around the situation within a very, very short period of time, but we are acting very fast on all front and we're expected to be able to reduce fast the drag and gradually to get to the synergies that were embedded in our business plan since the very beginning.

As I mentioned before in my prepared statement, all the consideration and -- that led us to the acquisition are still very valid. And in the first month in which we get contact with the people, the operation, the technology, we're confirming, let's say, the rationale and objective of the acquisition, but we will have a drag. This drag is also embedded in a high level of inventory in the company because the company in the end reacted slowly to the change of policy by the distribution system. So we have a level of inventory that are priced at a level that is reflecting the costs and are different from the costs that we have. So there will be a gradual reduction of this inventory, and this will be part of the drag that I mentioned for the first Q.

I will ask Luca to comment on the path, the road map and the synergy that we plan to get in the coming quarter.

[Luca Zanotti, executive]

Yes, Paolo. Thank you. Ian, specifically to synergies, what we have seen when we start looking into the company carefully, we see that compared to what we previously announced, we see a higher level of synergies. We estimate an annual run rate in the range of USD 80 million to USD 100 million. Now those synergies will come from 4 main buckets. The first 1 is the optimization of the allocation. We're going to be certainly favoring the most efficient and lower-cost mills. And at the same time, we want to reduce logistic costs, allocating in proximity of the consumption is forecasted. The second is going to be capacity reduction. And I believe that what we've done following the previous management is already public, but we rightsized production capacity. The third 1 is coming from the fixed cost reduction deriving from the integration. And the fourth is deriving for -- from the operational and purchasing/makeup by decision. So as I said before, these 4 main buckets are supposed to bring between USD 80 million and USD 100 million. We expect those synergies to kick in gradually through the year and to accrue the full benefit towards the end of 2020, the last quarter of 2020.

[Ian MacPherson, analyst]

My follow-up question, I wondered if you could maybe provide some range of expectations for first quarter revenues given the stabilization of your base business and then the full -- almost a full quarter capture of top line, even though at a dilutive margin from IPSCO, that would help provide a helping -- helpful starting point for us.

[Paolo Rocca, executive]

Well, in the first quarter, as you remember in -- 3 months ago, we were considering that we should have had positive impact from reduction in our costs coming from the lower price of hot-rolled coils getting through our inventory, from lower level of maintenance, because last year, we had some overrun in maintenance and some change in mix.

Now what we see today has been -- will be affected by the drag of the IPSCO acquisition. Some of the costs related to the closing of the transaction. We have lawyer and consultants that are supporting us. There will be some cost related to the final closing that happens in January. But there are specific issue that we need to complete during this month concerning inventory assessment and so on.

And the Pipe Logix reduction. We didn't anticipate in October, but the Pipe Logix went down between October and January by another additional 5%. So this has an impact that is offsetting the improvement that we were considering for the first Q. So we now assume that in the first Q, EBITDA ratio should be and the margin should be in the range of the fourth Q. So the first Q will be more or less aligned in our view in term of margin with 4Q.

Now from that point on, we expect things to start to improve, and we expect in the second part of the year to be able to get to the level of margin that we had in the first half of 2019, which is around 20% margin by that time.

[Ian MacPherson, analyst]

I understand the margin guidance. I don't understand what we're talking about in terms of top line as a starting point for the year.

[Paolo Rocca, executive]

In the top line, I think that considering the reduction in Pipe Logix that occur up to now, we will also be able to recover gradually. But if you look at, let's say, the entire company, we expect that in the second half of 2020, we will be at the top line, in the range again of the first half of 2019.

[Operator]

And our next question comes from the line of Sean Meakim from JPMorgan.

[Sean Meakim, analyst]

So maybe just to continue on to that line of thinking. If we think about the decline in Pipe Logix pricing in the fourth quarter, what's the average pricing that we should be thinking about in the first quarter relative to 4Q? Meaning, how much do we need to -- if we're stabilizing here, how much do we need to catch up first quarter relative to 4Q? And then just can we distinguish between seamless and welded?

[Paolo Rocca, executive]

I think this is considering the shift in the mix worldwide between, let's say, different regionals, if we are referring to the company as a whole, it's more difficult to give a clear answer in the level of pricing for this. The 5% reduction that we have seen between the 4Q and the first Q is in the Pipe Logix, but it didn't reflect entirely in our pricing. So from that point on, we also will be recovering.

The difference in contracts, long-term contracts, short-term sales makes a little more difficult to forecast how the recovery in price may happen during 2020.

[Sean Meakim, analyst]

Okay. And then maybe talk a little more about IPSCO. So start of the year, maybe not as good as you would have thought a few months ago, but understandable given all the moving parts. It seems like the distributors maybe are getting through a lot of the destocking process in North America. Could you give us a sense of your expectations for IPSCO's contribution to cash flow in 2020?

[Paolo Rocca, executive]

As I mentioned before, this will be growing over time, but Luca, maybe you can add some comment on the cash flow coming from IPSCO during 2020 after, let's say, the third quarter, it will be...

[Luca Zanotti, executive]

Yes, Paolo. Sean, as I was anticipating before, we see IPSCO [indiscernible] with a negative profitability. And then thanks to the 2 things that Paolo already mentioned in his opening, so a recovery in volumes and the full implementation of the synergy's action, we're going to see profitability to improve and get positive to -- in the second half of 2020.

[Sean Meakim, analyst]

And so when we think about CapEx associated with the business, on a full year basis, do we think that it's cash flow positive? Or is -- in 2020, as we're working through the process, is it maybe a net use of cash for the year?

[Paolo Rocca, executive]

Well, at this point in time, we are looking at the, let's say, the investment level for the entire company, considering the facility. There will be really operational in this. We consider that the company should -- as a whole, Tenaris should have capital investment in the range of $350 million, $360 million, including the investment that I mentioned to expand the range of the Koppel continuous casters, so to be able to supply the entire American system, Bay City and Ambridge. We will have to invest on this. So as a whole, this will be in the range of $360 million investment in capital. Now the EBITDA, we expect EBITDA of the single [ BDD ] the IPSCO asset to become positive in the second half of 2020.

[Operator]

And our next question will come from the line of Marc Bianchi from Cowen.

[Marc Bianchi, analyst]

I guess, first, back on the Pipe Logix question. Maybe not so much related to how it affects your revenue here in the first and second quarter, but just on a leading-edge basis, given the commentary about low imports and maybe where inventories sit, how do you see the Pipe Logix pricing index progressing from here?

[Paolo Rocca, executive]

We expect a recovery. We expect a recovery after that, let's say, the point that has been reached in these months. Frankly, I think that we should be bottoming out from here. But I would ask Luca. He share this feeling and if Pipe Logix is bottoming out.

[Luca Zanotti, executive]

Yes, thank you. Marc, I believe that yes, we need to consider different pieces. And the first 1 that you certainly have also seen is that recently, there is a number of an array negative results coming in from the industry. You have seen increase in negative EBITDA generation from some competitors, industrial restructuring from other competitors, recapitalization from other as well. And this is the first part.

The second, you've seen towards the end of 2019, competitors to announce price increases. And overall, these are all signs that the industry is in a situation that really needs prices to go up. My -- I share your point, and I believe that we are scraping the bottom of the barrel. And I see prices going up in the future.

[Paolo Rocca, executive]

Yes. I think -- yes, really, we are -- you should be touching the bottom. And this level of Pipe Logix and price is basically unsustainable in the medium term for the competitor, domestic, and global competitor for the U.S. market.

[Marc Bianchi, analyst]

Okay. I wanted to go back to IPSCO and the losses. A few questions around this IPSCO...

[Paolo Rocca, executive]

Let me add one -- sorry, let me add one comment here to make it -- just to keep in mind. Here, we are considering that there is no more relevant impact from coronavirus. I mean, if -- because this is the discussion we have, without considering additional disruption coming from the coronavirus on the level of economic activity worldwide in China and maybe consequently on the price of oil in China. So it's a scenario, the one that we are mentioning to you, that is consistent with the level of rigs in the level of 800 rigs, I mean, and no major disruption in the main variable of this. If something happens on the ground, obviously, things would be -- could be different. Sorry for interrupting you.

[Marc Bianchi, analyst]

No, that's helpful. Makes sense. In terms of the IPSCO impact on results here, so it's negative right now. It sounds like it's going to be negative in the first half. Can you help quantify just on an EBITDA basis what we're talking about here? Is it like a $10 million kind of drag per quarter? Or is it much more substantial than that? And then are we talking about breakeven...

[Paolo Rocca, executive]

As I mentioned before, I mean -- yes, as I mentioned before, what we expect today, considering this impact and considering the other elements that I mentioned, still, our margin in the first quarter should be in line with the margin of the 4Q.

[Marc Bianchi, analyst]

Okay. And is there -- you mentioned some professional fees and such. I would suspect that there might also be some restructuring if you're changing some of the fixed costs there. Is there a number that you care to quantify as to how much of a onetime headwind some of those things could be in the first half?

[Paolo Rocca, executive]

This was a component that I was including in the consideration of cost related to the integration of IPSCO. Let's say, I don't know in this moment, I wouldn't give a figure, but I don't know if, Luca, you could have an estimate. There will be some additional cost due to the restructuring.

[Luca Zanotti, executive]

There will be some additional cost. We are still putting together the numbers and -- but certainly, we need to consider, on top of what you just mentioned before, some severance that we're going to need to materialize the synergies on the fixed cost.

[Operator]

And our next question comes from the line of Stephen Gengaro from Stifel.

[Stephen Gengaro, analyst]

Just -- I think 2 things. One, just a follow-up on Marc's question. Those costs associated with the integration, are they part of your flat EBITDA margin guidance for 1Q? Or are they not included in that number?

[Paolo Rocca, executive]

Included. I mean, when I say -- I think this is a forecast. But in -- for the first Q, we expect to be able to reach a margin in line with the fourth quarter, including this, let's say, extraordinary expenditure for the integration of IPSCO and its first restructuring that we will incur between now and end of March.

[Stephen Gengaro, analyst]

Okay. And then I guess 2 other things, actually. The first is, if we looked at IPSCO's numbers from 2018 and we sort of thought about some decremental margins to get to negative EBITDA, it seems like the revenue run rate on a quarterly basis is kind of like in the $175 million to $200 million range right now. Is that a reasonable guess for the first quarter?

[Paolo Rocca, executive]

Can you say again, because -- to understand it?

[Stephen Gengaro, analyst]

So I think IPSCO did about -- it seems like IPSCO did about $1.3 billion in revenue in 2018. And just looking at what the market has done and looking at the fact that they've moved to an EBITDA negative position in the fourth -- third and fourth quarters of '19, it seems like their quarterly revenue is running a little bit under $200 million. Is that a reasonable starting point?

[Paolo Rocca, executive]

I think it's, I would say, even lower than what you mentioned. I mean, the compression in revenue that happens during the 9 months, in which we completed discussion with the antitrust, has been substantial. So the company enter to the strong squeeze for -- on the top line, well below, let's say, in the fourth quarter, the $200 million that you mentioned, and on a negative EBITDA that also is relevant in this model. Now this will change in the first quarter. But in -- fourth quarter has been below what you mentioned as a top line for IPSCO.

[Stephen Gengaro, analyst]

Okay. And then just one final one. When you think about your Rig Direct model and you think about moving IPSCO volumes through Rig Direct, based on conversations with customers that you've had since the deal closed, are you -- what's your sort of optimism around how rapidly you can kind of get the IPSCO volumes ramp back up through the Rig Direct distribution system?

[Paolo Rocca, executive]

Well, at this time, will be Tenaris acting as a whole, expanding this portfolio with the existing client and establishing, let's say, contract some of the client, existing client also of IPSCO. We will gain ground, I think, during 2020, pretty fast. But I will look how the client are reacting and if you see room for this catch-up and the rebuilding of the customer base and enhancing the expansion of the customer base.

[Luca Zanotti, executive]

Yes, Paolo. First of all, we need to mention that we have a commitment that was taken by IPSCO. And of course, we're going to respect those commitments. So I mean the speed at which you're going to be switching to Rig Direct also depends on the previous commitment that -- of what they can mine.

Going into the specific question. Well, you don't see this any more difficult than what we did at the beginning. Actually, we see this much easier because let's remember that we started from scratch in 2015, and in 2017, we were already in the range of 60% of our sales. Today, the understanding of the U.S. customer base is much higher than what we have at the beginning. So we don't have to go in and explain everything from scratch. So I see this happening through 2020. And according also to the commitments that were taken by IPSCO in the past. But I believe we can complete this through this year.

[Operator]

And our next question comes from the line of Sahar Islam from Goldman Sachs.

[Sahar Islam, analyst]

If I can start with another one on IPSCO, please. How should we think about the normalized through the cycle margins at IPSCO? And how would that be different under your management versus previous management?

[Paolo Rocca, executive]

I'm not sure, I mean, the normalized. In this -- in the integration that we are carried on in this, really, we will manage the entire system in a unified way since day 1. So it's correct to say the level of invoicing of IPSCO went down through 2019. It touched around $200 million in the third Q and then went down again substantially in the fourth Q. But at this point in time, we are looking at this as a Tenaris challenge, would be difficult to understand or to separate IPSCO from Tenaris. We are looking at our combined market share, and I would say that it will not be something like a normalized level of IPSCO operation.

We will also allocate material in the most efficient mill for rolling, for casting, for finishing, for heat treatment in a system that will be based on many different mills in the U.S. What we think we should do, and we are very confident we could do, that we will be able to establish the leadership that Tenaris has in volume, in service and in technology and our market share, which get to the level that we design and we have in mind when we launched the acquisition of IPSCO more than 1 year ago.

[Sahar Islam, analyst]

And then my second question can be away from the U.S. Can we get some more color on pricing in the international markets, please?

[Paolo Rocca, executive]

Thank you, Sahar. I would ask Gabriel to give us -- to give a view how we perceive the tension to this up to now and further condition.

[Gabriel Podskubka, executive]

Yes. Thank you, Paolo. Sahar, pricing in the [indiscernible] international market remain competitive. This really has decoupled from the Pipe Logix dynamic that we're mentioning before. So there is not a direct link. There is a very limited impact of the Pipe Logix into the -- into our formulas of some of our contracts in international market, but this is very limited.

We have a positive momentum in our average pricing, given our backlog of enriched mix due to the gas developments in Middle East and some offshore as well. So year-over-year, the pricing moves in a positive dynamic within a competitive environment.

And we also see some tightness in some specific niches of our service, corrosion-resistant alloys, where we're able to push some price increases. But this is a limited impact in the overall portfolio. It's a little bit of the dynamic at the general level.

[Operator]

And our next question will come from the line of Alessandro Pozzi from Mediobanca.

[Alessandro Pozzi, analyst]

My first question is on cash flow for 2020. Just wondering, in particular, how do you expect working capital to evolve? Clearly, we've seen a positive contribution in 2019. I was wondering how much positive contribution do you expect, if any, from working capital in 2020?

[Paolo Rocca, executive]

Thank you, Alessandro. We also -- we continue to intervene on the entire supply chain, on the lead time. And we think that the integration of IPSCO will also support after the initial period in which we have to reduce the inventory that we are receiving with IPSCO. We will continue to reduce inventory, and we expect to have positive contribution in the range of some $200 million or in this range during 2020. So this will contribute to our cash flow. We are confident that we will get a very strong cash flow in 2020.

The recovery in the margin in the second part of the year, combined with a relatively contained level of investment and reduction in working capital, should allow us to be able to give a very robust cash flow in 2020.

[Alessandro Pozzi, analyst]

Do you have in mind what net cash you could end up with at year-end?

[Paolo Rocca, executive]

As I can tell you, we can -- always considering, let's say, the situation as it is today without, let's say, relevant slowdown of the economy or reduction in the level of rigs. We consider that, as we mentioned before, we can have a level of cash flow similar to the level that we had in 2019.

[Alessandro Pozzi, analyst]

Okay. And just 1 thing on the CapEx. I think you mentioned, say, $50 million to, say, $60 million. Does that include the IPSCO CapEx as well?

[Paolo Rocca, executive]

Yes, we are including the investments that we are planning to undertake in the -- especially in the Koppel steel shop, to advance in the capability to supply the entire need of the U.S. operation from Koppel.

[Alessandro Pozzi, analyst]

Okay. That's fine. And just the last 1 on the -- you mentioned the global OCTG demand is likely to fall in 2020. I was wondering if you can maybe give us a bit more color on where you see -- which regions you see more strength there.

[Paolo Rocca, executive]

Well, I will say that in 2020, we are considering that it will be -- there will be a low recovery in Argentina. We do not expect so much from the demand in Argentina in the first part of the year until some of the key issue of the economic plan will be defined and negotiation also for the debt will be completed. But then we will see. Argentina could be [ capped ]. It could be, let's say, increasing, expanding the market in the second half.

And second area that, in our view, is important is the Gulf of Mexico from the -- both the American and the Mexican side. The international oil company are working actively in Mexico. But in the Gulf of Mexico, we are seeing project going on. We have the contract with ADNOC that was mentioned in my prepared remarks. We have a very large contract, the majority of the need of ADNOC. We estimate around $1.9 billion in the period of 5 years. This will kick in during the second part of the year, in our view, depends also from how fast ADNOC will work on this.

Another area that could be positive for 2020 second part, is Brazil. We have an important market share in Brazil offshore. If, as it seems, Petrobras and private company -- international company are maintaining the programs of drilling, this will be also a positive area. One is a niche but it's still important is the connector that we sell worldwide for the offshore project are also an area in which we will expand our sales. So these are the area in which we may have, let's say, positive development during the course of 2020 that may compensate for a relatively weak demand due to the destocking in Saudi and the Argentina situation as far as we can see today.

[Operator]

Our next question will come from the line of Alan Spence from Jefferies.

[Alan Spence, analyst]

I've just got 2. The first one, regarding those extraordinary expenses, you mentioned -- still related to IPSCO for Q1. Can you give us a rough ballpark or estimate of what those would total during the quarter?

[Paolo Rocca, executive]

Extraordinary expenses of IPSCO, Luca?

[Luca Zanotti, executive]

Yes, Paolo. I mean, as I said before, we are still finalizing the number, but we expect this to be in the range of $15 million to $20 million.

[Alan Spence, analyst]

Yes. Okay. Apologies if I missed you saying that number earlier. So the second one, when you talk about the second half '20 improvement in IPSCO and it turned into a positive contribution, is that driven by any forecasts around improved pricing? Or is that predominantly due to your expectations around synergies and maybe some better volumes?

[Paolo Rocca, executive]

As I mentioned before, I think the present level of pricing in Pipe Logix is difficult to sustain. So it's worth assuming that there would be -- there could be some limited rebound but -- at least in this. But mainly, what we are counting on the synergies that Luca was mentioning before due to allocation, to restructuring of the production system, efficiency in this and some cost reduction that we can get in working -- integrating the 2 companies.

[Operator]

And our next question will come from the Lillian Starke from Morgan Stanley.

[Lillian Starke, analyst]

Just 1 quick question from my end. You mentioned the accumulated inventory at IPSCO. I was just wondering if, at any point, do you think we could expect an impairment on the back of this. Or are these tubulars that you expect to be putting in the market, just at a lower margin?

[Paolo Rocca, executive]

Well, according to a contract, we are reviewing the inventory. We will sure assess quality condition of inventory, and then we have to close the contract and the agreement with TMK based on this. Once we completed this, I expect no impairment. We expect to be able to sell to the market. But as I mentioned before, the cost of sales for this product and this inventory is higher than the average cost of sales for our -- the material we provide from the rest of the facility. So this is part of the drag that we will have in the first. Let me tell you that gradually, the new production and the new material, in our view, will be competitive in term of cost after the dimension and the restructuring that we will have. Now we didn't complete the first stage, which is the overall assessment of inventory. We have, according to the contract, 75 days to complete this. So in general, this is the sense we have. There are no major issue coming from this.

[Operator]

And our next question will come from the line of Rodrigo Almeida from Santander.

[Rodrigo Reis de Almeida, analyst]

So I have a couple of questions from my side. The first one is related to the IPSCO acquisition and the margins that you mentioned at the 20% level for the second half of 2020. Just a quick question. If you do include the synergies that you mentioned, the $80 million to $100 million in synergies for this 20% margin for the second half of 2020. And my second question is related to the JV you made in Russia, in Siberia. If you -- how is that going, if you're spending any cash from that? And if you could -- if you are, if you could give us a breakdown of how much is going towards that, that would be interesting to know also.

[Paolo Rocca, executive]

Thank you, Rodrigo. On the first point, when I mentioned the recovery of the margin to get back to the range of 20%, I'm considering this is the margin for all of the Tenaris and is considering all of the element company to it, including synergy that we plan to have in -- gradually into this. We mentioned $80 million to $100 million in the annualized figure. But we can expect it to enter -- starting gradually, I mean. Say gradually but at least we plan to reach it by the fourth quarter, for sure.

The second issue on the Russian venture, we are proceeding for our investment. We will be investing during 2020. Maybe, Gabriel, you can comment on how things are going on in the -- in Russia.

[Gabriel Podskubka, executive]

Yes, Paolo, thank you very much. Rodrigo, indeed, JV in Russia is progressing very well. We have a great understanding and dialogue and cooperation with our partner, Severstal. We are advancing full speed in the engineering and the construction, targeting as planned commission -- commissioning of the facility by the second half of 2021. So we're looking forward to complete that facility, another line of business.

In terms of CapEx, our provision is around $70 million for 2020 and probably a similar number or a bit lower into 2021.

[Paolo Rocca, executive]

This figure is not included -- I mean, is in the $350 million --

[Alicia Mondolo, executive]

No, it's not included in the $360 million because this is our participation in the joint venture. So we are expecting to -- our investment in 2020 will be $70 million. And in 2019, we invested about $20 million.

[Paolo Rocca, executive]

This is our participation in the venture, so it's not considered a part of the $360 million that we are mentioning is CapEx.

[Alicia Mondolo, executive]

And it is our...

[Paolo Rocca, executive]

But are included in the overall vision of the cash flow that I gave before.

[Operator]

And I'm not showing any further questions at this time. I'd like to turn the call back over to Giovanni for any closing remarks.

[Giovanni Sardagna, executive]

Okay. Thanks a lot for joining us in the call, and we hope to see you in London, April 3. Thank you.

[Paolo Rocca, executive]

Thank you very much.

[Alicia Mondolo, executive]

Thanks.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.