Morgan Stanley's Deep Dive Into Tenaris Leads To Downgrade

Morgan Stanley's Ole Slorer downgraded the rating on Tenaris SA (ADR) TS to Equal-Weight, while lowering the price target from $28 to $25.

"We see limited absolute downside given TS's pristine balance sheet and strong free cash flow generation; however, elevated 2016/17 earnings expectations and risk of a "trough cycle" dividend cut suggest limited scope for meaningful outperformance," Slorer explained.

The analyst also said consensus expectations appeared too high and that there could be a risk of a dividend cut being announced when the company reports its Q4 results on Wednesday.

In addition, there appear to be no signs of the OCTG price declines abating, while Morgan Stanley's deep dive analysis suggest that there could be downside to the consensus EBITDA expectations.

According to the Morgan Stanley report, "US inventories are above 9 months of demand, which we believe could last well into 2016 at current activity levels, driving further destocking and potentially bringing US sales to a halt."

Slorer mentioned, however, that Tenaris has been able to sustain its prices, which has declined a mere 8 percent since late 2014, benefiting from long term contracts and a better mix.

"This downcycle is likely to continue to pressure financially levered & operationally inefficient companies, and TS remains well positioned in this regard," the analyst added.