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Aluminum heavyweight Alcoa Inc. (AA - Analyst Report) has sealed a major contract from oil and gas exploration company Pennsylvania General Energy (“PGE”). Under the pact, the company will produce and supply 3,500 feet of aluminum alloy drill pipe to PGE for gas drilling in the Marcellus Shale formation of Pennsylvania. PGE was among the first companies to explore and drill a well in the region, in 2005.

Alcoa noted that its 4.5 inch drill pipe will extend the reach of the drilling rig on natural gas well in the Marcellus Shale to roughly 7,500 feet, which is 1,000 feet deeper than commonly used steel drill pipe can penetrate without using larger, more expensive rigs. The financial terms of the deal, however, were undisclosed.

The novel drill pipe is a tapered, high-strength, aluminum alloy tube powered by the company’s proprietary thermal connection technology, which enables tool joints to attach to the aluminum pipe. This increases the pipe’s strength-to-weight ratio and allows it to be used with steel pipe.

The drill pipe’s high strength-to-weight ratio will enable PGE to drill deeper with less energy and increase operating efficiency. The unique design and construction of Alcoa’s pipe makes it up to 50% lighter than conventional steel pipe while maintaining the durability and strength of steel. The deal underscores the growing traction of aluminum as a replacement for steel.  

Alcoa’s second-quarter 2012 adjusted earnings of 6 cents a share came in line with the Zacks Consensus Estimate. On a reported basis, the company swung to a loss in the quarter, hit by weak aluminum pricing.

Revenues decreased 9.4% year over year to $5,963 million, yet beat the Zacks Consensus Estimate of $5,828 million. While weak aluminum prices dragged down sales, the company saw increased demand across aerospace and automotive markets in the quarter.

Alcoa expects demand for aluminum to remain strong moving ahead. Higher demand in the end markets, especially aerospace and automotive, is expected to drive future growth.

Alcoa is divesting underperforming assets through its restructuring program. We believe that the company’s cost reduction efforts are, to some extent, offsetting the impact of higher energy and raw material costs on its bottom line.

We currently have a long-term Neutral recommendation on Alcoa. The company, which competes with Aluminum Corporation of China Limited and RioTinto plc. (RIO - Analyst Report) among others, holds a short-term Zacks #4 Rank (Sell).

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