Executive overview

Forward-looking statement

The following review of our financial position and results of operations is based on, and should be read in conjunction with, our consolidated financial statements and related notes for the year ended 31 December 2012.

Certain information, including our forecasts and strategy, contains forward-looking statements and is subject to risks and uncertainties, domestically and internationally. In assessing these forward-looking statements, readers should consider various risk factors as the company’s actual results may differ materially from the expected results discussed in this report.

Rounding

Certain monetary amounts, percentages and other figures included in this report are subject to rounding adjustments. On occasion, therefore, amounts shown in tables may not be the arithmetic accumulation of the figures that precede them, and figures expressed as percentages in the text and in tables may not total 100 percent. Changes for periods between monetary amounts are calculated based on the amounts in thousands of U.S. dollars stated in our consolidated financial statements, and then rounded to the nearest million or percent.

Executive overview

We are one of the leading global manufacturers and suppliers of tubular products for the energy industry, as well as other industrial applications. We are also Russia’s leading manufacturer and supplier of steel pipe for the energy industry. The largest share of our shipments comprises high-margin oil-country tubular goods (OCTG). Our sales mix also includes OCTG pipes with the entire range of premium connections.

We sell our products worldwide to major oil and gas, automotive, engineering, and power generation companies, and provide oilfield services. Our operations are geographically diversified with manufacturing facilities in Russia, the United States, Canada, Romania, Kazakhstan and the Sultanate of Oman. We operate R&D centers in Russia and the U.S. Our global market presence is supported by a wide distribution network. In 2012, we delivered 55% of our tubular products to our customers located in Russia and 26% in North America. We estimate our share on global market of seamless OCTG at 10%.

According to our estimates, in 2012 Russian pipe market fell by 9% as a result of lower demand for welded large diameter (LD) pipe, offset to a certain extent by increased consumption of seamless OCTG and seamless line pipe. Our sales increased slightly year-on-year, and we retained our leading position in the Russian pipe market with a 25% market share.

We are the largest exporter of pipes in Russia. Exports of pipes produced by our Russian plants accounted for 19% of our total sales in 2012 as compared to 14% in 2011.

In 2012, we sold 4,238 thousand tonnes of steel pipes. Seamless pipes comprise more than half of our sales volumes. Sales of seamless and welded OCTG reached 1,722 thousand tonnes, a 12% year-on-year increase, whereas sales of LD pipe dropped by 33% to 408 thousand tonnes following the completion of major pipeline projects in the second half of 2011 and the postponement of new projects by our customers.

Our total consolidated revenue was relatively flat year-on-year at $6,688 million as compared to $6,754 millionin 2011, despite a $318 million decrease due to the negative currency translation effect1. Adjusted EBITDA2 declined to $1,040 million as compared to $1,050 million. Adjusted EBITDA margin stayed flat at 16%.

In the fourth quarter of 2012, our sales volumes were higher by 3% as compared to the previous quarter while our revenue in creased from $1,617 million to $1,631 million. Adjusted EBITDA declined by 5% to $230 million from $243 million in the previous quarter, while adjusted EBITDA margin decreased from 15% to 14%.

Key events

Product development

In January, we developed and introduced vacuum insulated tubing (VIT), a technologically unique product offered by a limited number of producers globally.

In February, TMK PF ET premium connections successfully passed qualification tests in accordance with ISO 13679 CAL IV standard for 100% gas tightness under the application of total compression force. Completion of this certification serves as confirmation of the world quality level of our threads.

In March, we started production of 13-Chrome steel casing pipe. 13-Chrome steel pipes have unique characteristics that allow using them in various aggressive environments.

In May, we shipped casing with ULTRA™ FJ Premium connections to Lukoil and Gazprom. This premium product was patented by our American division and manufactured at our Orsky Machine Building Plant. The shipments of our premium product, new for the Russian market, confirm our commitment to offer top-quality innovative products to our strategic partners.

In July, our company signed agreements on technology cooperation with Gazprom for 2012–2015. The Sci-Tech cooperation programme concentrates on developing and delivering substitutes for imported product and new types of tubular products with high performance characteristics that would meet the advanced needs of OAO Gazprom.

In January 2013, we run casing pipes with ТМК PF premium connections in the onshore and offshore parts of the well at NOVATEK’s Yurkharovskoye gas field, beyond the Arctic Circle.

Production capacity

In March, TMK IPSCO started development of a new pipe threading and service facility in Edmonton, Canada. The stateof- the-art production equipment at the facility will thread a full range of ULTRA™ Premium connections. In addition, it will offer accessories, services and repairs of pipes. We started experimental-industrial exploitation of the facility in early 2013. It will expand TMK’s local presence and enable us to better serve our customers in North America.

In July, our Orsky Machine Building Plant qualified for compliance of their quality management system that covers both the plant and OCTG production with the American Petroleum Institute (API) standard. A thread line for casing with premium connections was commissioned in October 2011.

In September, TMK-INOX commissioned a new line manufacturing stainless steel and alloy-based welded precision pipe. The new pipe shop produces high-quality products conforming to worldclass samples and standards, which are in great demand with car manufacturers, food, energy, and construction companies. We plan that after reaching their full production capacity the lines will annually produce several thousand tonnes of high-tech welded stainless steel and alloy pipes.

In October, TMK IPSCO launched its research and development center in Houston, Texas. The new state-of-the-art R&D center serves as the heart of our company’s innovation initiatives – new product design and development, experimental and validation testing, and advanced metallurgical research – and is a key part of our company’s long-term strategy to strengthen our position in oil and gas markets.

Dividends

In June, the annual shareholders’ meeting approved payment of a final dividend for 2011 in the amount of 2,531 million Russian roubles ($76 million at the exchange rate on the date of approval) or 2.70 Russian roubles ($0.08) per ordinary share, of which 201 million Russian roubles ($6 million at the exchange rate on the date of approval) related to treasury shares in possession of TMK Group.

In November, the extraordinary general shareholders’ meeting approved an interim dividend payment for the first six months of 2012 of 1.5 Russian roubles ($0.05) per ordinary share in the amount of 1.4 billion Russian roubles ($44.8 million at the exchange rate on the date of approval).

Acquisitions and joint ventures

In December, we acquired a 55% stake in Gulf International Pipe Industry (GIPI) plant in the Sultanate of Oman. The plant’s annual capacity exceeds 200,000 tonnes of welded OCTG and welded line pipe shipped to oil and gas companies operating in the Gulf Cooperation Council countries.

We also launched a service joint venture, Threading and Mechanical Key Premium LLC, with EMDAD in Abu Dhabi, the United Arab Emirates, one of the leading service and support companies for the oil and gas industry in the Arabian Gulf region. The center will focus on repair of pipes and underground equipment, as well as threading of connections on various components of pipe columns. Its annual production capacity is approximately 10,000 tonnes of premium pipe. The commissioning of the center is set for the middle of 2013.

The plant acquisition and the launch of the service center have allowed our company to expand in the Middle East.

Business structure

Our operating segments reflect TMK’s management structure and the way financial information is regularly reviewed. For management purposes, TMK is organised into business divisions based on geographical location and has three reporting segments:

  • Russian division: manufacturing facilities located in the Russian Federation, Kazakhstan and the Sultanate of Oman, and oilfield service companies and trading companies in Russia, Kazakhstan, Switzerland, the United Arab Emirates and South Africa. The Russian division is engaged in the production and supply of seamless and welded pipe, premium products and the provision of related services to oil and gas companies;
  • American division: manufacturing facilities and trading companies located in the United States and Canada. The American division is engaged in the production and supply of seamless and welded pipe and premium products, including ULTRA™ connections;
  • European division: manufacturing facilities located in Romania and trading companies located in Italy and Germany. The European division is engaged in the production and supply of seamless pipe and steel billets.

1 The currency translation effect on income/expense items illustrates the influence of different exchange rates we use to convert these items from functional currenciesinto the presentation currency, the U.S. dollar, in different reporting periods for financial reporting purposes.
2 Adjusted EBITDA -See “Selected financial data”.

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