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Nucor Corp (NUE) Restructures Natural Gas Supply Deals


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Nucor Corporation (NUE - Analyst Report) recently completed a number of transactions to improve its access to a long-term supply of low cost natural gas. Nucor and oil and gas producer Encana ended the two carry and earning (C&E) drilling deals they had entered into in 2010 and 2012.

By terminating these agreements, Nucor has eliminated all future carry capital and all contingent liabilities related to those contracts, which the company expects to lead to lower unit cost for any future drilling.

Under the new structure, Nucor has also bought 49% of Encana’s leasehold interest covering around 54,000 acres in the South Piceance Basin. This compares to the limited contractual commitments to participate in drilled wells that Nucor had under the original C&E deals. Nucor noted that this ownership structure gives it full discretion on its participation in all drilling capital investment in the future.

Further, Nucor has sold its 50% equity interest in Hunter Ridge Energy Services LLC to Encana. Nucor and Encana formed Hunter Ridge, a gas gathering and water service provider, in 2012 to facilitate the joint well development in the North Piceance Basin.  

Nucor has also entered into long-term deals directly with existing third party gathering and processing service providers to support its operating wells and potential future well developments on the 54,000 acres.

Nucor’s CEO John Ferriola said that the transactions provide both companies capital flexibility and also preserve Nucor’s long-term access to low cost gas resources in support of its raw material strategy.

Nucor’s shares closed roughly 2.5% lower at $47.62 on Oct 4.

Nucor, which is among the leading U.S. steel makers along with U.S. Steel (X - Analyst Report) , AK Steel (AKS - Analyst Report) and Steel Dynamics (STLD - Snapshot Report) , provided its outlook for third-quarter 2016 last month. The company expects earnings for the quarter to be in the band of 85 cents to 90 cents per share. That is an increase from 71 cents a share it earned a year ago and 73 cents per share recorded in the previous quarter.

Nucor said that the expected improvement in third-quarter earnings on a sequential comparison basis mainly reflects improved performance in its Steel Mills and Raw Materials divisions.

Profitability of the company’s sheet mills is expected to improve in the quarter on higher average selling prices. The company also expects a significant improvement in performance in the Raw Materials segment in the third quarter compared with the second on better performance in its direct reduced iron (“DRI”) facilities. However, Nucor envisions reduced profitability in its Steel Products segment on a sequential comparison basis in the third quarter on margin compression.

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