Merger-mania in the oil-country tubular goods (OCTG) sector came to a head in early May when Stockholm, Sweden-based SSAB Svenskt Stal AB announced its plan to buy Lisle, Illinois-based Ipsco Inc. for $160 per share in a deal valued at approximately $7.7 billion.

SSAB has a leading European position in quenched and tempered heavy plate and EHS/UHS sheet steel. Before SSAB placed the winning bid for Ipsco, it was rumored that the buyer could be Russia's largest steelmaker, Evraz Group SA, giving Russia an entrée into the U.S. market.

"The acquisition of Ipsco represents a further step in SSAB's 2010 strategy toward global leadership in value-added steel," says Olof Faxander, president and chief executive of SSAB. "Through this transaction, SSAB will accelerate its growth and acquire a platform for future expansion and market presence in North America."

This announcement came after months of merger rumors about Ipsco, which has been left as one of the few remaining large North American OCTG-makers. At the end of March, Pittsburgh-based United States Steel Corp. announced its plan to acquire one of the other large OCTG players, Dallas-based Lone Star Technologies Inc. The deal is for $67.50 per share, or approximately $2.1 billion in cash, and may close in this or the next quarter.

Like many other companies that are buying into the energy pipe business, U.S. Steel's main rationale for purchasing Lone Star is to get a bigger piece of the highly profitable oil and gas industry pie.

"This transaction represents a compelling strategic opportunity for U.S. Steel to strengthen our position as a supplier to the robust oil and natural gas sector by significantly expanding our tubular product offerings, our production capacity and our geographic footprint," says John P. Surma, U.S. Steel chairman and CEO.

The combination is expected to create North America's largest tubular producer. Following the transaction, U.S. Steel will have annual North American tubular manufacturing capability of approximately 2.8 million tons.

These two high-profile deals are among many OCTG mergers recently in a wave of acquisitions in the sector that has significantly reduced the number of major players, and changed the composition of the sector so that steelmakers have become some of the biggest names in OCTG.

"The increased levels of gas-drilling activity have made the industry very good," says Poe Fratt, an analyst with A.G. Edwards & Sons. "The steel players want exposure to the U.S. OCTG market, and they're buying into a very attractive market."

Even more consolidation may be under way. According to Fratt, the three major players in the OCTG space today are now U.S. Steel, Luxembourg-based Tenaris SA and Ipsco Inc. Among these, Ipsco is being purchased, and there are rumors that Tenaris, which recently bought Hydril Co., may be bought as well.

This merger trend in the relatively quiet OCTG sector is one that began in the summer of 2006 with Tenaris' acquisition of St. Louis-based Maverick Tube Corp. for $65 per share, or a total of $3.2 billion. The acquisition gave Tenaris full access to the U.S. and Canadian tubular markets, as well as the Colombian market.

"This is a major step for Tenaris," says Paolo Rocca, Tenaris chairman and CEO.

Announcements by Ipsco for NS Group and by U.S. Steel for Lone Star followed. The Tenaris and SSAB deals could represent a trend among foreign steel producers buying into the U.S. OCTG space to gain access to the U.S. oil and gas market, Fratt says.

"It's a function of globalization, really," he says. "To create flexibility and get access to markets that are attractive, acquiring a U.S. company is the easiest thing to do. Strategically, it makes sense for these firms to have a U.S. presence. Foreign steel companies weren't interested before because the oil and gas industry wasn't doing as well and there were import restrictions. The companies aren't subject to the import restrictions if they are incorporated in the U.S. This trend is also a function of the weak U.S. dollar."

Meanwhile, other foreign steel producers have been stepping into the U.S. market in the form of joint ventures, three of which were done in 2006 by Lone Star.

The first was with Hunan Valin Steel Tube & Wire Co. Ltd., one of China's largest steelmakers. Under this agreement, Lone Star acquired a 40% stake in Hengyang Valin MPM Steel Tube Co. Ltd., one of Valin Tube & Wire's subsidiaries, for $132 million in cash. The joint venture also called for Lone Star and Valin Tube & Wire to establish a sales company to manage North American sales and marketing of tubular products produced by the joint venture, giving Valin Tube & Wire access to the U.S. market.

Lone Star set up another joint venture to acquire a 50% stake in Apolo Mecanica e Estruturas Ltda., an oilfield tubular products facility in southeastern Brazil, for $42 million, with Grupo Peixoto de Castro, a Brazil-based holding company.

The third venture is with Welspun Group, one of India's leading manufacturers of tubular products, and has given Welspun access to the U.S. market through a new, jointly owned spiral-weld mill, which is expected to be built in the Southwestern U.S. and begin producing in early 2008.

"The joint venture will enable us to strengthen our presence in the fast-growing U.S. market, where demand for spiral pipe continues to increase," says B.K. Goenka, vice chairman and managing director of Welspun.

After the announcement of Tenaris' acquisition of Maverick, Ipsco announced its acquisition of Newport, Kentucky-based NS Group Inc. for $66 per share, for a total deal value of approximately $1.5 billion. This acquisition made Ipsco the large OCTG player it is today, as the transaction was estimated to generate more than $50 million in annual pre-tax operating synergies.

Another player in the OCTG space that got involved in recent merger activity is Houston-based Enventure Global Technology LLC, which is owned jointly by Shell Technology Ventures and Halliburton Energy Services and has operations in North America, the Middle East, Asia Pacific, South America, Europe and the Far East.

Enventure made its move in the OCTG merger frenzy at the end of October 2006 with the purchase of Houston-based Triad Pipe & Steel Co., a supplier of OCTG, for an undisclosed price. Before the acquisition, Triad was primarily focused on supplying tubulars to operators in the Gulf of Mexico.

After the past 12 months of mergers and joint ventures of OCTG companies, and with merger rumors circulating on one of the remaining two large players in the space, it looks as if the lion's share of the OCTG market will soon be wrapped up.

These mergers and rumors have been great for stock prices as well. U.S. Steel's stock has risen from $98.01 per share on the day of its announced bid for Lone Star in late March to $104.54 at press time. Shares of Ipsco have grown from approximately $100 each a year ago to nearly $160 upon the SSAB bid. Tenaris has gone from trading at $44.10 to holding steady at around $47 during the same time period.

Despite the fact that the field seems to be narrowing in the wake of mergers and acquisitions, Fratt says this activity will ultimately widen the OCTG space, not shrink it. "The market is not going to get smaller," he says. "It's just going to be filled with bigger players."



Recent Deals Involving OCTG Manufacturers

Est. Value Seller/Acquired or Date ()Buyer/Surviving EntityMerged EntityAnnounced Comments

$7,700SSAB SvensktIpsco Inc.5/07To buy co., a producer of energy tubulars andStal ABsteel plate in North America.

$3,200Tenaris SAMaverick Tube Corp.6/06Bought co., a producer of welded OCTG, linepipe and coiled tubing.

$2,100U.S. Steel Corp.Lone Star 3/07To buy co., a manufacturer of welded OCTG, Technologies Inc.making U.S. Steel North America's largest tubulars producer.

$1,500Ipsco Inc.NS Group Inc.9/06Bought co., a producer of tubular products for the energy sector.

$132Lone Star Hunan Valin Steel 8/06Entered a joint venture for a 40% stake inTechnologies Inc.Tube & Wire Co. Ltd.Hengyang Valin MPM Steel Tube Co. Ltd., involving at least 200,000 tons annually of OCTG products in North America.

$42Lone Star Grupo Peixoto de Castro10/06Entered a joint venture to acquire 50% of Technologies Inc.Apolo Mecanica e Estruturas Ltda., an oilfield tubular products manufacturer in southeastern Brazil.

$26.4Lone Star Welspun Group12/06Entered a joint venture for a 40% stake in Wel-Technologies Inc.spun-Lone Star Tubulars.

NAEnventure Global Triad Pipe & Steel Co.10/06Bought specialty OCTG co.Technology