REPORT 2011 - Vallourec annual report 2011 vallourec is a world leader in premium tubular solutions primarily serving the energy markets (oil and gas, powergen)

ANNUAL REPORT

2011

Registered office: 27, avenue du Général Leclerc92100 Boulogne-Billancourt (France)552 142 200 RCS Nanterre

Tel.: +33 (0)1 49 09 35 00 Fax: +33 (0)1 49 09 36 94

www.vallourec.com

A French limited liability company (société anonyme) with Management and Supervisory Boards and issued capital of €242,868,818

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Vallourec Annual report 2011

VALLOUREC IS A WORLD LEADER IN PREMIUM TUBULAR SOLUTIONS PRIMARILY SERVING THE ENERGY MARKETS (OIL AND GAS, POWERGEN). ITS EXPERTISE ALSO EXTENDS TO THE INDUSTRY SECTOR (MECHANICALS, AUTOMOTIVE, CONSTRUCTION ETC.). WITH 22,200 EMPLOYEES, SALES OF 5.3 BILLION EUROS IN 2011 – 73% OUTSIDE EUROPE – INTEGRATED MANUFACTURING FACILITIES IN MORE THAN 20 COUNTRIES AND ADVANCED R&D, VALLOUREC OFFERS ITS CUSTOMERS INNOVATIVE GLOBAL SOLUTIONS TO MEET THE ENERGY CHALLENGES OF THE 21ST CENTURY.

22,200 in more than 20 countries

EMPLOYEES

>50PRODUCTION FACILITIES

€5,296SALES IN 2011

MILLION

74%SALES IN THE ENERGY SECTOR

73%SALES OUTSIDE

THE EUROPEAN UNION

SALES BREAKDOWN BY ACTIVITY IN 2011

PROFILE

Oil & Gas

Power generation

Petrochemicals

Mechanical engineering

Automotive

Construction and other

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%

7

12

7

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CONTENTS

GROUPProfi le 01

Vallourec in the world 02

Interview with the Chairman of the Supervisory Board and the Chairman of the Management Board 04

Context & strategy 06

Governance 08

Sustainable development 10

Human Resources 12

ANTICIPATING MARKET DEVELOPMENTSOil & Gas 16

Power generation 20

Industry 22

INVENTING TOMORROW’S SOLUTIONSMastering technological challenges 26

STRENGTHENING OUR LOCAL LEADERSHIPBrazil: a unique position 34

United States: serving local markets 36

Europe: a hub of technological excellence 37

China: a stronger presence 38

Strategically positioned in the Middle East 39

MORE EFFICIENT AND MORE COMPETITIVEVSB, a key part of Vallourec’s industrial facilities 42

FINANCE2011, a year of growth and preparation for the future 46

Vallourec’s share price 48

Balance sheet and income statement 50

Glossary 52

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MaIn custOMERsOil & Gas / Oil companies: Aramco (Saudi Arabia), Petrobras (Brazil), OGX (Brazil), Total (France)

Oil & Gas / Distributors: Champions Pipe & Supply (United States), Chickasaw (United States), Pipeco Services (United States), Premier Pipe (United States)

Power Generation / Power plant construction: Alstom (France), Bharat Heavy Electricals (India), Dong Fang (China), Doosan (South Korea), Hitachi Power (Japan)

Power Generation / Distributors: Buhlmann (Germany)

Other Distributors (Petrochemicals, Industry): Açotubo (Brazil), ThyssenKrupp (Germany), Van Leeuwen (Netherlands)

automotive, Mechanical engineering / tube manufacturing: Salzgitter (Germany)

finishing units

steel mills

tube mills

plantation and mine

sales and services offices EuROPE

aFRIca / MIDDLE East

asIa

SALES BREAKDOWN BY GEOGRAPHIC REGION

BREAKDOWN OF EMPLOYEES BY GEOGRAPHIC REGION

VaLLOuREc In thE wORLD

nORth aMERIca

sOuth aMERIca

IntERnatIOnaL PREsEncE cLOsE tO OuR custOMERs

GROuP

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14 %

4

9

7

26

19

21

North America

South America

Asia and Middle East

Germany

France

Other EU countries

Rest of the world

%

12

7 1

45

36

Europe

Brazil

NAFTA*

Asia

Middle East

* United States, Canada, Mexico.

02 03

Vallourec Annual report 2011GROuP

01

Jean-Paul ParayreChairman of the Supervisory Board

Philippe CrouzetChairman of the Management Board

Philippe Crouzet

2011 was a year of preparation for the future, during which Vallourec continued to advance with the start-up of large-scale industrial projects.

We continue to provide Vallourec with all of the industrial, human and financial assets that the Group requires to deal with tomorrow’s technological challenges.Jean-Paul Parayre

what were the main trends seen by Vallourec in 2011?

Philippe Crouzet: first of all, 2011 was a year of strong growth. the recovery, which had already begun in 2010, continued. this allowed Vallourec’s plants to operate at full capacity for a large part of the year. in the unique economic environment of 2011, our business was driven by markets linked to the energy sector, which represent three quarters of the group’s sales. in industrial markets, particularly the mechanical engineering sector, growth was especially strong in the first half of the year while there was some hesitation in the second half due to the economic uncertainties that arose following the financial crisis in the summer. two-thousand eleven was also a year of preparation for the future, during which Vallourec continued to advance with the construction and start-up of large-scale industrial projects. the start-up costs of these new plants evidently weighed on the group’s operational profitability. net income nevertheless remained almost stable; it is for this reason that the dividend offered to shareholders is identical to that of last year.

INTERVIEW WITH THE CHAIRMAN OF THE SuPERVISORY BOARD AND THE CHAIRMAN OF THE MANAGEMENT BOARD

where did you focus your strategic investments?

Jean-Paul Parayre: VsB, our new integrated plant in Brazil, and Vm2, our pipe mill which shall soon be operational in the united states, clearly demonstrate Vallourec’s ambitions in the Americas, our most profitable region. these projects embody our long-term industrial vision: the predicted rise in world energy demand remains strong, and the growing complexity of the technical conditions for producing energy gives us the opportunity to create value. Vallourec has built its reputation on its ability to respond to technological challenges: it is known as a specialist in high-end tubes that are capable of withstanding the harshest conditions and environments. to respond to such growth, we have to add new capacity to our industrial infrastructure. We have invested in modern, competitive plants in the united states and Brazil – but also france, china and the middle East with the extension of the Valinox nucléaire (montbard) and the V & m changzhou plants and the acquisition of Zamil pipes – which will let us operate as closely to our customers as possible.

what are the Group’s priorities through 2012?

Philippe Crouzet: ramp-up of the new units is our main short-term priority. these new units will let us accompany our customers’ growth and optimize the allocation of production among Vallourec’s different plants. We will also step up efforts to research and develop new products, responding to more stringent requirements. the accidents affecting the macondo well in the gulf of mexico and the fukushima nuclear power plant in Japan, which occurred within a few months of each other, are reminders of the extent to which energy production must take place under the strictest safety conditions. our third priority is to continue improving our operational performance on the basis of a continuous improvement policy. our new plan, cAptEn+, aims to further improve the group’s performance in the areas of safety in the workplace, cost reduction and customer satisfaction.

what assets does Vallourec have to deal with future challenges?

Jean-Paul Parayre: to continue offering solutions allowing companies to extract oil and gas in increasingly complex environments, build ever-cleaner power plants and design tubular solutions and structures that are both lighter and more resistant, the group’s ability to innovate remains a key strength. this asset mainly depends on the experience and know-how of our teams, whose responsiveness and ability to adapt are essential. the commitment of our employees to their work, their motivation and their confidence in the future of the group, as demonstrated by the success of our employee share ownership schemes, are also key assets. they are a great source of pride for us. finally, our governance guarantees an equitable and sustainable distribution of the wealth created.

how does the human Resources policy sit within the management of the Group?

Philippe Crouzet: there is no doubt that the group’s greatest assets are the men and women who contribute through their work, commitment and creativeness to Vallourec’s success and performance. it is for this reason that the group’s human resources policy aims to ensure all employees develop on a personal level and add to their skills while making sure know-how is shared between the generations. Vallourec’s strength resides in its cohesion and the extent to which employees embrace the values that unite the group. these values make up the foundation permitting the integration of new teams which, in turn, enrich our business culture. finally, our employees are concerned about protecting the environment. it is also on their behalf that we implement a range of measures that aim to reduce our impact on the environment and let us grow in harmony with the communities that surround and support us.

are you confident about the Group’s outlook?

Jean-Paul Parayre: in an unpredictable macroeconomic environment, we continue to provide Vallourec with all of the industrial, human and financial assets that the group requires to deal with tomorrow’s technological challenges and to seize the best growth opportunities offered by our markets. the ramp-up of our new strategic capacities will continue in 2012 and they will start to contribute fully from 2013 onwards. Vallourec will then be perfectly positioned to take advantage of the promising outlook for the energy markets and take on the major energy challenges of the 21st century.

04 05


PremiumLocaLcomPetitiVeness

the world’s energy markets, which sit at the heart of Vallourec’s business, will remain highly promising. to make the most of these favorable conditions, the Group has decided to invest where growth is prevalent. With the ramp-up of its new capacities, Vallourec considerably strengthens its industrial and commercial position, both to take advantage of the growth expected in the oil and gas markets and to step up its local presence in growth areas. The Group has also broadened its portfolio of premium products, which are particularly high-tech, in order to meet the challenges faced by its customers. By putting these changes in place, the Group is building a new Vallourec, structurally more competitive, benefiting from greater volumes of premium products, a lower cost base and increased flexibility.

three strategic priorities

A Group in trAnsformAtion

PremiumSpecialized in the most complex applications, Vallourec relies on its five research centers around the world and more than 500 engineers and technicians to strengthen its technological leadership. The Group continuously develops new manufacturing processes and innovative products. It also designs high value-added global solutions for its customers, particularly oil and gas companies.

Local A large number of countries in which the Group operates now prefer that a growing share of the added value of the products they purchase be produced locally in order to contribute to the development of their own economies. Faced with this challenge, Vallourec is in the process of reorganizing its industrial facilities and extending its presence around the world.

competitivenessThe Group’s competitiveness cannot only depend on the technological excellence of its products or the suitability and quality of the services it offers. Operational efficiency – as it ensures healthier economic performance and a faster and more efficient response to customer enquiries – is a key component of the Group’s policy.

WOrld enerGy demAnd GrOWTh

+ 22%2009 TO 2020(Source: International energy Agency / new Policies Scenario / november 2011)

PremIum AS A ShAre OF TOTAl OCTG demAnd

30%By 2015(Source: Vallourec forecast)

context & strateGy

GrouP

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Vallourec Annual report 2011GROuP

01GOVERNANCE

A mAnAgement structure with A supervisory BoArd And A mAnAgement BoArd

The Executive Committee combines a wealth of industrial experience and an excellent understanding of the market.Philippe Crouzet

The Supervisory Board

1 – Philippe Crouzet, Chief Executive Officer

Management Board2 – Jean-Pierre Michel, Chief Operating Officer

3 – Olivier Mallet, Chief Financial Officer and General Counsel

Other members of the Executive committee

4 – Flavio de Azevedo, TRDI Director and Chairman of V & M do Brasil S.A. and Vallourec & Sumitomo Tubos do Brasil5 – Dirk Bissel, Director of the Drilling Products Division6 – Philippe Carlier, Director of the Upstream Division (since 1 January 2012)7 – François Curie, Head of Human Resources

8 – Nicolas de Coignac, Director of Powergen and Speciality Powergen Divisions (since 1 January 2012)9 – Andreas Denker, Director of the Industry Division (since 1 January 2012)10 – Pierre Frentzel, Director of Strategic Projects11 – Didier Hornet, Director of the OCTG Division

12 – Alexandre Lyra, CEO of V & M do Brasil S.A.13 – Jean-Yves Le Cuziat, Strategic Marketing and Sourcing Director (since 1 January 2012) 14 – Dominique Richardot, Director of the Pipe Project Division (since 1 January 2012)15 – Philippe Roch, Chief Performance Officer

ChairmanJean-Paul Parayre, Member of the Supervisory Board of Peugeot S.A.

Vice-ChairmanPatrick Boissier, Chairman and CEO of DCNS

MembersPascale Chargrasse, Business Development Manager at Valinox Nucléaire

Jean-François Cirelli, Vice-Chairman and COO of GDF SUEZ

Vivienne Cox, Director of BG Group plc, Pearson plc and Rio Tinto plc

Michel de Fabiani, Director of BP FranceDirector of Valeo

Anne-Marie Idrac, Director of Saint-Gobain and Mediobanca (Italy)

Edward G. Krubasik, Vice-Chairman of the Federation of German Industry (BDI)

Alexandra Schaapveld, Member of the Supervisory Board of Casino Holland

Jean-Claude Verdière, CEO, member of the Management Board of Vallourec to 30 June 2001

Bolloré, represented by Cédric de Bailliencourt, CFO of Bolloré Group

Censeurs (non-voting Board members)François Henrot, Chairman of Rothschild Group investment bank

José Carlos Grubisich, Chairman of Eldorado Brasil Papel e Celulose

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sustaInaBLE DEVELOPMEnt

an aPPROach stRuctuRED aROunD thREE cOMMItMEnts

“EnsurE thE sustAinAbility of our businEss with compEtitivE And innovAtivE products”Innovation, the foundation of Vallourec’s growth, is fundamental to its long-term success. It is the Group’s responsibility to support its customers over the long term by designing reliable solutions that inspire their confidence and that of all Vallourec partners. the Group’s commitment to its customers can be summarized in five points:

• contribute to the safety and performance of the customers’ business operations;

• work with the customers to meet their expectations and facilitate their actions regarding sustainable development;

• innovate and invest in research & development to deliver efficient, reliable, competitive and environmentally friendly products;

• achieve operational excellence;• conquer new markets.

some figures: • €78 million: amount invested in r&d in 2011,

up 11% on 2010. • 30%: the forecasted share of premium products in 2015

global octg sales, versus 25% in 2010 and 22% in 2005*. * source: Vallourec forecast.

In 2011, Vallourec drafted its new sustainable development charter. the document structures its approach around three firm commitments, which testify to the Group’s desire to operate as a responsible company and to involve all Group employees in concrete actions. numerical indicators have been devised to measure progress made toward reaching targets that have been set.

“protEct our EnvironmEnt And usE our rEsourcEs judiciously”Vallourec will align with its customers’ expectations and will participate in taking up the challenge of managing and exploiting the Earth’s resources as best possible, while at the same time reducing the environmental footprint of its industrial activity. the Group has set itself three priorities:

• respect our environment and protect biodiversity by preventing all types of pollution, reducing water consumption, recovering waste and reducing disturbances;

• limit the use of natural resources and implement clean and safe technologies;

• improve the energy efficiency of our equipment and reduce the carbon emissions of our production processes.

some figures: • 20%: targeted reduction in total gas and electricity

consumption by 2020. • 95%: five-year waste-recycling target, compared to 89%

in 2011.

20102010

2009

20112011

20112010

WAtEr consumption (m3/mEtric ton procEssEd)

1.74

“mAintAin sustAinAblE rElAtions with our stAkEholdErs”Vallourec will foster a fair relationship with its partners and create internal working conditions based on the fundamental values and principles that are compiled in the “Vallourec way” as the Group’s code of ethics. the Group will therefore pursue the following goals:

• ensure the safety and protect the health of employees; provide each of them with good working conditions;

• train and motivate employees by developing skills, recognizing expertise, promoting talents and developing careers;

• provide employees with satisfactory and fair compensation taking into account the contribution to the company’s performance;

• meet with shareholders’ expectations over time;• understand the expectations of local communities

and stakeholders and take into account their interests in actions toward them;

• establish a network of reliable and responsible suppliers;• communicate about activities to all stakeholders.

some figures: • 2: 2012 ltir* target; versus 2.8 achieved in 2011.• 2,630: number of employees trained at Vallourec university

in 2011.• €6 million: resources allocated for financial partnerships.• B: 2012 target rating from non-financial rating agencies;

versus B- obtained in 2011.

1.67

lost timE inJury rAtE (ltir)*

3.25.3 2.8

GROuP

01

20,600 22,200numBEr of EmployEEs

3.4% 5.0%shArE cApitAl hEld By EmployEEs

37.3% 39.3%diVidEnd pAy-out rAtio

* number of accidents involving lost time per million hours worked.20102010 20112011

rEnEWABlE EnErgy in thE EnErgy mix in 2011

37%

10 11


huMan REsOuRcEs

tkills development is a priority

for the Group. Vallourec has several operational hr management tools

to support its employees’ work and careers. for example, the talent 360 hr information system, which has been rolled out in 17 countries, lets the group homogenize the appraisal of managers, define training needs more accurately and optimize career management. talent Review is a talent management system which provides a clear, quantitative and qualitative picture of the group’s capabilities and favors the identification of high potential individuals and the competency requirements of each division. the atlas Program anticipates the skills required by the group’s future international locations. the hr department recruits employees in situ. these employees are then trained for approximately two years in france and the united states before being placed in a key position in their home countries. training programs are also designed for each subsidiary. apprenticeships and work/study programs complement these solutions by ensuring generational skills transfer enabling an improved management of the age pyramid.

EncourAGinG And supportinG pErformAncE

s

“opinion”: ArEAs for improvEmEnt hAvE bEEn idEntifiEd

vAllourEc univErsity,for mAnAGEmEnt trAininG

n employee satisfaction survey, “Opinion”,

was carried out among 5,200 French and chinese

employees in 2010. interviewees spoke of how proud they were to work for Vallourec and stressed that they had a clear understanding of the group’s strategy and how it was being steered. the survey also revealed a number of areas for improvement, which have

been turned into action plans. in france, individual review meetings have been formalized for managers, who also receive a statement which details their full remuneration. in china, each employee now has specific targets and annual interviews have been put in place. in both countries, information meetings and social events are now held on a regular basis.

allourec university is one of the solutions used by the

Group to train its managers. in operation since february 2011,

this learning and knowledge-sharing center offers theoretical and practical courses at the head office and in those countries where the group is present. three courses were offered in 2011: they focused on project management, operational excellence, managing growth strategies and customer proximity. Vallourec university also encourages the promotion and dissemination of a common management culture by bringing

managers together around several strategic areas: innovation, leadership, customer orientation and project management. it thereby strengthens the employee’s feeling of belonging to the group and accelerates the sharing and implementation of best practices. Vallourec university, which implements a continuous training policy, is also a center of education for the group’s customers.

V

a

huMan REsOuRcEs: at thE hEaRt OF thE GROuP’s aMBItIOn

GROuP

01

12,700 16,0002010 2011

numBEr of EmployEEs Who hAVE AttEndEd A trAining coursE

and future needs, the group’s hr policies and tools ensure the expertise that is essential to its development is retained and the skills required in the future are put in place. By laying the foundations of a common culture shared by 22,200 employees around the world, Vallourec brings the employee closer to the group and its values with just one aim: to build a sustainable organization that is efficient and sufficiently flexible to face the future.

he Group pays particular attention to its relationship

with all employees as its development depends on the valuable contribution made by its teams. Vallourec’s management of its human resources, which strives to be rigorous and ambitious, is based on policies and tools that aim to support and boost the motivation and commitment of employees. By adapting the workforce’s level of expertise to technological developments and the company’s current

12 13

02antIcIPatInG MaRkEt DEVELOPMEnts

west Phoenix Platform in the north sea (schat-harding)

Vallourec is a world leader in tubular products and solutions for the most complex environments. It operates primarily on the energy markets, serving the oil and gas, power generation, and petrochemical industries. It also has expertise

with industrial applications in the mechanical engineering, automotive, and construction sectors. In 2011, Group sales increased significantly thanks to favorable conditions in several of its main markets. Business in the oil and gas market benefited from

a sustained level of exploration and production activity as well as the growing complexity of drilling conditions. Industrial business saw strong growth, due in particular to the dynamic mechanical engineering industry

in Germany.

SALES BY ACTIVITY AND COMPARISON WITH 2010

Oil & Gas

Power Generation

Petrochemicals

Industry

Mechanical Engineering: 12%

Automotive: 7%

Construction and other: 7%

%

54 +21%

13 - 9%

7 +4%

26+38%

14 15



upported by global demographic growth and

the needs of large emerging markets, demand for energy

continues to grow. the international Energy Agency (iEA)1 expects world energy demand to rise by 22% between 2009 and 2020. in 2011, high oil prices, which had increased by 45% in one year (reaching an average of $111/bbl compared to $76/bbl in 2010), encouraged oil companies to step up their level of investment in exploration and production, which rose by 19% to $544 billion over the same period. these two factors are driving the oil and gas exploration market and, consequently, increasing demand for octg tubes and connections, Vallourec’s core business.

ExplorAtion And production: A positivE trEndVallourec designs and develops a comprehensive range of seamless steel tubes, premium connections, and services for the oil and gas markets. a major player in this growing market, which requires extremely reliable products, Vallourec offers cutting-edge technology for finding and exploiting new hydrocarbon reserves.

s

OIL & Gas

actIVItIEs

02

q

what technological challenges did you face in 2011?“Easy oil” is drawing to an end. the deposits available are now very difficult to exploit and require ever-better premium products and solutions. now we are even talking about “advanced premium” solutions to meet the technical constraints of the most challenging deposits. We are already designing advanced premium tubes for the exploitation of Brazil’s offshore pre-salt deposits, which are located at depths of up to 7,000 meters

(22,966 feet). in ultra-deep offshore, Vallourec teams have delivered tailor-made tubes for the exploration of high-pressure/high-temperature deposits in the north sea and Asia pacific.

what does this mean for Vallourec?the more complex the deposit, the greater the demand for our premium products, tubes, and joints. our products have been approved for use in extreme conditions and remain completely fail-safe under pressure exceeding

1,000 bar. the need for reliability, which has increased since the macondo accident, has translated into greater interest in our VAm premium-product solutions.

Didier Hornet, Director of the OCTG Division

higher-premium products for increasingly complex drilling operationsoil companies are working hard to discover new deposits as their long-standing oil and gas fields are starting to run dry. this means pushing back boundaries and exploring new areas that are difficult to exploit, with increasingly advanced technologies. new hydrocarbon deposits, found in very deep underwater reservoirs (including pre-salt deposits in Brazil) and even at the heart of the Arctic, require new forms of technology that can withstand high pressure, high temperatures (hp/ht), and corrosion. in the united states, the development of hydraulic fracturing for the exploitation of oil- and gas-rich shale plays calls for products that are different than those used in vertical wells. to tackle these challenges under the safest possible conditions for the environment and mankind, large oil companies need increasingly state-of-the-art equipment. the April 2010 macondo well blowout on the deepwater horizon oil rig in the gulf of mexico led to a demand for more reliable operations, in turn fuelling demand towards more premium products. the accident, which had substantial human and environmental consequences, has led to more stringent safety requirements.

1 source: iEA – new policies scenario – november 2011.

VAm® top cleanwell® string ready for make-up on the rig.

AVErAgE oil pricE (BrEnt us$/BArrEl)

1112011

762010

AVErAgE gAs pricE (hEnry huB us$/mmbtu)

42011

4.42010

Share of offShore in gloBal oil produCtion

By 2020 (foreCaSt)

34%source : douglas Westwood.

16 17

7

8

9

3

6

4

5

1

2

Platform during drilling process Platform during production process

1 drill pipe

3 casing

8 umbilicals7 flowline

9 Welding by serimax

6 production riser

4 tubing5 connection

2 tool joint

Vallourec’s offer for oil platforms


Acquisition of a stake in Tianda Oil Pipe (china). in April 2011, Vallourec acquired 19.5% of the share capital of the chinese seamless-tube manufacturer tianda oil pipe. under the terms of a cooperation agreement, VAm changzhou is to provide premium threading for tubes produced by tianda oil pipe to allow Vallourec greater access to the local premium market.

Acquisition of Zamil Pipes (Saudi arabia). the group has strengthened its industrial and commercial base in the middle East with the acquisition of saudi seamless pipes factory company limited (Zamil pipes) in november 2011. this acquisition made Vallourec the first on the octg market to own local installations for heat treatment and threading. A VAm® threading line will be added.

n 2011, Group sales in the oil and gas market grew by 21%

to €2,841 million thanks to dynamic global markets. in order to meet the constant rise in demand for octg products, Vallourec is increasing its production capacity for growth markets and innovating to respond to the technological challenges its customers face.

commercial launch of VaM® 21.the success of this connection, which is particularly intended for the deepwater offshore market, is a perfect illustration of its high-end positioning. several orders have been received for the north sea, indonesia, nigeria, and Brazil.

Building of a new plant in youngstown (united states). in order to meet the rise in demand for small-diameter tubes which are used in horizontal wells for the exploitation of non-conventional deposits, the group is building a new plant in youngstown, ohio, with a rolling mill and several threading lines to increase local production capacity.

shale hydrocarbons: a technological revolutionthanks to hydraulic fracturing techniques combined with pad1 and batch2 drilling, the united states has stepped up exploration and exploitation of oil and gas shale plays nationwide. these huge, new energy deposits require deeper and deviated wells with long horizontal sections to be drilled. they

therefore need more small-diameter tubes and connections able to withstand torque, pressure, and corrosion. In 2011, the number of drilling rigs in service in the united states rose by 19% to 2,000, including a growing share of horizontal drilling rigs. This technique applies to both oil

and gas production. Furthermore, there was a shift from gas drilling to oil drilling due to the fall in gas prices.

02actIVItIEs / oil & gAs

q

1st string of VAm® sg installed in East texas with

nabors rig m44.

vAllourEc rEsponds to complEx drillinG opErAtions Around thE world

demand for premium and advanced premium octg1 products is set to rise by 45% between 2010 and 20152.

Exploiting reserves that are difficult to accessthere has been a rise in the exploration and exploitation of such deposits around the world. in 2011, operations gradually resumed in the gulf of mexico, where the number of oil rigs reached 41 at the end of the year, 17 more than in 2010. the significant increase in the exploitation of shale oil and gas has led to particularly strong demand in the united states (see box p.19). Eastern Europe and china have also detected large shale oil and gas deposits, opening

pEtrochEmicAls: businEss sustAinEd in thE unitEd stAtEs And thE middlE EAst

allourec produces a wide range of tubular solutions for refineries,

gas and oil processing installations and seawater desalination plants.

in 2011, sales in this market reached €373 million, an increase of 4% versus 2010.

increased sales in the united states and Asia and the sustained level of business in the middle East helped offset the drop in sales in Europe. during the year, Vallourec supplied tubes for oil sand facilities in canada, the shaiba gas

project in saudi Arabia, and the Amal steam project in oman. several petrochemical plants are also planned in saudi Arabia, Kuwait, and south Korea.

V54%

shArE of oil And gAs in group sAlEs

2011 oil And gAs sAlEs

million

€2,841

up new opportunities.in the north sea, several high-pressure/high-temperature (hp/ht) projects have been launched, while in West Africa the granting of new offshore drilling permits has translated into strong demand from oil companies. East Africa is opening up to oil exploitation and also represents new potential.in Brazil, state-owned petrobras plans to invest $127 billion between 2011 and 20153 in the exploitation of pre-salt fields. these offshore deposits, located under salt domes which are more than 2,000 meters (6,562 feet) thick and more than 7,000 meters (22,966 feet) below sea level, contain massive reserves. those contained in the lula field (formerly tupi), which is the most well known, are estimated at five to eight billion barrels. reservoirs with identical geological characteristics have been identified off the coasts of Angola and ghana and could give rise to substantial investments.

1 oil country tubular goods tubes used for oil and gas production (tubing and casing).2 source: Vallourec forecast.3 source: petrobras Business plan 2011 – 2015.

1 pad drilling of several wells from a single well-head.2 Batch drilling: repetitive, industrialized drilling of identical

wells using the same equipment.

preparation and handing of pipe connections on an oil rig.

I

18 19


a specialist in tubular solutions for the new generation of supercritical and ultra-supercritical power plants, Vallourec is also the world’s only supplier able to offer all of the tubes required by an electric power plant. the Group constantly innovates to strengthen its technological leadership in these demanding markets.

n the conventional coal-fired power plant market, a greater

supply of tubes on a local level in china and in India has exerted

pressure on prices. this partly explains the 9% fall in sales, to €707 million, which was seen in this segment in 2011. in 2010, the power generation business benefited from higher sales prices and a more favorable product mix. power generation nevertheless remains a profitable market in which Vallourec is looking to strengthen its position, particularly in china. the group is well placed in other dynamic markets including south Korea, Eastern Europe, and south Africa. in Asia, the gradual move from conventional power plants to the new generation of supercritical and ultra-supercritical plants should also

bring more premium products into the product mix and thereby favor the group. the sale of tubes for nuclear power plants, which represent 20% of power generation sales, remained buoyant in 2011 thanks to programs which were in place and for which the order cycles are long.

Extension of Valinox nucléaire in Montbard (France). in 2011, the extension of the site was put into service, increasing by a factor of 2.5 the site’s capacity to produce nickel alloy tubes used in the manufacture of steam generators for the nuclear industry. At the beginning of 2012, Valinox nucléaire was awarded a contract by Areva to replace steam generators at two Edf 1,300 mW power plants.

Valinox nucléaire facility under construction in nansha (china).A new nickel alloy steam generator tube production unit will allow the company to support china’s fast-growing nuclear energy industry.

Extension of V & M changzhou (china). the installation of a forge with a capacity of 60,000 metric tons of large-diameter premium tubes will enable Vallourec to meet chinese demand for locally sourced products. once extended, today’s high-end finishing unit will be supplied with locally produced tubes.

mEEtinG GrowinG EnErGy nEEds

I

actIVItIEs

POwER GEnERatIOn02

allourec designs and sells products that are able to

withstand the severest temperature and pressure conditions which exist in

both coal-fired power plants and nuclear power plants. the group’s tubular solutions cover a wide range of dimensions, materials (carbon and alloy steels, stainless steel and titanium, nickel alloy), and finishes.

the development of highly efficient power plantsAccording to the international Energy Agency (iEA), the production of electricity from coal is set to rise by 35% over the next ten years, mainly in china and india, which together will represent around 60% of new capacity. coal is still an abundant and easily accessible source of energy. furthermore, new-generation coal-fired power plants are also very efficient, achieving rates of 42% for supercritical plants and 48% for ultra-supercritical plants, compared with 35% for traditional plants. in 2011, china – a country which has very ambitious carbon reduction targets – alone increased its electricity generation capacity from coal by 55 gW, which amounts to half of the total electrical capacity in service in france today. the other dynamic markets are Eastern Europe, south Africa, and south Korea.

Pursuance of nuclear programs by Vallourec’s main customersthe accident at the fukushima nuclear power plant in Japan on march 11, 2011 reopened discussions on changes to the world’s energy mix. nuclear energy should continue to grow over the coming decades but not as quickly as had been expected before the accident. currently, fifteen countries, including france, china and india, are pursuing their nuclear energy construction programs. inversely, the decision of some countries to withdraw from nuclear energy should increase the contribution of conventional coal-fired or combined cycle gas power plants to electricity production.

V

what recent changes has the market seen?All studies show that despite the efforts made to increase the share of renewable energy sources in electricity production, conventional and nuclear power plants will continue to dominate new capacity programs. combining this fact with the clear desire to build clean power plants provides an excellent outlook for nuclear energy and gas, a sector for which turbine manufacturers report constantly improving performance levels. preference is being given to the new generation of supercritical and

ultra-supercritical coal-fired plants, especially in china and india, where they are gradually expanding. finally, the small number of new power plant projects in Europe and the united states implies a significant rise in the maintenance needs of current installations.

how does the rise in the number of high-efficiency power plants affect Vallourec’s business?these plants operate at very high pressure (above 220 bars) and temperature levels (above 600 °c).

they require tubes whose steel grades are very difficult to develop and in which we have a significant technological lead. for a number of recent orders, the group was the only producer in the world able to deliver the solutions that respond to the demand. And we are continuing to develop new steel grades to anticipate future challenges.

Nicolas de Coignac, Director of Powergen and Speciality Powergen Divisions

Vallourec’s offer for thermal power plants

13%shArE of poWEr gEnErAtion

in group sAlEs

2011 poWEr gEnErAtion sAlEs

€707million

A full rAnGE of solutions

header

Waterwall panel

Economizer

superheater

reheater

steam piping low pressure feedwater heater

condenser

high pressure feedwater heater

20 21


IndustrIal actIvItIes drIven by the mechanIcal engIneerIng marketsThe Group is active in the mechanical engineering market, which covers several applications such as lifting equipment and agricultural machinery. It also supplies tubes and components to automotive and equipment manufacturers and produces tubular structures used in innovative architectural projects.

02ACTIVITIES

INDUSTRY

n 2011, Vallourec continued to develop its range of high

value-added solutions by offering tubes and structural elements that are

both more resistant and lighter to better meet new technical and environmental constraints. Furthermore, the Group has accelerated the time to market for “tailor-made” solutions, which are intended to increase the use of Group products.

The new ranges of fine grain steels further increase the tubes’s resistance to high levels of tension. These new heat-treated low-carbon steel grades improve the resistance and elasticity of structures while making them lighter. This dual advantage in terms of resistance and weight meets the requirements of many industrial applications and is particularly suited to the specific constraints of the hydraulic systems of large lifting equipment such as gigantic cranes that are capable of carrying loads of several thousand metric tons.

High-strength hollow-section tubes, whose qualification process was launched in 2010, also allow a substantial reduction in weight while guaranteeing high levels of resistance.The qualification of these tubes provides Vallourec with substantial opportunities in the transport market (high-speed trains, heavy trucks, and agricultural machinery) and the market for new-generation building structures that are more resistant to seismic constraints.

New software programs that optimize the use of MSH sections were developed in 2011 for engineering companies and steel construction firms. These industrial design tools help simplify the dimensioning of fittings for hollow sections, calculate the span of buildings and optimize welding operations.

OfferIng IncreasIngly InnOvatIve sOlutIOns

I

n the whole, industrial markets remained dynamic

in 2011 despite contrasting conditions.

Vallourec’s non-energy sales (mechanical engineering, automotive, and construction, in particular) grew by 38% in 2011 to €1,375 million. Growth levels varied significantly depending on the sector and geographic area. The Group’s Mechanical Engineering business benefited from Germany’s dynamic export industry. This market saw the highest growth (+58%), particularly during the first half of the year. The pace of growth slowed in the second half of 2011 due to economic uncertainty. Mechanical Engineering now represents 12% of Group sales.In the automotive market, sales rose by 13% compared to 2010, with a significant increase in the first half of the year followed by a slight drop during the second half. Most of the Group’s automotive business takes place in Brazil.In Europe and Brazil, the “Construction” segment was dynamic. Sales of iron ore from the mine operated by V & M Mineração in Brazil benefited from high prices.

O

What challenges are your customers facing?Our customers’ needs are increasingly technical. One of our major challenges is to anticipate their new requirements and to offer solutions that make our products even more essential. This is what we are doing in the construction sector with the Preon system.

What does this system consist of?Preon is a modular system designed to facilitate the assembly of MSH hollow sections that are

used in the construction of unsupported wide-span structures. In addition to products, Vallourec also offers a wide selection of related services, ranging from preliminary studies to pre-dimensioning calculation software for the angles and span of the building’s structures.

What are the advantages of Preon?It ensures considerable savings in terms of material and, consequently, weight and time. For example, it allows sub-units to be pre-assembled before the

building is erected on the site. Compared to a traditional building project, construction time can thereby be cut by a third. The structural elements can be ordered and delivered by the engineering firm before the company entrusted with final assembly has even been selected. By creating such smart solutions, we are changing the face of the construction industry.

Andreas Denker, Director of the Industry Division

Breakdown of Industry dIvIsIon sales and comparIson wIth 2010 (In € mIllIon)

Mechanical Engineering

Automotive

Construction and other

657+58%

359+13%

359+35%

SHArE OF InDuSTry In GrOuP SAlES

26%

2011 InDuSTry SAlES

€1,375million

In 2011, V & M do Brasil supplied 500 metric tons of structural tubing for Independência Stadium in Belo Horizonte, Brazil.Vallourec provides high performance tubes

for cranes able to lift thousands of metric tons.

22 23


03InVEntInG tOMORROw’s sOLutIOns

specialized in the most complex applications, Vallourec relies on its five Research and Development centers around the world and more than 500 engineers and technicians to strengthen its technological

leadership. the Group’s control over the entire production chain, from producing steel to tube finishing, guarantees product excellence. thanks to its technology, R&D, and Innovation Department (tRDI) and several technological partnerships, the Group can continuously

develop new manufacturing processes and innovative products. It also designs high value-added global solutions for its customers, particularly oil and gas companies.

Houston, Texas (USA)

Belo Horizonte (Brazil)

Rio de Janeiro1 (Brazil)

Aulnoye (France)

Düsseldorf (Germany)

Riesa (Germany)

VALLOuREC’S RESEARCH CENTERS

1 Start-up in 2013.

24 25

site engineers from VaM Field service

receive training in aberdeen, united kingdom

Vallourec Annual report 2011PREMIuM / inVEnting tomorroW’s solutions

03

safety, and respect for the environment. to make this possible, the group increased its research & development capacities with a budget of almost €80 million in r&d in 2011, 11% more than in 2010. its technology, r&d, and innovation department (trdi) has 500 engineers and technicians spread throughout the world on production sites and in the group’s five research centers, to which a sixth research center will soon be added in rio de Janeiro, Brazil (see box). in partnership with the group’s divisions and Vallourec university, trdi’s main role is to develop and promote technological innovations both for the group’s range of products and its production processes. to disseminate an innovation culture within the group, trdi is working on strengthening the

Vallourec decided to step up its cooperation in the area of research with Petrobras, Brazil’s state-owned oil company and the Group’s main customer in the country. Vallourec Research Rio de Janeiro, which is scheduled to open in 2013, will be located close to cEnPEs, the Petrobras research center.

the new center will cover all of the Group’s activities in the pre-salt sector including drill pipes, umbilicals and accessories. It will put Vallourec directly in touch with the needs and expectations of the Brazilian oil group, which exploits deposits characterized by extreme pressure, temperature, and corrosion conditions.

the Rio de Janeiro research center will benefit from synergies with the Federal university of Rio de Janeiro and Levras university in areas such as the environment, robotics, and energy use. Integrated within tRDI, it will share its competencies with the Group’s five other research centers.

A new research center in Rio with Petrobras

V

mAstering technologicAl chAllengesThe markets in which Vallourec operates are becoming increasingly complex. The Group, recognized for its technological leadership, continues to expand its range of premium products and solutions in order to provide the best possible solutions to its customers’ challenges and maintain its lead in an increasingly competitive market.

The R&D center in Houston doubles VaM® connection testing capacity in the usaIn april 2011, VaM usa opened the doors of its new integrated R&D center in houston, texas. the outcome of a long-standing cooperation agreement between Vallourec and its Japanese partner, sumitomo corporation, this center contains a large share of the Group’s expertise and research efforts in the area of threading and metal-to-metal

sealing, which stand at the heart of VaM® joint technology. this R&D center doubles the Group’s connection testing capacity in the united states. Its purpose is to respond to the tightening of regulations, which took place after the Macondo accident, as well as to local enquiries from oil companies. VaM® connections

undergo the most extreme real-life tests: make and break, simulation of combined loads (tension or compression), bending, high temperatures, and fatigue resistance. the houston center also helps develop and approve new VaM® premium connections.

allourec is positioned in the energy market, which will

remain attractive over the long term. the solutions put in place

to meet its customers’ needs are increasingly advanced. this is particularly true in the oil and gas markets: the deposits currently available, such as shale or offshore deepwater reservoirs, are increasingly difficult to exploit, and demand more technical tubes and connections. in the power generation market, the efficiency required from the new generation of conventional coal-fired power plants necessitates the use of highly sophisticated tubes. finally, in the industry and mechanical engineering markets, the search for performance and the need for lighter materials call for increasingly state-of-the-art products to be developed. All of these factors serve to boost customer demand for the group’s premium products and solutions, which embody substantial technological developments and for which Vallourec benefits from extensive experience and recognized competitive advantages.

Enhancing the Group’s innovation capacityin order to tackle these new challenges, Vallourec must continue to innovate unremittingly in order to offer products and solutions allowing its customers to operate in the most extreme environments while guaranteeing the highest possible level of reliability,

r&d inVEstmEnt in 2011

€80million

nearly

sharing of knowledge, project-based teamwork, and networks of expertise.

Process communitiesintroduced a number of years ago, process communities were strengthened in 2011. these teams bring together production directors of the seven main process fields which include steel production, hot rolling, heat treatment and threading.

their work, which is mainly based on internal and external benchmarks and the creation of indicators that are common to all plants, quickly and continuously improves the group’s manufacturing processes. this proactive innovation policy lets Vallourec respond to market needs more quickly and thereby retain its place as the leading global supplier of premium tubular products and solutions.

26 27

Vallourec Annual report 2011PREMIuM / inVEnting tomorroW’s solutions

03

n 2011, the Group’s product mix saw a clear rise in the sale

of premium and advanced premium tubes and connections.

this phenomenon is set to last and becomes even more prevalent in the oil and gas market: Vallourec believes that 30% of world demand for octg will specifically concern premium and advanced premium solutions in 2015, compared to 25% in 2010.

the VaM® range, adapted to all environmentsthe VAm® range, which spearheads Vallourec’s premium connections for the oil and gas market, is segmented to respond to each drilling environment’s specific constraints. for example, the threaded connection, VAm sg®, developed in a very short period of time, is especially adapted to the exploitation of shale gas: compact in size, which is highly appreciated for narrow wells, it offers excellent sealing performance and withstands high levels of torque. orders for this product increased in 2011.

connection VAm® 21, launched onto the market in 2011, has been designed for complex environments such as offshore hp/ht (high-pressure/high-temperature) deposits, for example, in the north sea, or very deep wells, particularly the pre-salt fields off the coast of Brazil. the reliability of VAm® connections is a safeguard for the well and the highly secure transport of hydrocarbons from the reservoir to the rig, ensuring environmental protection and human safety.

new steel grades for OctG tubesin some oil fields, corrosion, caused by salt and sulfur, among other things, represents a significant constraint. Vallourec has developed two new steel grades, Vm125ss and Vm40ss, so that its tubes can withstand these conditions. these tubes may be fitted with VAm® connections which are especially adapted to the operating environment. in 2011, Vallourec teams delivered tailor-made tubes, developed

I

using this dual expertise, for the exploration of deposits in the north sea and Asia pacific.

cleanwell® Dry, a safer, cleaner, and more efficient solutionto meet the demand for grease-free products, particularly in the north sea, the family of cleanwell® coating products was expanded to cater for increasingly varied applications. the new cleanwell® dry solution is a dry coating intended for offshore, Arctic, and desert applications.

Launched after six years of development in Vallourec’s laboratories, the new VaM® 21 connection has enjoyed great commercial success in growth markets such as the north sea, Indonesia, Brazil, and nigeria. this high-performance connection, as resistant as the tube to which it is fitted, is currently the only connection at this performance level that meets the new IsO caL-IV 2011 safety

standards required by the American Petroleum Institute, which establishes the norms applied in this sector. this coupled solution, which is extremely resistant to compression and guarantees performance and reliability levels that are unequaled in the harshest environments such as hP/ht (high-Pressure/high-temperature) deposits, facilitates the self-alignment of tubes.

this allows them to be screwed together safely and quickly during on-site pipe-laying. It is compatible with cleanwell® Dry coating, which preserves the environment by connecting tubes without the use of grease. VaM® 21 threading can be carried out in all of the Group’s threading units around the world; maintenance is assured by 172 VaM licensees.

VaM® 21, a high-tech solution for tomorrow’s wells

API products (standard)

Premium products

SHARE OF PREMIuM PRODuCTS IN GLOBAL OCTG SALES

62%

energy effiCienCy rate of the irShing poWer plant in gerMany

eQuiped With VM12 tuBeS

demAnd for premium products soArs

2005

7.6million metric tons

78%

22%


2015 (forecast)

30%

70%


2010

25%

75%

source: Vallourec forecast.

the coating is applied to the surface of VAm® threads in the plant; the tube is then ready for use when it arrives at the well. this solution respects the environment and is safer, cleaner, and more efficient.

tubular solutions for new-generation thermal power plantsthe group’s metallurgical know-how is also applied in the electricity sector to meet the temperature and pressure constraints in new-generation power plants. in 2011, siemens chose the group’s new steel tubes, Vm12, to equip the combined cycle gas plant in irsching, germany, the first to reach an energy efficiency rate of 62%, around 15% higher than the average achieved by new-generation power plants. the Boiler & line pipe competence center (Blcc), Vallourec’s r&d center specialized in the heat treatment of tubes, located in düsseldorf, germany, is already working on the next stage: resolving constraints associated with temperature cycles. the tubes will have to withstand the temperature variations to which conventional power plants will soon be subjected when they operate alternately to supply energy to a power grid that is open to renewable energy sources.

weight constraints in the industrial marketin the industrial market, rapid progress in the area of steel grades has allowed the group to sell steel sections that are lighter but still extremely resistant to high tension levels. these sections are increasingly necessary for the construction of wide-span structures and respond to the constraints imposed by manufacturers of cranes, cylinders, and other industrial equipment regarding mechanical strength and the need for lightweight material.

cleanwell® coating system being tested at the VrA (Vallourec research Aulnoye).

28 29

ACCESSORIES

FIELD SERVICES

WELL DESIGN

OFFER BY APPLICATION

EDUCATION

LOGISTICS AND SUPPLY CHAIN

REPAIR SERVICES

PRODUCTION


n 2011, the Group launched a number of strategic initiatives to develop an integrated range

of services in order to strengthen its position as the partner of choice for customers. the group makes every effort to identify and respond to the market’s

expectations as well as possible, from the development of products and services to their sale around the world.

creating value with VaM Global solutionsthe group has multiplied its initiatives to offer its customers a portfolio of solutions that encompasses all of the group’s various areas of know-how. the VAm global solutions premium offer (see box and illustration on page 31), whose roll-out was accelerated over the past few months, illustrates this commitment. developed for the oil and gas sector, it combines a set of products

and services that provide tailor-made, region-specific answers throughout the value chain, from mill to well. By complementing the group’s range of tubes and connections with a broad range of high value-added services, VAm global solutions contributes to the group’s strategy to create value and win market share. this global solutions process is gradually being extended to other group activities.

Meeting the needs of engineering firms and oil companiesthe new pipe project division is dedicated to the oil and gas markets and is strategically positioned in the

PREMIuM / inVEnting tomorroW’s solutions

03

VaM Global solutions: from mill to wellRolled out in 2011, the VaM Global solutions offer is one of the levers used by Vallourec to work more closely with its customers. the portfolio of solutions offered by VAm global solutions includes the creation of a specific offer for each application. this involves defining at a preliminary stage the alignments required in accordance with the type of drilling operation and putting forward sales kits before the call for tenders is issued. these include Vallourec know-how in such areas as deepwater offshore drilling,

shale gas and hp/ht wells. supporting well design, which includes helping customers define the dimensions and type of steel grades for the tubes and select the connections best suited to the particular constraints of their drilling operations; a logistics management and optimization service, which has different delivery lead times depending on the urgency and anticipation of orders; implementation of local platforms to handle direct deliveries to oil fields; development of the sale of accessories with the introduction of a one-stop shop offering assembly and repair services; expansion of field services with teams entrusted with accompanying and inspecting the screwing together of well strings.the network of VAm® licensees, who are responsible for the sale and after-sales service of equipment (threading) and accessories as well as for providing a comprehensive range of technical courses (tubular Essentials), aims to increase the use of tubes and VAm®

connections and rounds off this portfolio of services. A dedicated team has been put in place to develop the VAm global solutions offer around the world.

exploration and production (E&p or upstream oil) sector. it encompasses all of the products and services intended for the engineering firms and oil companies that are customers of the group. these companies intervene downstream of the drilling operation, from the well-head to the refineries and petrochemical plants. the division has an innovative range of global solutions in which project management plays a key part in the success of the solution, particularly for the offshore construction market (surf1) (see box). the industry division takes the same approach; it offers, for example, software programs that optimize the use of structural tubes. these tools facilitate the pre-dimensioning of structures and speed up the design and construction stages by allowing industrial building structures to be pre-assembled. the duration of the building works can thereby be cut by a third.Approaching the market in these different ways strengthens ties with the group’s customers and helps build lasting relationships.

1 surf: subsea umbilicals risers & flowlines.

A gloBAl And comprehensive rAnge of services

I

VaM Global solutions Offer

the new Vallourec umbilicals plant, located in Venarey-les Laumes (eastern France), produces tubular components for umbilicals. umbilicals are lines made up of tubes, cables, and optic fibers that connect installations on the seabed to their control station on the sea’s surface for the transport of liquids and energy. Vallourec has entered this new market with a competitive

premium offer. the know-how acquired by the Group through its subsidiary, Valtimet, in the production of long welded tubes has enabled the Group to reduce the number of orbital welding points for these components. the umbilicals assembled with Vallourec tubes will be both lighter in weight and provide greater fatigue resistance, which is essential at sea.

Vallourec umbilicals: longer and lighter tubes for umbilicals

what is the mission of the Pipe Project Division?the new pipe project division is dedicated to the oil and gas markets and especially to the offshore sector called: surf (subsea umbilicals risers & flowlines).it offers Epc’s (engineering, procurement and construction companies), oil and gas companies, and specialist distributors a wide range of products—including subsea

flowlines, process tubes, and fittings and tubes for umbilicals. it offers as well innovative services for the group, such as welding, coating, bending and project management.

what is the added value for Vallourec customers?this new approach will enable the best technical solutions to be provided and focus the group’s offer on turnkey projects with high added value. thanks to the

expertise and know-how of serimax, coordinated coating and pre-assembly welding services are now available alongside the supply of tubes for offshore flowline projects. serimax specializes in flowline welding solutions, especially for deep-water offshore projects. it was acquired by the group in 2010 and has been integrated into the pipe project division.

Dominique Richardot, Director of the Pipe Project Division

30 31

Well site supervision during running of casing.


04stREnGthEnInG OuR LOcaL LEaDERshIP

Vallourec has over 22,000 employees and approximately fifty production facilities around the world. a large number of countries in which the Group operates now prefer that a growing share of the added value

of the products they purchase be produced locally in order to contribute to the development of their own economies. Faced with this challenge, Vallourec is in the process of reorganizing its industrial facilities and extending its presence

around the world by building new capacity and by targeting external growth, notably in Brazil, the united states, china, and the Middle East. the Group is thereby expanding in high-growth regions where customers are sensitive to local content,

in addition to service quality which is in turn linked to supplier proximity.

2011 SALES BREAKDOWN BY GEOGRAPHIC REGION

%27

7 26

19

21

North America

South America

Asia and the Middle East

Europe

Rest of the World

the saudi seamless Pipes Factory company Limited (Zamil Pipes) in Dammam, Saudi Arabia

32 33

Vallourec & Sumitomo Tubos do Brasil

V & M Mineração

V & M do Brasil Vallourec Research Belo Horizonte

V & M Florestal

Curvelo

Belo Horizonte

Jeceaba

Brumadinho

etrobras is the world leader in deepwater operations and

Vallourec has developed a unique level of expertise in the design of

tubes and connections for this type of application: the Group is present in three quarters of the world’s deepest offshore drilling operations.

In 2007, the Brazilian company discovered large pre-salt deposits off the coast of Rio de Janeiro which could represent around fifty billion barrels of crude oil. To support its long-standing partnership, Vallourec subsequently launched the Vallourec Pre-Salt Project, which involved Group research teams from all around the world. The challenge of this program was to find solutions to meet the extreme conditions of the deposit: distance from shore (250 km), water depth (1,500-3,000 meters), well depth (2,000 meters of sand and rock, then 2,000 meters of salt), and High-Pressure/High-Temperature (HP/HT) levels.

LocaL / STRenGTHenInG loCal leadeRSHIP

04

as part of the technological partnership agreement with Petrobras, a new R&d center will be opened in Rio de Janeiro in 2013. This center, dedicated to the development of research programs on pre-salt wells, will strengthen the existing center in Belo Horizonte (see box p.27).

ocated in Belo Horizonte (Minas Gerais), the V & M do

Brasil (VMB) production site sits at the heart of the Group’s

regional industrial installations. The plant, which has one steel mill and two rolling mills, is unique insofar as it was built as an integral part of the surrounding environment, making it more flexible and optimizing the quality and cost of raw materials and the sustainable management of resources. The steel mill is supplied with iron ore from the Pau Branco mine, which is operated by V & M Mineração, a VMB subsidiary, while another subsidiary, V & M Florestal, grows eucalyptus trees to produce charcoal for the blast furnaces. Mainly serving Brazil’s internal market, V & M do Brasil sells seamless steel tubes for the oil and gas, automotive, and industrial markets.

a global range of products and services in BrazilIn 2011, the Group broadened its range of local products and services for the Brazilian market. VaM drilling, which specializes in the production of drill pipes, connections and accessories, installed a new welding line at the VMB pipe mill in 2011. This new line now produces drill pipes for the Brazilian and South american market. Furthermore, the technology of V & M Tube alloy, which specializes in the production of premium oCTG accessories for offshore applications, was added in 2011 to the Rio das ostras services base.

L

Brazil: a unique positionVallourec’s presence in Brazil goes back many years: the first plant was built in 1952 to meet the needs of the nascent state-owned oil company, Petrobras. This country, currently the world’s tenth biggest oil producer, has become a strategic hub for the Group, accounting for 20% of sales in 2011.

P

partnering with petroBras, the leader in deepwater offshore

on September 1, 2011, Brazil’s President officially opened the Vallourec & Sumitomo Tubos do Brasil (VSB) industrial site, Vallourec’s second plant in the country. The plant, located in Jeceaba, in the state of Minas Gerais, was created as part of a joint-venture agreement with the Japanese firm, Sumitomo Metal Industries.This state-of-the-art industrial complex employs 1,600 people and has created 2,000 indirect jobs.

Dilma Rousseff inaugurates the new VSB site

SaleS In BRazIl In 2011

€1,053 million

20%SHaRe oF BRazIl In GRouP SaleS

Vallourec Research Rio de Janeiro(Start up in 2013)

34 35

Vallourec annual report 2011


allourec VaM® connections, produced in Houston, Texas

since 1984, have become a benchmark on the US market.

over the past ten years, the company has substantially increased its american presence. In 2002, the acquisition of V & M Star in Youngstown (ohio) provided Vallourec with a local and integrated site with a steel mill and a pipe mill. In 2008, the acquisition of three companies that were active in the premium oCTG market consolidated Vallourec’s position in relation to both oil and gas companies and distributors operating in this market. With a comprehensive range of tubes, connections, accessories, and services, Vallourec has benefitted from recent market developments brought about by the technological revolution making the exploitation of large shale oil and gas deposits possible.

a new pipe mill to come into service in 2012In 2010 the Group decided to build a new high-end pipe mill on the V & M Star site in Youngstown, which is located close to large shale gas deposits, particularly the Marcellus and utica shale plays. With 350 additional jobs, this industrial complex will become the region’s biggest employer. The new rolling mill, which will be joined by heat treatment and threading capacities, will enable the site to optimize production and respond to demand for small-diameter tubes

for horizontal drilling more quickly. Vallourec will thereby be better able to meet oCTG demand in north america. With the support of its distributors, over the past few months, the Group has signed several multi-annual agreements with major customers including Total, exxon Mobil, Shell, devon and Chesapeake.

n parallel with the ramp-up of its new Brazilian and american

sites in 2011, Vallourec undertook a reorientation of its European

production towards high value-added products. Two projects, one in aulnoye, France, and the other in Mülheim, Germany, are a case in point. Their purpose is to make the plants more flexible in order to improve the way they respond to new orders for state-of-the-art products, such as chrome alloys, which are produced in small runs. The pipe mill in aulnoye was therefore equipped with a high-tech forge that can operate in conjunction with the hot piercing tools used by the Group (see box). downsizing at the Mülheim plant allowed the pipe mill’s finishing capacities to be reoriented towards highly technical products, in particular steel grades (ferritic and austenitic stainless steel) that have undergone a process of heat treatment. The steel grades obtained have an excellent level of steam oxidation resistance and will allow lighter products to be developed for the mechanical engineering industry.

Three state-of-the-art research centerseurope has historically been and still remains Vallourec’s center of expertise. Three of the Group’s five international R&d centers are located in europe and focus their efforts on the key technologies developed by the Group. Vallourec Research Riesa (VRR), opened in 2011 in Germany, was

V I

04

Vallourec’s services subsidiary offers customers support and advice on the drilling site itself. The objective is to ensure proper operational readiness of Vallourec products, essential to ensuring well integrity. This offer includes auditing the implementation of VaM® connections on oil rigs, the inspection of connections at the customer’s yard and the preparation of equipment on land prior to delivery to work sites. These services employ some 40 engineers in the United States within the subsidiary VaM USa Field Service. overall, VaM Field Service employs more than 130 engineers spread over most of the Group’s geographic areas of intervention (United Kingdom, Singapore, Dubai, azerbaijan, africa, china and Brazil).

VaM Field Service: tailor-made supportThe pipe mill in aulnoye, France uses a manufacturing process not found anywhere else in the world: the combination of a forge and hot piercing technology, which makes Vallourec’s seamless tubes unique. This new process lets the plant produce tubes in a wider range of sizes, both in diameter and thickness, and work with steel with a higher alloy content, all of which means that the aulnoye plant is destined to produce premium tubes. The new process makes it easier to change the machinery in use and is also very flexible, which favors the provision of tailor-made products in small production runs. Thanks to this technology, whose importance grew in 2011, the aulnoye pipe mill can refocus its business on small production runs with high added value for the mechanical engineering, power generation, and petrochemical markets.

Premium Forged Pipes: a unique process

united states: serving local markets

europe: a huB of technological excellence

The exploitation of shale hydrocarbons has brought about a rise in demand for small-diameter connections and tubes. With the construction of a second plant in Youngstown, ohio, the Group strengthens its capacity, making it at a key player in this dynamic market for horizontal drilling.

Europe hosts the majority of the Group’s R&D centers. Vallourec’s expert industrial sites, located in France and Germany, produced 60% of the tubes delivered in 2011. Their activity is increasingly focused on the research and production of small volume runs offering very high added value.


SaleS In THe unITed STaTeS In 2011

€1,372million

26%SHaRe oF THe unITed STaTeS

In GRouP SaleS

SaleS In euRoPe In 2011

€1,426million

27%SHaRe oF euRoPe In GRouP SaleS

established to optimize manufacturing processes and improve mastership of the technologies implemented within the Group’s plants. Vallourec Research aulnoye focuses on alloys and new steel grades which improve the tube’s resistance and weight, destined for either the oil industry or mechanical engineering applications. The Boiler & line Pipe Competence Center (BlCC) in düsseldorf, installed close to major German boiler and steam generator manufacturers, dedicates half of its resources to the development and design of tubes and steel used in conventional and nuclear power plants.

V & M Tube-Alloy VAM Drilling USA

VAM USAV & M Star

Vallourec Research Houston

V & M Tube-Alloy

V & M Star

V & M Star Valtimet

Valtimet

V & M Tube-Alloy

Youngstown

Morristown

Brunswick

Casper

Muskogee

Houston Broussard

Houma

36 37

hile china is the world’s biggest market, (accounting

for around 40%1 of global consumption of seamless

tubes), it is also a very competitive market. The Group’s business relations with China stretch back in time: it delivered its first tube to the city of Shanghai in 1904 and has been present in Changzhou since 1997. Its plant, V & M Changzhou, a specialist in tubes for the power generation market, was built in 2006. In 2011, the Group strengthened its position in the oil and gas market by acquiring 19.5% of the share capital of

Tianda oil Pipe, a private operator which specializes in the production of seamless oCTG tubes. under the terms of a cooperative agreement, VaM Changzhou is to provide premium threading for tubes produced by Tianda oil Pipe to allow Vallourec greater access to the local premium market.

New capacity for the power generation marketsTwo internal growth operations in the area of power generation will help strengthen the Group’s local position. The first is the extension of the V & M Changzhou plant: with a capacity of

60,000 metric tons of seamless tubes per year, it will house a patented, state-of-the-art forge which uses the same technology as the aulnoye pipe mill. This installation, which will come into service in the second half of 2012, will allow the Group to respond to local demand for tubes used in supercritical and ultra-supercritical coal-fired power plants. This machinery will complement the existing high-end finishing unit.The second project concerns the construction of a Valinox nucléaire plant in nansha, in the south of the country (Guangdong province), the foundation stone of which was laid in May 2011 and which will employ 200 people. This site will produce nickel alloy tubes used in steam generators intended for China’s nuclear industry. It will complement the Group’s existing production capacity in Montbard, France, and bring capacity up to almost 7,000 km of tubes per year.

he Group is in the process of implementing its industrial

strategy in the Middle East, the world’s biggest premium ocTG

market. It has increased local production of premium tubes and connections following the wishes of Middle eastern countries to favor and encourage the development of their national economies. zamil Pipes in dammam (Saudi arabia), a local specialist in seamless oCTG tube processing and finishing, was acquired in response to this policy. a new VaM® threading unit will be added to the zamil Pipes site to complement the Group’s local offer.

Building closer ties with Saudi aramcoThese new premium industrial facilities in this strategic region enable the Group

to strengthen its relationship with local customers, at the head of which stands Saudi aramco, the state-owned oil company and the world’s biggest oil producer. Vallourec is currently the only company in the region with heat treatment facilities and a threading unit. The Group will therefore be able to offer customers shorter production lead times for its premium oCTG tubes. This new industrial complex will benefit from the rise in premium business in Saudi arabia while relieving the burden placed on Vallourec’s heat treatment and threading units, which are currently working at full capacity elsewhere in the world.

W

T

04

china: a stronger presenceVallourec has gradually moved from being an exporter of goods to china to a local producer. In 2011, by taking a stake in Tianda oil Pipe, a local ocTG player, and by increasing its production and finishing capacities, Vallourec strengthened its position in the country.

The chinese nuclear energy market is the fastest growing market of its kind in the world. Public authorities have decided to continue with all of the programs launched before the Fukushima accident. at the end of 2011, twenty-one reactors were under construction. Most are set to come into service by 2014. Vallourec, which participated in the development of France’s entire nuclear program, has unique technological know-how to support growth in this local market.

accompanying china’s growing nuclear energy industry

To support the development of its industrial activities in Saudi arabia, in 2011, Vallourec opened a new sales office in the port area of Jebel ali, 35 kilometers south-west of Dubai. This office provides local tailor-made logistics support services, particularly as part of the range of services offered by VaM Global Solutions. VaM Drilling, a Group subsidiary which specializes in drill pipes and accessories, also has a production unit in Jebel ali.

A new sales office in Jebel ali

In 2011, Vallourec strengthened its presence in the Middle East by acquiring Saudi Seamless Pipes Factory company Limited (Zamil Pipes), the first seamless ocTG tube processing and finishing company in Saudi arabia, and by creating a new threading unit.


SaleS In CHIna In 2011

€250million

strategically positioned in the middle east

Xi’an Baotimet Valinox Tubes

V & M BeijingVAM Field Service

Tianda Oil Pipe

Valinox Nucléaire Tubes Guangzhou

V & M Changzhou VAM Changzhou Oil & Gas Premium Equipment

Changzhou Valinox Great Wall Welded TubesChangzhou Carex Valinox Components Chuzhou

Xi’an

Changzhou

nansha

Beijing

1 Vallourec forecast.

38 39


05MoRE EFFIcIENT aND MoRE coMPETITIVE

The Group’s competitiveness cannot only depend on the technological excellence of its products or

the suitability and quality of the services it offers. operational efficiency – as it ensures healthier economic performance and a faster and more efficient response to customer enquiries – is a key component of the Group’s industrial policy. as part of the Group’s improvement policy,

the constant search for greater productivity, along with optimizing production allocation to particular sites, contribute to this effort. The same also applies to the construction of new production facilities, investments

in more competitive regions ensuring greater proximity with customers, the modernization of our production facilities, and the implementation of cost-cutting measures.

LTIR (Lost Time Injury Rate: number of accidents involving lost time per million hours worked)

2

CAPTEN+ OBJECTIVES BY 2013

ocTG threaded tube

REDUCTION IN ADDITIONAL coSTS BEFORE INFLATION

NUMBER OF COMPLAINTS AND COSTS RELATED TO QUaLITY DEFEcTS

14 %

÷2

40 41


coMPETITIVENESS / MoRe eFFICIenT and MoRe CoMPeTITIVe

05

he inauguration of the VSB site in Jaceaba (Brazil) was

one of the Group’s highlights in 2011 primarily because the

creation of this site, which stretches over more than 250 ha and which comprises a steel mill and a pipe mill, was a unique adventure at both the industrial and human levels. The last project of this size for Vallourec dates back to the construction of the Saint-Saulve plant in France in 1975! The aim behind this investment is to increase over time the industrial capacity of the entire Group by more than 10% and to optimize the implementation of its global high-end

solutions offer. developed as part of a joint venture agreement with Sumitomo Metal Industries and Sumitomo Corporation (Vallourec’ s Japanese partner holding a 44% stake), the VSB plant will be able to produce almost 600,000 metric tons of seamless tubes per year, of which half to be sold by Vallourec, for the world’s oil and gas market.

a state-of-the-art industrial complexVSB includes a comprehensive steelmaking plant which produces steel using charcoal and iron ore; it consists of an electric arc furnace, a secondary

steelmaking unit and five continuous casting lines. The pipe mill, which houses the first three-roll PQF mill installed by the Group, allows tubes to be produced with great accuracy, a lower level of eccentricity, and excellent surface quality. It is complemented by a number of heat treatment lines, non-destructive testing equipment and two finishing lines, one for oCTG and the other for line pipes and tubes that do not require any specific finish. output at the site, which went into operation in 2011, is set to increase in 2012 in conjunction with all of the qualification tests. once all of the equipment is operational, VSB will be in a position to competitively produce a wide range of large-diameter premium and aPI tubes.

Production for exportunlike V & M do Brasil (Vallourec’s first Brazilian plant located in Belo Horizonte and aimed at the local market), VSB will focus on key export markets, particularly the Middle east, asia, the north Sea, and West africa. Its production will gradually lean more towards premium products. This industrial complex, complemented by local heat treatment and threading units, will permit the Group to provide a more flexible response to enquiries from oil and gas markets and retain its competitive advantage.

T

vsB, a key part of vallourec’s industrial facilitiesVallourec & Sumitomo Tubos do Brasil (VSB), the Group’s new site in Brazil, began operations in 2011 and will increase its output throughout 2012. It will, in particular, supply finished premium tubes and semi-finished tubes for local finishing to international ocTG markets.

he extension of the Valinox Nucléaire plant in Montbard,

France is part of its plan to develop Group production

capacity geared towards high-tech products in Europe. Global leader in the production of high nickel alloy stainless steel tubes for nuclear power plant steam generators, Valinox nucléaire has invested €75 million to increase by a factor of 2.5 the production capacity of its long-standing site located in Montbard (eastern France). Inaugurated in april 2011, the extension has created 150 jobs. almost 4,500 km of tubes will be produced by Valinox nucléaire every year.

Tubes for new-generation power plants Valinox nucléaire has successfully adapted its technological know-how to the needs of new-generation power plants. The tubes made on the site are very slim and are designed to withstand for several decades over 250 bars in internal pressure and temperature levels exceeding 200 °C. Valinox nucléaire Montbard is situated at the heart of the Burgundy nuclear Partnership, a cluster of companies gathering

all nuclear-related industries and professions within seventy kilometers of dijon. Increasing the site’s production capacity will enable the company to meet the needs of an expanding French and international fleet of reactors – the site serves the Chinese and Indian markets in particular – and demand associated with the extension of the current fleet’s life time. at the beginning of 2012, areva awarded Valinox nucléaire a contract for the manufacture of tubes to equip the steam generators of two 1,300 MW reactors as part of a program to replace the components of several active power plants managed by edF.

T

valinox nucléaire montBard increases its production capacity in europe

Improving forest and mine productivityThe Pau Branco mine (Minas Gerais), owned by V & M Mineração, a VMB subsidiary, has been in operation since 1983. It produces four million metric tons of iron ore per year and supplies the Group’s two Brazilian plants as well as the local market. In 2011, Vallourec made changes which will double the mine’s life time.

The Group also has a subsidiary, V & M Florestal, that manages a eucalyptus plantation. The wood from the plantation is turned into charcoal for the blast furnaces. The use of charcoal rather than coke significantly reduces the carbon footprint left by the production of cast iron.

42 43


coMPETITIVENESS / MoRe eFFICIenT and MoRe CoMPeTITIVe

05

aPTEN , which focuses on improving safety,

performance, and customer satisfaction, is a six-point

program which identifies priority areas of progress for the Group up to 2013.encouraged by the success of its first three-year plan, Cap Ten, which achieved excellent results between 2008 and 2010 in the areas of safety and cost-cutting, Vallourec has launched its second performance improvement plan: CaPTen+. Its scope of application has been broadened to include six key areas: safety, which remains a major priority for the Group; improving industrial

lead times; quality and customer service; reducing the use of energy, liquids, raw materials, etc.; and, finally, optimizing the efficiency of support functions (administration, maintenance, etc.). This internal program will let the Group roll out the best practices and best production, management, and organization methods across all of the Group’s sites. It is an integral part of the Vallourec Management System (VMS), a continuous improvement initiative which involves everyone in the company at every level of responsibility.

aiming to achieve greater customer satisfactionImplementation of the six CaPTen+ strategic goals depends on the work of the Continuous Improvement Teams (CIT), each of which focuses on a specific goal. By pooling good practice at a group level, CaPTen+ ensures that the various measures put in place remain consistent. This program should

generate around €300 million in savings by the end of 2013. The savings made in 2011 stand at over €80 million. The goals for 2013 set by the Group are: an lTIR (lost Time Injury Rate) close to two, a 14% cut in additional costs before inflation, and a division by two of the number of complaints and costs related to quality defects. The plan’s ultimate aim is to further increase the Group’s competitiveness and to meet its customers’ needs over the long term.

naugurated in January 2011, Vallourec Research Riesa (VRR),

which is located in Germany, houses the latest technology

to test and optimize production methods. unparalleled, VRR operates like a miniature plant and brings together all of the Group’s key areas of know-how: piercing technology, which turns a billet into a shell, and rolling-drawing on a mandrel. It is the only research center to combine a piercing mill and a mandrel mill. This industrial equipment allows tests to be performed without having to stop a production line or risk any damage to machinery. Heat treatment operations may be launched on this site in May 2012.

VRR allows tests under real-life conditions to be carried out for all of the Group’s units and innovative production methods to be developed, contributing to improvement in Vallourec’s competitive advantage. It is at VRR that the technologies enabling the Group’s plants to improve in quality and speed in the future will be tested.

Measuring instruments directly connected to the Group’s other sitesThe center has a number of state-of-the-art measuring instruments and a data processing and transmission system. Cameras, placed at eight control points, film the process undergoing testing and directly transmits data to the Group’s other sites around the world. This gives Group production and R&d teams real-time access to all test results. The tests carried out at VRR also allow for the testing of new steel grades and even industrial automations before they are applied to the production process. The Riesa center will be able to host a number of technical courses on manufacturing processes organized by Vallourec university.

c

vallourec research riesa, a mini-plant to test future processes

a program to strengthen operational efficiency

I

2.77LITR1 IN 2011

VS 3.16 IN 2010

Shortening the length of time between the receipt of an order and the delivery of the goods is one of the caPTEN+ plan’s priorities. The reorganization of the industrial facilities in Europe, which began in

2011, will in fact improve production lead times and lower the amount of time it takes to supply products when needed. Such flexibility will improve the Group’s response times while lowering stock levels.

Shortening delivery times to reduce stock levels

Vallourec’s safety results in 2011 were very positive. The LTIR1 was in line with the targets set in the caPTEN+ Safe program, reaching 2.77, three times lower than that of 2008, the year in which the first safety plan was launched. The TRIR2 was brought down to 9.39. The target for 2013 is to achieve an LTIR close to two. To meet these targets, caPTEN+ Safe must continue to instil a safety culture within the Group through, in particular, the continuous Improvement Teams in each plant and systematic safety visits and mini safety meetings, which are the main levers of this very active policy.

Safety: a top priority

1 lost Time Injury Rate: number of accidents involving lost time per million hours worked.2 Total Recordable Incidence Rate: number of accidents recorded per million hours worked.

SAVINGS GENERATED IN 2011 BY CAPTEN+ MEASURES

€83million

44 45


06FINaNcE

In 2011, Vallourec’s business was driven by the energy sector, which represents three quarters of the Group’s sales,

and by the industrial and mechanical engineering sectors, which continued to recover. Profits remained stable mainly due to the start-up costs of current projects and the rise in raw materials prices

during the year.

€940 M2011 EBITDA

23%2011 NET DEBT/EqUITY

€5,296 M2011 SALES

€402 M2011 NET PROFIT GROUP ShARE

n 2011 the Group’s level of business remained healthy

and the majority of its plants operated at high output levels. Sales volume rose by 19% to 2,251 thousands metric tons of tubes, a growth rate similar to that of the Group’s consolidated sales, which stood at €5.3 billion, 18% higher than in 2010.

a growing businessThe increase in sales is chiefly attributable to the Group’s oil and gas business (+21%), which made good progress in most regions. Sales in non-energy sectors also rose considerably (+38%), particularly in the mechanical engineering sector, which was boosted by Germany’s manufacturing industry. due to the rise in the cost of raw materials in 2011 and the start-up costs associated with the strategic projects in Brazil and the united States, eBITda only rose slightly (+2% on 2010) to €940 million. The Group’s eBITda margin (as % of sales) stood at 17.7%, compared to 20.6% in 2010. The performance improvement program, CaPTen+, produced annual savings of €83 million, a figure in line with the Group’s targets. net income, Group share, totaled €402 million, a 2% drop on 2010.

Investments for the futureVallourec invested €909 million in industrial projects during the financial year of 2011, of which €622 million related to strategic projects. Thanks to these substantial investments, the Group was able to carry on developing its production facilities to better meet customer expectations and increase its operational efficiency. despite the large amount invested, the Group remained financially stable with net debt limited to 23% of its equity on december 31, 2011.

outlook for 2012Vallourec expects its sales to rise in 2012 primarily due to a dynamic oil and gas sector and the higher prices introduced in 2011. The Group will nevertheless have to operate in an environment which is less favorable for its activities outside of oil and gas, in europe and Brazil. The Group’s gross operating margin should fall below that of 2011.

I

2011, a year of growth and preparation for the futureThe year 2011 was characterized by a significant increase in activity, together with the advancement and start-up of the Group’s major industrial projects.

SAlES (IN € mIllION)

SAlES VOlumE (IN ThOuSANd mETrIC TONS)

2009

2009

4 ,465

1, 503

2010

2010

4 ,491

1,888

2011

2011

5, 296

2,251

46 47


Financial communication policyWith regard to the communication of the Group’s financial information, Vallourec ensures all shareholders are treated equally. Vallourec provides material which is common to all shareholders as well as more specific material which is adapted to the expectations of the different shareholder groups. anyone may consult this information in its entirety under the “Finance” section of the Group’s website.

DividendVallourec decided to ask the Shareholders’ Meeting of May 31, 2012 to approve the payment of €1.30 per share in respect of the financial year 2011. This is identical to the dividend approved the year before and represents a pay-out ratio of 39.3%.Shareholders will be able to choose, between 5 and 19 June 2012 (inclusive), to receive payment of the dividend in cash or in new shares offered at a 10% discount.

EArNINgS PEr ShArE ANd dIVIdENd (IN EurOS)

2010 2011

Earnings per share 1 3.60 3.40

Dividend per share 2 1.30 1.30 2

Pay-out ratio 3 37.3% 39.3%

vallourec’s share priceVallourec has built and maintains a lasting and constructive dialogue with its shareholders on the basis of a clear, informative and transparent communication policy. The application of a consistent dividend policy over the long term also contributes to these efforts.

on December 7, 2011, Vallourec successfully launched a €650 million bond issue, maturing in February 2017 with an annual coupon of 4.25%.The bond issue will be used for the general financing purposes of the Group, enabling Vallourec to increase its financial flexibility, lengthen the maturity of its debt profile and diversify its financial resources. The success of this issue with investors confirms the confidence of the market in the creditworthiness of the Group.

Bond issue

In 2011, over 15,000 employees in nine countries (Germany, Brazil, canada, china, the United arab Emirates, the United States, France, Mexico and the United Kingdom) signed up to Vallourec’s global employee share ownership plan, increasing the share held by employees in the Group’s capital to 5%. The participation rate has risen every year (73% of the workforce in 2011 compared to almost 70% in 2010). Through their broad participation in the plan from one year to the next, employees show their confidence in the Group’s long-term strategy and performance.

The growing importance of employee share ownership

Key dates regarding the payment of the dividendJUNE 4, 2012

Record date

JUNE 5, 2012

ex-dividend date

JUNE 5–19 2012

option period

JUNE 27, 2012

dividend payment

FINaNcE

06

VaLLoUREc SHaRE FacTSHEET

LISTED ON ThE EURONExT PARIS EUROLIST (SECTION A)

PART OF ThE DEFERRED SETTLEMENT SECTION (SRD)

ISIN CODE (ShARE): FR0000120354

ISIN CODE (ADR): uS92023R2094

INDICES: CaC 40, euRoneXT 100, MSCI WoRld IndeX

FTSE CLASSIFICATION: enGIneeRInG and MaCHIneRY

MARkET CAPITALIzATION: €5.8 BIllIon aT MaRCH 31, 2012

cHaRacTERISTIcS

LISTING MARkET NYSE EURONExT PARIS

ISSUE PRICE PER BOND €100,000

NUMBER OF BONDS ISSUED 6,500

COUPON 1 4.25%

MATURITY DATE FEBRUARY 14, 2017

LONG-TERM RATING BBB+

1 The coupon, payable on February 14 every year, stands at 4.25% per year of the bond’s nominal value.

BrEAKdOWN OF ShArE OWNErShIP AT dECEmBEr 31, 2011

7.0

5.0

0.8

10.1

1.7

1.6

Public (of which 10.1% individual shareholders)

FSI & Caisse des Dépôts et Consignations

Employee shareholders

Groupe Bolloré

Sumitomo Metal Industries

Directly held by Vallourec

%83.9

1 earnings per share is calculated by dividing net Income Group Share by the weighted average number of outstanding shares over the period. 2 dividend submitted for approval to the Shareholders’ Meeting on May 31, 2012.3 The pay-out ratio calculation is based on the number of shares in issue at 31 december.

48 49


Vallourec group income statement In € thousand

2010 2011

Sales 4,491,272 5,295,861

Cost of sales* -3,039,466 -3,744,615

Selling, general and administrative costs* -487,527 -576,499

other* -39,461 -35,028

EBITDa 924,818 939,719

depreciation of industrial assets -184,008 -200,538

other depreciation and amortization -39,050 -55,969

Impairment of assets and goodwill -3,195 391

asset disposals and restructuring costs -16,175 9,599

oPERaTING PRoFIT 682,390 693,202

Financial income 21,283 21,851

Interest costs -45,441 -78,114

net financial costs -24,158 -56,263

other financial income and charges 7,126 15,755

other discounting costs -10,810 -8,012

FINaNcIaL INcoME/LoSS -27,842 -48,520

PRoFIT BEFoRE TaX 654,548 644,682

Income tax -199,453 -191,624

net profit of equity affiliates -2,260 3,765

NET PRoFIT FRoM coNTINUING oPERaTIoNS 452,835 456,823

coNSoLIDaTED NET PRoFIT 452,835 456,823

Profit attributable to non-controlling interests 43,235 55,276

Profit Group share 409,600 401,547

Profit Group share:

earnings per share (in euros) 3.6 3.4

diluted earnings per share (in euros) 3.5 3.4

*Before depreciation and amortization.

FINaNcE

BaLaNcE SHEET aND INcoME STaTEMENT06

Vallourec group balance sheet In € thousand

31/12/2010 31/12/2011

NoN-cURRENT aSSETS

Intangible assets, net 266,499 276,950

Goodwill 506,421 519,803

Gross property, plant and equipment 4,508,326 5,394,514

less: accumulated depreciation -1,153,901 -1,328,239

Property, plant and equipment, net 3,354,425 4,066,275

Biological assets 129,996 184,299

Investments in equity affiliates 64,622 146,713

other non-current assets 235,222 289,014

deferred tax - assets 59,821 140,806

ToTal 4,617,006 5,623,860

cURRENT aSSETS

Inventories and work-in-progress 1,190,270 1,388,977

Trade and other receivables 863,581 1,057,871

derivatives - assets 35,685 39,705

other current assets 188,268 182,510

Cash and cash equivalents 653,762 901,886

ToTal 2,931,566 3,570,949

ToTaL aSSETS 7,548,572 9,194,809

EQUITY aND LIaBILITIES

Issued capital 235,888 242,869

additional paid-in capital 569,491 732,568

Consolidated reserves 3,063,829 3,349,473

Reserves, financial instruments -9,502 -55,773

Foreign currency translation reserve 308,450 205,932

Profit or loss for the period 409,600 401,547

own shares -21,343 -46,330

equity, Group share 4,556,413 4,830,286

non-controlling interests 267,159 380,022

ToTaL EQUITY 4,823,572 5,210,308

NoN-cURRENT LIaBILITIES

Bank loans and other borrowings 813,689 1,189,221

employee benefits 122,290 116,705

Provisions 8,549 9,929

deferred tax - liabilities 136,629 198,817

other long-term liabilities 50,961 92,113

ToTal 1,132,118 1,606,785

cURRENT LIaBILITIES

Provisions 148,229 120,297

overdrafts and other short-term bank borrowings 220,705 906,172

Trade payables 647,370 668,680

derivatives - liabilities 29,698 115,697

Tax liabilities 97,888 62,485

other current liabilities 448,992 504,385

ToTal 1,592,882 2,377,716

ToTaL EQUITY aND LIaBILITIES 7,548,572 9,194,809

50 51


FINANCE

GLOSSARY06

Alloy: combination of a metal and one or more other chemical

elements that acquires greatly enhanced mechanical properties

when subjected to mechanical and heat treatments.

American Petroleum Institute (API) standards: US

organization that produces standards relating to the oil industry.

Billet: section cut from a steel bar (round tube) for the purpose

of transforming it into a tube by mechanically working it while hot.

Blast furnace: reactor that uses carbon (in the form of coke

or charcoal) as an iron ore-reducing agent to produce iron.

Buttress: standard threading for OCTG products.

Casing: tubes assembled by means of leak-tight threaded

connections to form a column consolidating the walls of an

oil or gas well.

Connection: system enabling tubes to be connected to each

other by a make-up process.

Continuous caster: industrial facility that solidifi es metal

in a mould in a continuous process, forming long bars.

Drill pipe: extremely strong tube used to drill oil or gas wells.

Drill pipes are assembled end-to-end to form a drill string,

which may be up to 10,000 m long.

Drilling: use of appropriate tools to penetrate underground

formations, whether for geological studies or to remove fl uids

(oil, gas, water, etc.) from the drilled terrain.

Electric arc furnace: furnace designed for smelting scrap

metal or prepared ore, in which the main heat source is an

electric arc.

Heat treatment: transformations in the structure of steel

obtained by performing heating and cooling cycles for the

purpose of improving the steel’s mechanical properties.

Hollow: semi-fi nished tube, which can subsequently be

transformed into a product satisfying the specifi c requirements

of a particular market.

Line-pipe: oil and gas transport pipes, generally consisting

of seamless tubes in the offshore section and large-diameter

welded tubes in the onshore section.

MSH section: trade mark registered by the Vallourec Group

for premium structural tubes.

OCTG: Oil Country Tubular Goods – casing and tubing

products for oil and gas production.

Riser: offshore pipe that carries oil extracted from the sea bed

to the export facility on the surface.

Rolling mill: plant where seamless tubes are manufactured

in a three-stage hot process:

1. pierce the billet;

2. draw the resulting hollow on an internal mandrel;

3. calibrate the fi nal dimensions.

Structural tube (hollow section, micro-pile, etc.): round,

square or rectangular hollow sections used in a vast range of

applications in the mechanical engineering, construction and

civil engineering sectors.

Supercritical or ultra-supercritical power plant: enhanced-performance thermal power plants that operate

at high temperature (>374 °C) and high pressure (>221 bar).

The term “ultra-supercritical” applies to plants operating

at temperatures in excess of 600 °C.

Threading: machined profi le at the ends of tubes, allowing

them to be assembled by screwing the male and female parts

together.

Tubing: steel tubes assembled by means of gas-tight threaded

connection to form a production string through which fl uids are

piped from a well bottom to the surface.

Umbilicals: assembly of steel tubes and/or hydraulic pipes,

electric cables and optical fi bres, used to connect the

equipment on the sea fl oor to its control station on the surface.

Vallourec supplies stainless steel tubes for umbilicals.

VAM® joints: family of premium threaded joints invented and

patented by Vallourec. VAM® joints ensure a totally gas-tight

connection and are suitable for a wide range of demanding

applications.

52

VALLOUREC_RA_2011_part2_II-33-VA.indd 52 14/06/12 13:57

Other publications

Sustainable development report

Shareholder’s guide

Registration document and Annual fi nancial report

Published by Vallourec - Communications Group - May 2012

Design and editing -

Photo credits: Franck Dunouau, Philippe Dureuil, Thiago Fernandes, Patrick Jacob,

Victor Liupanez, Miguel Medina, Gérard Uféras, PasàPas, Photothèque Vallourec,

Terex, UMOE Schat-Harding.

Computer graphics: Antoine Dagan

100% recycled and FSC certifi ed

Order or download these publications at www.vallourec.com

Vallourec-couv-RA-2-3-UK-V2.indd 1 15/06/12 13:21

ANNUAL REPORT

2011

Registered office: 27, avenue du Général Leclerc92100 Boulogne-Billancourt (France)552 142 200 RCS Nanterre

Tel.: +33 (0)1 49 09 35 00 Fax: +33 (0)1 49 09 36 94

www.vallourec.com

A French limited liability company (société anonyme) with Management and Supervisory Boards and issued capital of €242,868,818

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Documents

REPORT 2011 - Vallourec annual report 2011 vallourec is a world leader in premium tubular solutions primarily serving the energy markets (oil and gas, powergen)