Executive overview

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 December 31, 2011.

Certain information contained in this section, including information with respect to our plans and strategy, includes forward-looking statements and inherently involves risks and uncertainties. In assessing this report, various risk factors must be considered, which means that our actual results may differ significantly from those presented in these forward-looking statements.

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%.

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 the leading manufacturer and supplier of steel pipes for the energy industry in Russia. We focus our efforts on high-margin oil country tubular goods (OCTG) which account for the majority of our sales.

Our industrial operations are geographically diversified with manufacturing facilities in Russia, the United States, Romania and Kazakhstan. We sell our products worldwide to major oil and gas as well as automotive, engineering and power generation companies. In 2011, we delivered 61% of our tubular products to customers located in Russia and 24% to our customers in North America. We also provide related services to oil and gas companies.

Sales volumes of our tubular products increased as the Russian pipe market continued to grow; however, our share in the Russian market decreased from 27% to 25% as competition intensified due to the commissioning of new production facilities for large-diameter pipe and higher imports, in particular from the Ukraine. Nevertheless, we retained a strong market position for our key products, maintaining a 59% market share in seamless OCTG and 64% in seamless line pipe markets.

We are the largest exporter of pipes in Russia. Export sales of pipes produced in Russia accounted for 14% of our total sales volumes for the year as compared to 12% in 2010.

In 2011, we sold 4,185 thousand tonnes of tubular products, an increase of 6% as compared to last year, including 2,342 thousand tonnes of seamless pipe. Our sales of seamless and welded OCTG achieved 1,535 thousand tonnes, a 4% increase as compared to 2010.

In 2011, we reported total consolidated revenue of $6,754 million, up 21% as compared to 2010. Adjusted EBITDA1 increased 11% to $1,050 million as compared to $942 million in 2010. Adjusted EBITDA margin was 16% as compared to 17% in 2010.

The second half of 2011 saw lower operating results as compared to the first half of 2011, mainly affected by the slowdown in the third quarter. In the third quarter of 2011, our sales volumes declined as compared to those in the each of the preceding two quarters as market activities are usually lower in that quarter of each year and our planned equipment maintenance works occurred during that time. Though not achieved the levels of the first and second quarters, our sales volumes in the fourth quarter increased as compared to those in the third quarter, mainly in the segment of seamless OCTG and line pipe. Therefore we continued to show a positive trend in 2011 as compared to last year.

Key events

In January 2011, we supplied seamless pipe to Gazprom for construction of the Portovaya compressor station. Unique in its technical and operating characteristics, this compressor station is a starting point for gas supplies via the Nord Stream gas pipeline.

In January 2011, we completed the offering of $500 million of 7.75% loan participation notes which fall due in January 2018. The notes have been admitted for trading on the London Stock Exchange. The proceeds were used to refinance existing indebtedness.

In March 2011, we won an open auction for the acquisition of a 25.5% stake in OAO Volgograd River Port for RUB113 million (approximately $4 million). The auction was held by the Russian Federal Property Management Agency. The acquisition was finalised on August 4, 2011. This acquisition will allow us to optimise logistics for our Volzhsky plant, located close to the Volgograd River Port, and will create additional opportunities to ship OCTG and line pipe to the oil and gas fields in the Caspian region.

In March 2011, the second thread line for ULTRA connections with a capacity of 240 thousand joints was commissioned at TMK IPSCO’s facility in Brookfield, U.S.A. The new line will also enhance our product range and help us to meet growing demand from oil and gas companies.

In April 2011, we completed shipments of casing pipe with ULTRA SF Premium Connections to Gazprom Neft for the Urmanskoye field in the Tomsk region in Western Siberia. The pipes were produced by TMK IPSCO. This was the first of our deliveries to Russia of premium tubular products made in the United States.

In May 2011, we finalised the sale of TMK Hydroenergy Power S.R.L., non-core assets previously owned by TMK-RESITA, comprising four hydropower generating units located in Romania.

In June and July 2011, as a part of the Programme on Development and Testing of TMK Premium Connections, we successfully completed qualification tests of TMK PF and ULTRA-QX connections in accordance with ISO 13679 CAL IV standard. Certification of the connections will allow us to provide more tailored solutions to customers and further strengthen our position in the segment of premium pipe products.

In June 2011, we started production of pipe with a new TMK CWB premium connection for drilling with casing. The implementation of new technology will allow us to increase the connection’s gas-tightness and operational efficiency. One of the TMK CWB connection’s outstanding features is its ability to be coupled with other types of threads without adapters.

In June 2011, the annual shareholders’ meeting approved a final dividend in respect of the full-year 2010 in the amount of 796,948 thousand Russian roubles ($28 million at the exchange rate on the date of approval) or 0.85 Russian roubles per share ($0.03 per share), of which 60,839 thousand Russian roubles ($2 million at the exchange rate on the date of approval) related to treasury shares in possession of the Group.

In September 2011, Standard & Poor’s Rating Services raised its long-term corporate credit rating on TMK to “B+/ru A”. The upgrade reflects the improvement in TMK’s liquidity and its operating and financial performance in the first half of 2011.

In October 2011, we commissioned a thread line for casing with premium connections at Orsky Machine Building Plant which is part of TMK’s oilfield services division. The capacity of the new thread line is 24,000 tonnes of pipe of the designated product mix per year. Production of casing with gas tight connections will allow the company to expand its product line and ability to offer new products for oil and gas wells and related infrastructure development and services.

In November 2011, an extraordinary general meeting of shareholders approved an interim dividend in respect of the first six months of 2011 in the amount of 871,955 thousand Russian roubles ($28 million at the exchange rate on the date of approval) or 0.93 Russian roubles per share ($0.03 per share), from which 69,211 thousand Russian roubles ($2 million at the exchange rate on the date of approval) related to the treasury shares in possession of the Group.

In December 2011, we signed an agreement with LUKOIL, one of the largest global vertically integrated oil and gas companies, on pipe supplies in 2012. LUKOIL is a longstanding partner of TMK. Under the agreement, we guarantee to supply all of the company’s requirements for pipe products. The supply volumes are planned to be not less than 260 thousand tonnes for the year.

In December 2011, TMK IPSCO and Ferrous Metal Processing Co. signed a 12-year agreement to install a slitting line at TMK IPSCO’s manufacturing facility in Wilder, KY, U.S.A. This will be the largest slitter in North America. The commercial operation is scheduled to start in autumn 2012. Ferrous will own and operate the new facility and slit steel coils for TMK IPSCO on a toll basis, providing 100 percent of the company’s slitting needs for pipe production.

In December 2011, TMK IPSCO completed construction of its new R&D centre located in Houston, TX, USA. Employees and test equipment began moving into the facility in January 2012 and the facility will be fully operational in July 2012. We are one of the few global pipe producers with its own R&D centre and whose testing results are recognised by oil and gas majors. This project underlines TMK’s commitment to developing new products to service the industry and to meet the evolving needs and challenges that oil and gas companies face in their business.

In December 2011 and February 2012, TMK PF and TMK PF ET premium connections successfully passed qualification tests. All tests were conducted at the Oil States Industries international testing centre in Aberdeen, UK. TMK PF passed qualification tests in accordance with the ISO 13679 CAL IV standard, while TMK PF ET passed tests designed to ensure gas-tightness under the application of internal and external pressure, tension and compression forces.

We developed and introduced a vacuum insulated tubing (VIT), a technologically unique product offered by a limited number of producers globally. In early 2012, we delivered the first shipment of VIT to Gazprom for use in the Bovanenkovo gas condensate field on the Yamal Peninsula.

Business structure

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

  • Russian division: manufacturing facilities located in the Russian Federation and Kazakhstan, 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 rendering of related services to oil and gas companies;
  • American division: manufacturing facilities and trading companies located in North America. 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 Adjusted EBITDA — See "Selected financial data".

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