Paying the Piper – Vallourec
By David Murray
Steel pipes play a conceptually simple role: transporting liquids and gases. Basic pipes are commoditised and used across a broad range of industries, but there are specialised products too.
Why pay the piper?
Not all pipes are created equal. Hostile environments—particularly prevalent in the oil and gas industry—require highly specialised tubes that won’t leak or break or fail. These pipes need to operate deep underground or underwater, and are subject to intense heat, corrosion and pressure.
The oil and gas industry places great value on pipe quality and reliability. The downside is too serious to allow otherwise.
Why Vallourec?
Vallourec specialises in premium steel pipes, producing a valuable product. It has a decades-long history of setting the industry standard in seamless pipe connections, patenting and profiting from each new iteration of pipe connection it develops.
Geographically, Vallourec is well placed. It does business across the world, particularly focused on the oil and gas hubs of the United States, South America, Asia and the Middle East.
The U.S. is the single largest market for oil and gas pipes and Vallourec’s manufacturing position is particularly strong there. It fully owns an integrated domestic production chain and has been a key beneficiary of the recent increases in steel tariffs (designed to protect domestic U.S. manufacturers like Vallourec).
Source: The Beauty of Steel, Vallourec Barreiro
Investment thesis
We look for great businesses at anomaly prices.
Vallourec is a market leader in an important and specialised industry. It has a fortress balance sheet with almost zero net debt, and the experienced management team is focused on maintaining its defensive, highly-liquid position through any market cycle.
We saw it as an investment-grade quality company, unlike the rating agencies and broader market that viewed it as sub-investment grade. Our investment case included a belief that efforts to fortify the balance sheet would flow through, the company would be upgraded by rating agencies, and the market would turn positive on the name.
This difference of opinion created the opportunity to purchase the bonds at a yield of more than 7%.
Investment progress
The investment progresses well. Vallourec was upgraded by S&P to an investment grade credit rating in late November—an important milestone that the market places great value on.
It has been a great investment for the Fund and continues to pay an attractive yield for the risk.
Portfolio of best ideas
The Enhanced Yield Fund targets capital preservation, low volatility, and regular income by searching globally for the best businesses in a sector and buying at anomaly prices; companies like this tend to thrive under different market conditions, with the tools available to adapt as needed.
Disclaimer
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