How Would U.S. Steel Benefit From A Recovery In Oil Prices To $80 Per Barrel By 2020?

The recent agreement by OPEC to reduce crude oil output has given a boost to oil prices, with Brent crude oil prices exceeding the $50 per barrel level. ^[1] An increase in oil prices is good news not just for oil and gas companies, but also for U.S. Steel’s Tubular Products division, which produces steel pipes (Oil Country Tubular Goods or OCTGs) used in oil and gas drilling. An increase in U.S. oil and gas drilling activity translates into higher demand for OCTGs and an increase in the Tubular Products division’s shipments. Though oil prices are expected to average over $50 per barrel next year, we expect the upside for oil prices to remain limited in the next few years. ^[2] This is because rising oil prices will likely allow a large number of U.S. oil and gas producers to resume production, which would again adversely impact the global balance of demand and supply. Thus, we have only factored in a modest increase in oil prices over our forecast period into our estimates, with our shipment forecast for the Tubular Products division in 2020 standing close to that realized by the company in 2015. This forecast implicitly assumes oil and gas drilling activity to remain close to levels seen in the mid-$50s per barrel price level. ^[3]

However, a sharper increase in oil prices could significantly boost drilling activity and the demand for the Tubular Products division’s steels. Such a trigger for an increase in prices to say $80 per barrel by 2020 would likely be a combination of further production cuts by OPEC and an increase in demand for crude oil. Higher U.S. economic growth driven by President-elect Trump’s pro-business policies could be one factor boosting global demand for crude oil. An increase in economic growth in other large economies such as China could also contribute to the same.

In case oil prices reach $80 per barrel due to a combination of factors mentioned previously, the shipments of the Tubular Products division could rise significantly from our base case assumption. In order to model this scenario, we have assumed that the division’s shipments will recover to levels seen in 2014 by 2020. Brent crude oil prices averaged close to $100 per barrel in 2014. We have assumed that technological developments and a lower corporate tax regime promised by the President-elect will allow U.S. oil and gas drilling activity to reach levels seen at $100 per barrel in 2014, at levels of around $80 per barrel in 2020.

See our forecast for U.S. Steel’s Tubular Products division shipments in this scenario

We have also suitably modified our pricing and margin forecasts for the division in order to model our revised estimates corresponding to this scenario. The new estimates translate into a 26% increase to our price estimate for U.S. Steel. Thus, a recovery in oil prices would certainly boost the prospects of the Tubular Products division and the company as a whole.

See our complete analysis for this scenario here

Have more questions about U.S. Steel? See the links below.

• What Is U.S. Steel’s Revenue And EBITDA Breakdown?
• What Is U.S. Steel’s Fundamental Value Based On Expected 2015 Results?
• How Has U.S. Steel’s Revenue Composition Changed Over The Last 5 Years?
• By What Percentage Did U.S. Steel’s Revenue & EBITDA Change In The Last 5 Years?
• By What Percentage Can U.S. Steel’s Revenue & EBITDA Grow In The Next 3 Years?
• How Has The Increase In Steel Imports To The U.S. Impacted U.S. Steel’s U.S. Flat-Rolled Steel Operations?
• How Has The Decline In Oil Prices Impacted U.S. Steel’s Tubular Steel Shipments?

Notes:

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Notes:

1. OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years, Bloomberg [↩]
2. Short Term Energy Outlook, EIA [↩]
3. Brent Crude Spot Prices, EIA [↩]