Nucor Inks Agreement with EnCana

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Steel maker Nucor Corporation (NUE) entered into a deal with Canada’s largest natural gas producer Encana Oil & Gas (USA) Inc. to develop onshore natural gas drilling program in the continental U.S. Nucor believes that the drilling program will provide a reliable, low-cost supply of fuel for more than 20 years.

Per the agreement, Nucor will share its part of costs and will also shell out an additional amount for the drilling. The agreement also has an option where either of the companies may suspend drilling if the price of natural gas falls below a predetermined threshold. Encana will provide expertise for drilling and operating the wells.

The agreement will establish a reliable gas supply for the direct reduced iron facility, which is currently under construction in Convent, Louisiana where iron ore is turned into a concentrate. The facility is expected to come online in mid 2013 and is expected to increase Nucor’s usage of natural gas. The recent deal is an extension of the existing agreement between Nucor and Encana that was signed in 2010.

As per Nucor, the deal can provide enough natural gas to offset the fuel that is used at its U.S. mills and two gas-intensive direct reduced iron facilities. Nucor believes that the deal will improve its competitive position and will be beneficial for both the companies.

Last month, Nucor released its third quarter 2012 results. The company reported adjusted (excluding special items) earnings of 45 cents per share in the third quarter of 2012, ahead of the Zacks Consensus Estimate of 42 cents. The adjusted earnings exclude cost associated with Skyline Steel buyout and loss on divestiture of the assets of Nucor Wire Products Pennsylvania, Inc.

Profit (as reported) came in at $110.3 million or 35 cents a share, down 39% from $181.5 million or 57 cents per share reported a year ago. The bottom line was hurt by lower operating profits at the company’s steel mills, especially in sheet and plate.

Revenues slid 8.6% year over year to $4,801 million, missing the Zacks Consensus Estimate of $4,856 million. An 8% fall in average sales price weighed on Nucor’s revenues in the quarter. Total tons shipped to outside customers dipped 0.3% year over year to 5.8 million tons in the reported quarter and total mill shipments decreased 1.7% to 5.0 million tons.


The company, which competes with Commercial Metals Co. (CMC) and United States Steel Corp. (X), maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating. We currently have a long-term Neutral recommendation on the shares of Nucor.
 

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