Philippe Crouzet – Chairman, Vallourec – France
EBR speaks to the chairman of Vallourec, a world leader in tubular solutions, who outlines the restructuring plan he unveiled last February. He explains that in spite of the difficulties encountered, his international expansion strategy was visionary and make the company more resilient in near future.
In light of the challenges faced by Vallourec, you announced a restructuring plan in February. What was your diagnostic of the difficulties you were facing?
We are currently witnessing the downturn of an oil and gas cycle. The previous example occurred in 2009. I am however convinced that besides these cyclical considerations and long before hydrocarbon prices crumbled, the industry has been in dire need of structural changes. On the one hand, we must adapt to the steep fall in activity by stopping lines, delaying operations, reducing working hours and unfortunately enacting layoff plans. On the other hand, we must respond to the evolution of the industry by introducing long-term strategies.
What are the main lines, time frame and goals of this plan?
We have identified and implemented short-term objectives revolving around cost saving, cash generation and cash allocation, which should produce tangible results by the end of 2016. Overall, our target is to reduce our cost base by $350 million by 2017 and drastically reduce Capex in order to improve our rate of return on capital.
Not only have you reduced investments for 2015, you claim to have changed your investment evaluation methods. What does that entail? And which projects will be affected?
In the last decade, Vallourec has allocated significant investments to reposition its assets beyond Europe. Historically, more than two thirds of our assets were found in Europe; a framework which we deemed unsustainable due to currency risks and high labor costs. We therefore conducted major investments in Brazil, North America, Saudi Arabia and China. After completing this essential set of investments, our capital expenses returned to normal levels. When we looked back at this intensive investment period, we identified some shortcomings in project management and execution.
Our philosophy consisted indeed in minimizing spending before capital investments were approved. But it is only after a deep work in terms of engineering that we can sure know the cost of a project. Consequently, we decided to allocate significant budgets on detailed evaluation during the design phases of a project in order to optimize the decision criteria and do savings in the long run.
Your argue that the current mismatch between hydrocarbon supply and demand causing low prices will inevitably resolve itself by 2016- 2017. What is your forecast for those two-three difficult years?
Qualitatively speaking, 2015 and 2016 will be difficult years in light of low demand levels. We are therefore first concentrating our efforts on short-term adaptation. But we also work on reinforcing our fundamentals, i.e. innovation and industrial excellence, and finally deploy our ambitious competitiveness plan. Lastly, to be more efficient and closer to our customers, we decided to adopt a new regional organization. These profound changes require time and effort. But, to some extent, economic slowdowns can help implement changes decisively. We will then be ready to profit from the rebound when market conditions return to normal.
Your described your investments in production facilities in Brazil and the United States as visionary, although they haven’t yielded the expected results and are notably working below capacity. Why do you insist that it was visionary and what can be done to operate these facilities at full capacity?
If we look beyond the short term, the consensus amongst the industry in terms of promising prospects, points toward shale in North America, offshore in Brazil and deep offshore worldwide. Our strategy fully subscribes to this vision. We were the first to invest in a North American new operation fully dedicated to shale oil and gas. And we were operating in full capacity during the second half of 2014. Our customers in North America have undisputedly recognized our commitment, our loyalty and the quality of our services. Today, the shale revolution constitutes one of the major evolutions in the industry and will affect global trends in years to come. Vallourec is ready, way ahead of competition.
In Brazil, we made the decision to double our capacity in 2007 with a new integrated mill (steel + pipes). This is when pre-slat fields were discovered. We currently offer the most advanced technologies for pre-salt fields, which complement our successful historical presence. Although Petrobras is confronted to important issues at the moment, their presalt operations are yielding outstanding results and defying pessimistic forecasts issued by many players who now seek to position themselves. We must remind our audience that deep offshore wells in Brazil are the most productive in the world. We are fully equipped to support that opportunity and our mill in Brazil will also supply offshore in West Africa, the Middle East and Southeast Asia.
Between 2012 and 2014, the oil and gas activity represented 60 and 72 percent of Vallourec’s revenues the rest being shared between industry and nuclear energy. Are you expecting a rebalancing of your portfolio in the near future?
Oil and gas will continue to represent between 70 and 75 percent of our overall activity. It constitutes the backbone of our business. But oil and gas is a mature industry in some areas of the world where it presents fewer opportunities for growth, as opposed to the three segments mentioned in my previous answer : unconventional (shale), offshore in Brazil and deep offshore worldwide. Vallourec has not only rebalanced its activities towards these segments of oil and gas, it has also reorganized their geographic distribution. We have strove to reposition our assets in proximity to the most profitable oil and gas markets.
Although times may not be at their best in the sector, the company is still a market leader in its sector. What do you think you still have to offer to the Oil and gas sector?
Vallourec offers the most advanced tube solutions coupled with outsatanding services. We provide a very efficient and renowned field service activity. Any client using our VAM connection can request physical support in no time. We also provide repair service and accessories, which we either own directly or guarantee through licensees. Lastly, innovation is part of our DNA. Although technological developments take time to operate, we have been innovative for the last 50 years, addressing issues linked to corrosive wells, pressure etc. In this respect, we have recently increased our testing capabilities to accelerate the time to market of our innovations and match growing customers’ expectations of the qualification of new products. This is a significant trend, and a direct consequence of Macondo.
You recently celebrated 50 years of existence of VAM, a disruptive innovation that impacted the course of the history of oil and gas. What will be Vallourec’s new VAM for the future and in which direction do your R&D efforts go to?
We currently use a technology called VAM 21, which is the latest generation of T&C premium connection introducing a revolutionary design. We are expecting to unveil a very disruptive innovation in the coming years, which will respond to our customers’ ambition to continuously seek operations in extreme environments and remote locations. We are devoted to helping our customers save time and bridging the gap between the added value of our products and their operating costs. In the power generation industry for instance, our customers have been more diligent and concerned by operational costs. This trend reflects inefficiencies that we have identified long before the current slump. The positive correlation between oil prices and return on investments has eroded before 2013.
You claimed that when you arrived to Vallourec you faced a slow degradation of the working environment and transformed Vallourec from a Big SME into a large corporation by integrating people from Alstom or Danone at key positions. How is Vallourec no longer an SME?
The transition of Vallourec from an SME into a large corporation has required the introduction of key central functions, and the corresponding skills, to successfully execute the company’s strategy.
Crises usually compel companies to implement drastic decisions and adopt new management methods. What will you have learnt from these difficult times from a managerial and human point of view?
Vallourec is more customer-conscious. We are now capable to supply the most complex solutions locally with the support of our R&D efforts in Europe. Vallourec is more global and has devoted considerable efforts to integrate various working cultures. Finally, I insist on the success and the progress of our new hubs located in the Gulf and in Singapore. Overall, Vallourec has accompanied its clients for the last 50 years and will stand strong besides them for the next 50!