Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Tenaris SA Third Quarter 2016 Earnings Conference. [Operator Instructions] And as a reminder, this conference is being recorded. Now, I would like to welcome and turn the call to Mr. Giovanni Sardagna, IR Director. Please go ahead.

Thank you, Carmen, and welcome to Tenaris' 2016 third quarter results conference call. Before we start, I would like to remind you that we will be discussing forward-looking information in the call and that our actual results may vary from those expressed or implied during this call. With me on the call today are Paolo Rocca, our Chairman and CEO; Guillermo Vogel, Vice President of Finance and member of our Board of Directors; Edgardo Carlos, our Chief Financial Officer; German Cura, Managing Director of our North American operations; and Gabriel Podskubka, our Managing Director of our Eastern Hemisphere operations. Before passing over the call to Paolo for his opening remarks, I would like to remind you, I would like to briefly comment our quarterly results. Our third quarter sales at $1 billion were down 33% compared to last year and 6% sequentially, mainly reflecting a further decline in average selling prices. However, this quarter, shipments finally stabilized, with higher volumes in the U.S. onshore, offset by seasonally lower volumes in Europe and the completion of shipments for line pipe projects in Argentina. Our EBITDA margin at 15% was flat compared to last year, but higher sequentially, mainly due to lower restructuring charges and a one off gain of $14 million from the sale of land in Argentina. Average selling prices were down 17% compared to the corresponding quarter of last year and 7% sequentially, reflecting the trend of reduction in the market and a less favorable product mix. During the quarter, cash flow from operation remains strong at $254 million, and we ended the quarter with a net cash position of $1.8 billion. The Board of Directors approved the payment of an interim dividend of $0.13 per share or $0.26 per ADR to be paid at the end of this month. Now, I will ask Paolo to say a few words before opening the call to questions.

Thank you, Giovanni, and good morning to all of you. Following six consecutive quarter of declining shipments, I'm pleased to see that our sales volumes have now stabilized and look forward to seeing them begin to rise in the coming quarters. We now think we have reached the inflection point in the downturn with the oil price having breached $50 per barrel, sign of dialogue between Saudi Arabia and Iran, the rise in the price o0f natural gas, and the 25% increase in the U.S. rig count from its low point in May. With $50 oil and $3 gas, we can expect activity in North America to continue to pick up. In the rest of the world, however, activity will take longer to recover and may require oil price to rise farther, particularly for offshore development, while other key markets for Tenaris, such as Mexico and Argentina, will require an investment boost from the private sector. The pricing environment will improve gradually. So, this may take more time to filter through in our results. This will be driven by increasing demand in North America and by the increase in raw material costs, particular for coking coal, which is affecting the margin of our major competitor. The present pricing level, in my view, cannot be sustained over the medium term. Throughout this severe downturn, we have maintained a high level of efficiency in our industrial plants and adjusted our fixed cost structure to the decline in our revenues. Our production costs have come down, and our industrial structure is intact. We have focused on cash flow management and the protection of our financial position. Since the beginning of 2015, we have reduced our working capital in 1.9 billion and generated a free cash flow of 1.3 billion. We now have a…

[Operator Instructions] Our first question is from Bill Sanchez from Howard Weil. Please go ahead.

Thanks. Good morning. Good afternoon. My first question is on average selling prices in the quarter, down 7%. I guess, on the surface, I was a bit surprised, just given the fact that we had much more seamless volumes as a percent of the total here. So, it looks like it was a tradeoff between maybe some of the higher-priced Middle East market versus the U.S. market, but nonetheless higher seamless in total. Maybe speak a little bit as to why such a sharp drop in ASPs. And then I guess, as a follow-up to that, we've seen Pipelogic, the price deck I guess, flat, relatively flat since June. Can you talk about the possibility of when we would see your average ASP start to move back up or at least flatten here and then start an upward ascent?

Thank you, Bill. I think there is a mix of market that is relevant here. The market is picking up starting from the U.S. Some of the products and application may have slightly lower price in U.S. than some other application elsewhere. And this has an influence on our average price. Also, as you say, there's been no significant improvement in Pipelogic indicator. As I was saying in my remark, I really think that the price needs to get up in U.S. and elsewhere in the coming quarters. But, it will need some traction from the point of view of the volume in the market to realize this. The push from the cost side is strong, as you followed. We mentioned metallurgical core as one factor. It increased the last month from $76 per ton to something like $270 per ton. This is a major component of the cost of integrated mill. So, we considered also this factor should drive prices up in the coming quarter. But, up to now, this is what we have.

I guess we should expect, as you come off of the seasonal downtime in Q3 at some of your mills, just holiday-induced downtime, that mix better in Q4, ASPs could actually be up in Q4, Paolo. Is that fair, just due to mix?

As we say, I think that, basically, we do not expect, let's say, a sudden major change in pricing over the coming quarter, at least over this coming month, I would say, because there is an inertia in this. And we expect substantially stable level of pricing at least for the coming months. Then when the traction comes from volume is increasing. Demand is increasing in the United States. It's clear that we touched the bottom. It's clear that the rigs are moving up. It's also clear that inventory are no longer participating in the supply of and in the satisfaction of the demand. So, we expect this to have an impact. But, for the coming months, we expect price to remain on average relatively levered, even if at the margin we will see some increase.

Okay. Thank you. Just one follow up. German, just for you, again, noted the U.S. seamless improvements here in 3Q I thought notable, considering the type of customer is not really the tier one E&P companies. Paolo noted in his comments that you all are seeing the Rig Direct program extend at a smaller, more medium sized E&Ps clearly looks apparent in the 3Q results. Can you just walk us through where kind of the seamless welded mix is right now for you in the U.S.? I believe, at the Analyst Day, you said that was 70 to 30. How do we think about that ratio moving forward, especially as more tier one companies come back into the market? Thank you.

Well, thank you, Bill. Good morning. I think it's very remarkable the fact that, over the last few months, while rig count increased to a level about 150, 70% of that is taking place both in the Permian through the increase of longer laterals as well as some gas requirements, which we know usually are more associated to seamless than welded. The reason why seamless volumes have increased, and I see that trend to continue on, even when tier one users get back stronger than now, given that we still believe these are the two areas where activity would outperform the rest of, say, the regions in the U.S.

Our next question comes from the line of Igor Levi from Morgan Stanley. Please go ahead.

Hi, good morning. You mentioned that you added eight new customers to Rig Direct. How many customers at this point do you have in total? And how many of the customers that have tried Rig Direct have returned to order more, and how many did not?

Well, we will not say the overall number that we are serving. We are just mentioning the new clients here. What I can say is that everybody that comes into Rig Direct are not leaving this way of work because this has clear advantage. They appreciated this. We negotiate price periodically. But, we have, let's say, good level of loyalty. But, German, maybe you can add.

Only, thank you, Paolo. Only a small clarification, Igor. The number was 18 during the quarter, not eight. And that, of course, accounts for both the U.S. and Canada. Thank you.

Okay. Great. And also, on the Analyst Day, you spoke about the trade case still being far from over, despite a non eventful preliminary ruling. And you mentioned that new evidence would be taken into account for the final determination. Could you talk a bit more about this evidence and the confidence you have that the final decision would be material? And then what percentage tariffs would you need to see to actually slow imports? Thank you.

Thank you, Igor. On this, German, you are following this issue very --

Well, Igor, as we indicated during the Investors' Day, the preliminary -- during the preliminary determination, the DOC indicated on the public record that they have decided to evaluate between now and March, time at which we expect the final determination, late March, two very important components. One is something that we call the particular market situation that deals with the price of steel at which the OCTG Korean producers are buying. And the second aspect is called FAA. And it deals with, in the end, the final realized price at which the Korean OCTG is sold in the States. I think the consideration of these two elements introduced important changes in the margin calculation. And we're going to need to wait until the end of March for the DOC to come out with a final determination.

Yes, on the second point, which is the number that really have an influence on the market, I think, German, you can mention the example in Canada.

Yes, I think Canada is a good proxy where the Canadian authorities found that 37.5% margin, which translated on Korea today having zero volume in the Canadian market.

Yes, this is even. But, basically, I think that even a much lower level in this pricing environment, because remember, pricing went down by 38%, and really, there has been a margin compression. In this environment, I think even a much lower antidumping and countervailing duty will really discourage Korea into the U.S. market.

Great. Thank you. I'll turn it back.

And our next question comes from the line of Frank McGann with Bank of America Merrill Lynch. Please go ahead.

Just two things, if I could. One, in terms of the first quarter comments that you made about the Middle East and Africa volumes slowing down, just wondering if you'd provide a little bit more information exactly what you see driving that and how long lasting that potentially can be. And secondly, just in terms of costs, you made significant cost cuts over the last couple of years. I was just wondering how much more potential for additional reductions you see.

Yes, thank you, Frank. On the first point, as you rightly saw, we're driving for -- on the basis of an inflection point. That is what we see today, a recovery that started today. There will be improvement. But, also, we are very cautious concerning the first quarter of next year. We perceive that this could be a weakness in the first quarter because a slowdown of the demand in Africa basically, more than in Middle East that may not be more compensated by the increase in North America. That is something that we expect. But anyway, I will ask Gabriel to expand a little on what we may see in the first quarter and the second quarter of the next year from Africa that could affect our volumes.

Yes, thank you, Paolo. Good morning, Frank. And thank you for your question. Let me segment the Middle East/Africa segment into the Middle East. And then I will touch on sub-Saharan Africa as they represent clearly different dynamic. We see the drilling activity in the Middle East in the key GCC countries, like Saudi and Kuwait, very strong, with specific focus on gas drilling. To give you some concrete evidence on the number of rigs that are being targeting, gas in Saudi today, we expect 5% to 10% increase in 2017. And even we are foreseeing another jump of 20% in 2018. So, we see a very robust in terms of drilling activities there. Tendering activity has been in line with this expected increase in demand. We continue to command a leading share in Saudi, which is for us very important. But, on the other hand, this has been done in a very competitive tendering environment with an effect in pricing levels. If we turn to sub-Saharan Africa, the activity levels is completely different. Today, we have in sub-Saharan Africa only 13 deepwater rigs operating. The number two years ago was 43, so a very dramatic 70% decline in activity. This certainly will impact our revenues into the beginning into '17. This is what we see. We also are completing in 2016 a major development that we service in sub-Saharan Africa, both in tubular and also in coat. And we see the majors taking some time to sanction new projects in this environment. They are working on predesigning costs. They're discussing fiscal tariffs and trying to find breakeven levels with a midterm environment price of 50. So, we expect an eventual rebound on this segment of the market, but it will be gradual, and it will take some time.

Yes, thank you, Gabriel. Let me just add that, in the discussion we have with our client, we perceive that they have lowered the breakeven point substantially, in some case below $45, below $40. But, they also need to renegotiate the government take with some of the government in the region. All in all, we think that this process will take place during 2017. And we will see a rebound on FID and a restart of project mostly affecting 2018 and 19 and going on. Now, cost. On [indiscernible] cost, basically, I think that, in this month, there would be -- that our IFRS cost is basically reflecting what we have in inventory. So, there'll be no relevant changes in the coming quarter coming from the delay in our inventory. Now, as far as the fixed costs are concerned, we are stabilizing our structure from now on. We have the need to get back to normal operation, as I mentioned, are canceling work sharing programs. We need in some region to strengthen even slightly our operation. So, we are moving back to a normal situation. We don't expect major reduction for now. And even if we continue to work on efficiency, and we will get incremental marginal results, but these will not be something substantial. In terms of variable costs, looking ahead, the structure of our industrial structure is not exposed to metallurgical core increase. We are more exposed to scrap variation. Up to now, the scrap didn't change substantially. So, we hopefully, we can have also some stability on the side of raw material. And then, we mentioned the new power plant in Mexico may help us achieving higher level of utilization in Mexico because of the possibility to work in peak hour. Now, in general, if we increase the volume as we expect, there will be a reduction in the full cost due to the better absorption, no?

Okay. Great. Thank you very much.

Our next question comes from the line of Marc Bianchi with Cowen. Please go ahead.

Thank you. I guess, following up on the last conversation about the costs, there was a nice improvement in SG&A this quarter, I think improved by $30 million. Is that a level that we should think about now staying pretty stable, or was there anything temporary that we'll see that SG&A go back up in the coming quarters?

Yes, Edgardo, maybe you can comment on this.

Sure. Thank you for the question. Good morning, Marc. Yes, the achievement is a further reduction in our cost structure, as Paolo was mentioning. Basically, we finished with all the downsizing of our structure by June this year. So, we have full effect in this quarter. And we are going to maintain this kind of a level of SG&A, of course, labor cost associated with SG&A in this level for the next quarters.

Okay, thank you. And just to follow up from the Analyst Day, I think the commentary about the first half discussion for margins in 2017 was 15% to 16%. Is that still the case in light of the commentary here on Middle East and Africa being a bit of a headwind in the first half? Thank you.

Yes, I think, what we say in the occasion of the Investor Days is what we see today. We will increase our volume. To some extent, this will have an impact on our invoicing. But, in term of margin, we will stay more or less in line with what we had in this quarter for the period you mentioned until, let's say, in the first part of 2017.

Our next question comes from the line of Nick Green with Bernstein. Please go ahead.

Good morning, all. Thank you very much. So, just a couple of quick ones, please. The first one, returning to your Rig Direct model and the mentioning that 18 new customers have joined, I think I wanted to ask a longer term question around whether there's a size threshold of customer that you think Rig Direct perhaps wouldn't be appropriate for. Obviously, implementation of Rig Direct will be quite key to its profitability. I just wanted to get a sense of basically whether you think it's not efficient to go too far down the size scale. I'll ask my second question in a second.

Well, basically, I think there is no limit to size, on the contrary. We -- in all of the operations that have basically development of field, any size could fit into our system and our administration system, our management. We have no problem in managing any size. When we talk about exploration well, in which these are tailor-made program, one, two wells, the material could change, usually, we have a different kind of agreement. We work on a basis of allowing the client to give back the pipes that they don't use. We give different level of support. German, additional on this?

Only a small element Nick, which is important, smaller operators are profiting not only from the Rig Direct service, but also given scale and whatnot of our stream design, if you will, component, which help us to, say, support the smaller operators on one hand and, at the same time, if you will, leverage on the experience that only in particular region we build in with bigger-scale operators. So, short answer to your question is no. We'll be after pretty much everyone.

Okay. Thank you. And then second question relates to the Bay City mill and its ramp-up profile. In a downside scenario where volumes maybe don't come back to the levels you're indicating next year, or maybe the 2018 FIDs don't materialize as you are suggesting, can you talk to us about what is the minimum active capacity that bringing that mill on stream would need? Presumably, you would need to bring the whole effective capacity on stream. I'm working the assumption here that you probably wouldn't defer opening the mill, in which case, if that is the case, then how much is the minimum you would bring on stream in a downside scenario, please?

Well, in the unlikely hopefully scenario that you mention that I don't really think there is in effect -- what we perceive is quite the opposite. The system is picking up steam. But, in the case there is a sudden or dramatic change, the mill -- a mill of this size with this investment and this industrial structure that is very integrated may need to work, for instance, five days a week for two weeks instead of four weeks a month, should try to rearrange at a level that could be in the range of 150,000 tons of capacity per year. This would be a basis of what I would consider a minimum level for maintaining a variable in the full cost that is competitive.

That's extremely helpful. Is that minimum level -- we spoke in a conference call three or four quarters ago about, if the world hadn't gotten better by then we may have to -- you may have to consider closing some other facilities elsewhere in your industrial network to effectively compensate for the fact that you're bringing new capacity on stream. And basically, just to get my head around this -- and I know this isn't your scenario, but the 150,000 minimum you just mentioned there Bay City, would that level necessitate you perhaps looking elsewhere in your footprint to reduce, or do you feel that, actually that's not a great -- is not much of an addition to your existing footprint, so you wouldn't see any need there?

Yes, we will remember, we announced that we are starting back the operation in Algoma, for instance. We had a temporary stoppage in Algoma for a period of months. And we are starting back from Algoma. Obviously, if there is a crisis, we need to reconsider temporary stoppage in different facility within North America or elsewhere. But, I personally think that Bay City will always be operational, even at the level of volume that I mentioned to you. We will start up with the operation as a core component of our industrial capability in North America, just to the extent of what we have in front of us.

And our next question comes from the line of Steven Kengaro with Luke Capital. Please go ahead.

Thank you. Good morning. Good afternoon, gentlemen. Two questions. One, if you don't mind, starting with the balance sheet, you have a very strong net cash position. You're finishing up the CapEx on Bay City. What are your CapEx requirements going forward? And what else might you do with your strong balance sheet position at this point?

Thank you, Steven. Well, first of all, one comment on possible utilization of these resources. I think we need to be prepared for any opportunities that may come out in our space. You see every day that this industry is consolidating, is changing, is transforming. Circumstances are changing. I think we need to keep a strong financial position if we want to be leader in this space for the very long run. And then there will be opportunity. And we will be prepared for this, one. Second, I frankly expect the market to pick up. And our working capital will require part of this capital to some extent if the volume increase substantially. Maybe this will not be in the coming two or three quarters, but I think that this could happen over time. And we may need to support also our Rig Direct extension. This also is absorbing some forward-looking capital. Additional comment, Edgardo, on this?

Yes. Going back to your question in terms of the CapEx, for the first half of 2017, as I anticipated in the Investor Day, we are expecting to run basically $400 million. 75% of this is basically the completion of Bay City. And the second half of next year is going to be probably roughly speaking $200 million, so overall $600 million for next year. And as Paolo said, we probably will start ramping up some of our investment in the fourth quarter of this year. But, we are trying to maintain our free cash flow neutral for the first half of next year. This is one -- our target for the time being. Probably, if we see a significant increase in the second half of 2017, clearly, we need to start investing again.

Thank you. That's very helpful. And then my second question has to do with margin progression, but maybe asked a little differently. When you think about the different pieces, right, when you think about the U.S. piece I think is on the lower end of the margin front in general, the Middle East probably on the higher end. Is that a reasonable way to think about margin progression in what you seem to have indicated will be kind of a flattish price environment as how those two major pieces move from a volume perspective is going to be an impact driver on the margins for the next couple quarters?

Well, I would say that you're right that, in the U.S. today, we're probably on the low side of the margin. But, let me tell you, I expect this to react faster than some other environment because, in the end, remember, the U.S. market went down from a level of 7 million tons to 1.5 million. And now, if we assume that the rigs may continue to recover, they're right to 400, and now, they are back at 550, 557. If we assume that, during 2017, there will be even, let's say, a recovery, gradual recovery, considering the stock, the inventory position that is probably staying there, the price environment will change for the consideration that we had made before and will be possible to recover faster. Now, you mentioned Middle East. In this moment, Middle East, the compression on margin is happening again also because, to some extent, there is pressure on different competitors. And so, the margin in Middle East went down substantially. Now, we have two situations that are relevant, is Argentina and Mexico, in which for geographic region and for the logistic, we really are able to capture higher margin. Today, these are very subdued, in the case of Mexico, extremely subdued, in the case of Argentina, waiting for expansion but indefinitely subdued. So, these are area that, for mix, could have an impact on a very significant impact on Tenaris on the future. If you look for the area in which margin tied to differentiation could be higher, for sure, the offshore complex pipeline and OCTG project are the one that in which in many cases Tenaris is the only supplier that could fulfill the technical, extremely demanding technical requirement. In 2017, we will not have so much of these projects because offshore is clearly on the downturn. And we are completing some shipment today of big project. But, in 2017, we expect some clear slowdown of this. But, we expect this to pick up in 2018 and going on.

Okay. Great. No, that's very helpful color. Thank you.

Our next question comes from the line of Alessandro Pozzi with Mediobanca. Please go ahead.

Hi, thanks for taking my question. I wanted to go back to the outlook for OCTG demand course of 20% that you mentioned in the Investor Day. I was wondering how good a proxy that is for your revenues into 2017, especially in light of potentially a weak Q1.

You are referring here to the increase in OCTG demand if I understand.

Yes, yes.

Now and 2017.

Yes.

Okay. Well, we mentioned this, but mainly related driven by North America. In the end, when we're talking about the increase, there was driving the increase to 10.4 million at the time when we presented it to the Investor Day. It was the increase in apparent demand, no? It's not increase -- this is considering, no, that in 2016, part of the real consumption is supplied by the reduction in the inventory. So, when we look at the 10.4 million of the overall OCTG demand, we considered that this should be much closer to the level of real consumption, no? We are estimating this on the basis of a reasonable recovery of the demand in the United States. We can see that the United States could get closer to the 4 million -- United States and Canada, no, could be -- get closer to the 4 million tons of demand in 2017. Today in 2016, this demand will be almost half apparent demand what I said compared to 2017. So, this component of the demand is the one that is driving overall increase of the demand worldwide of around 18% to 20%.

Okay. So basically we could assume revenues growing to that level next year?

Well, revenue will depends much more that will be influenced by the mix. Well, as I was saying, the mix between offshore projects that may not repeat, North America going up, still a delay in Mexico picking up because we do not expect so much activity in Mexico while the private companies -- private operators are establishing plants and are planning for the development and some delay in Argentina. Overall, invoicing I think will be probably lower.

Okay, and just a follow up on the volume increase in Q4. So any chance you could potentially quantify how much kind of the volumes increase you see quarter on quarter from Q3?

What we are saying is that we have touched the inflection point. In term of invoicing, we should be increasing gradually from this point on and this will increase in 2016 Q4. And I was cautious about the situation in the first Q of 2017, but then the trend will continue in second Q of '17 and in the second part of '17.

Okay. Perfect. That's very helpful. Thank you very much.

And our next question comes from the line Shane McPherson with Siemens. Please go ahead.

I'm all set with my questions. Thank you.

And our next question comes from the line of Michael Rae with Redburn. Please go ahead.

Yes, hi there. Thanks for taking my two questions. I'll just address them one at a time, if that's okay. So, you've touched on this a little bit already. But, I was wondering, could you give a bit more color on the demand dynamics in the other markets in Latin America? It looks like the rig count has stabilized over the past few months in Argentina. So, I'm just wondering, are you becoming marginally more positive on Argentina in particular as we approach 2017? And then I'll just take the second question in a minute, if that's okay.

Thank you, Michael. Well, as I mentioned, I'm very positive on what will come from Argentina developing Vaca Muerta. I'm sure, I'm convinced that this is a need for the country and that the government's aware of this. And they will set up the policies that will promote, stimulate private investment in this. But, you are right that, for the time being, what we see is a relatively stable level of investment and drilling equipment, rigs. We are in the range of 70 rigs, while a few years ago, we were in the range of above 100 rigs. This is relatively stable. I expect this to increase in 2017 and then to pick up steam when the rules of the game will be established and confidence will grow over time on the action of the government. I'm positive on this. When we look in other countries of the continent, Colombia, I'm also positive on Colombia. I think Colombia reached bottom in terms of drilling in these quarters. We are down to 10 rigs, a very low level, between 6 and 10 in this quarter against the 35 that we had. I think we will get back to normal operation in the range of 30 rigs by the end of 2017. And Ecopetrol that suspended, almost suspended part of the drilling operation, is getting back to work. The price of oil is important here. If the price of oil stays above 50 or in the range of 50, this is a reference that will stimulate activity in Colombia but also in Ecuador. Ecuador, at least for the area that is more important for us, will be driven by the action of the companies that are actually drilling. Schlumberger is an example. And gradually, this will be a pickup in 2017. What we do not know is Venezuela. I think Venezuela is in an area of unpredictable circumstances. And it would be very difficult to understand, to make a forecast for this. The case of Brazil, we expect Brazil to stabilize and to continue recovering slowly on the basis of offshore drilling. This is positive for us for our sales of connectors and material that is applied and used in offshore drilling operation.

Okay. Okay. That's great. Thank you. And then the second question is just on deepwater development. So, you've touched on mainly West Africa in your comments so far. But, I think in the rest of the world, there's a bit of evidence that deepwater projects are slowly moving forward again, whereas in general, I think you seem a bit more cautious. So, I'd appreciate a bit more color on the other basins, Gulf of Mexico, Brazil, North Sea, etcetera. Thanks.

Maybe, Gabriel, you can comment on the possibility that project in offshore will get to the FID decision, no? Thank you, Michael.

Yes, Michael. In addition to sub Saharan Africa, the rest of the basins in this year that we monitor on deepwater activity are also being affected, and maybe not as much as the 70% of sub Saharan Africa that we're talking about. But, Southeast Asia has been down 60%. North Sea has been down 40%. And I will let German comment maybe on Gulf of Mexico. So, this is a segment that has been affected all across geographies. New projects are being re-discussed, reevaluated, cost of redesign government takes. And this will gradually recover. But, the list of FID projects that we monitor closely that we will have probably in 2017 and 2018 is not as big as we used to have in 2013 and 2014. So, it's something that will take some time.

Yes, but, as I said before, when you talk to the leader of the oil industry, very active on deepwater, you perceive that there is a drive for reduced cost as being successful. The breakeven, it clearly went down for some of the projects. So, they are now considering starting back. They are negotiating with the government for the government takes. But, I think that, in an environment of oil in between $55 or around that number, we will see in 2018 and 2019 FID of project in some of the area in which the reserves and the condition are favorable for this. This is also true for some LNG project. When you have reserves, you have associated liquids and reasonable political risk. German, a note on the Gulf?

Well, only very briefly, I think deepwater in Gulf of Mexico today with 20 rigs is less than half what it used to be two years ago, Michael. And we don't really see that coming back. There's some project, shale in particular, that is contemplated to restart during 2017, but nothing close to what it was. And adding to what Paolo just said, it is a view in conversation with the major oil companies that they, given the price now, they have come to conclude that, considering the scale of the deepwater projects, they're now a lot more focused on optimizing the deployment of fewer rather than what used to be the practice of the past.

Anyway, some projects like the Coral Eni for gas, like Zohr or -- we see and we are following, let's say, a reasonable number of projects. At least there are mood by client with whom we have a very good intimate relation. Maybe even if this market is going down, but maybe we may be very well positioned, at least this is what we feel, when this get into motion again.

And our next question is from the line of Felipe Santos with JP Morgan. Please go ahead.

Just some kind of follow ups from previous questions. The oil companies in general continue to reduce their CapEx for the next year. We saw major oil companies saying about a small reduction in CapEx, not as big as we saw before, but a small reduction in CapEx for next year, and yet especially exploration campaigns being lower. And then just want to [indiscernible] what is your projection for next year, for the growth of next year does not consider any increase in the exploration side or a [indiscernible] consider this reduction, and this would be mostly because of efficiency gain or lower breakeven, if this makes part of your base case here?

Thank you, Felipe. What we expect, frankly, is that overall investment of the oil industry in exploration and production will be probably in line or above the level of 2016, compounded by an increase in investment in North America and a reduction in some other region and stability in the Middle East. On this basis, we expect a slight decrease. Now investment in North America is more pipe intensive. And that justifies the increase in -- that you have seen in the demand for OCTG because it's mainly driven by the area in which are more pipe intensive. As far as exploration is concerned, it's true that we see a slowdown of exploration, and probably in 2017, what we see, and we are just observing the demand, is a lower demand for exploration project up to now. I really think that price of oil between 50 and 55 for a consistent period of time will put back in motion also the exploration activity.

And our next question is from the line Kevin Roger with Kepler Cheuvreux. Please go ahead Kevin.

Hi, good morning, gentlemen. Thanks for taking my question. The first one is very quick on the follow up from the Direct Rig, please. If I well understood, you won 18 new clients this quarter, but the penetration of the market is still the same at 50% quarter on quarter.

We are adding clients. But, I think we are increasing slowly, no, a small number. But, anyway, German, can you mention if we expect by the way in the coming months our penetration of Rig Direct to increase?

Thank you, Paolo. I think short answer, Kevin, is we are at 18 new customers. Rig Direct continues to gain traction. It is 50% of our OCTG sales in the States. It will be a higher number in the percentage number in the coming quarters. As a matter of color, if you will, during the quarter, we managed to switch, for example, ConocoPhillips, who's been a traditional user of Tenaris's pipes under one of our existing alliances contracts, but where we supply the pipes only. ConocoPhillips became a Rig Direct user as part of these new 18 Rig Direct users that I was referring to at the beginning.

Let me add one comment on Rig Direct. Something that is important for us is also that, in the Rig Direct, we are able to supply a number of services that are not only OCTG pipes. There are accessories. There are in some cases sucker rod. There are other services associated with Rig Direct. So, in the end, I see this as positive, not only for the intimacy and the improvement in the efficiency of our client, but also, from our point of view, it expands the range of products and services that we are delivering to our client.

Okay. That's helpful. And just a follow up also, please, in terms of the impact of the [indiscernible] EBITDA margin because, if we tracked the cost in terms of service and fees and commission and selling expense over the past quarters, when you compared it to the sales, it increased up to almost 13% this quarter compared to around 11% at the beginning of the year. So, was wondering, what would be the impact on the EBITDA margin at the end if you now manage all the sales, the service, the fees, the selling expense, etc.? It seems to increase in terms of percentage of sales.

Yes, well, maybe, Edgardo, you can comment on this aspect?

Yes, good morning. Yes, as you pointed out clearly, basically, what we call it, within the SG&A, a variable portion is what is very much related to the volume, which is freight, but also depends very much of the mix of region that we are serving. As you can see, this year, we have been a much more important participation from Middle East and some other places in which, overall, the logistic cost is much more expensive than when we are selling to our local markets. Therefore, we see this -- there are probably going to be some reverse of the trend coming next year when we start increasing the volume in the U.S. and especially when we have the facility up and running in Bay City.

Okay. Thanks a lot. And just maybe the last one is the increase in the [indiscernible] account, is it linked to the U.S. Direct Rig activity, meaning that you're not directly exposed to the risk of the [indiscernible] of your clients in the U.S.?

No, absolutely not. In the U.S. is one of the places in which we have the DSO, the lowest DSO within our portfolio. What happened in this quarter basically was a combination of delayed payments, basically in Ecuador and Angola, those that we are pursuing to recover in the coming quarters.

Okay. That's very helpful. Thanks a lot, gentlemen.

Thank you.

Thank you. And ladies and gentlemen, this concludes our Q&A for today. I would like to turn the call back to Giovanni Sardagna for any final remarks.

Well, thank you, Carmen, and thank you, all, for participating in the call. Bye.