How Has the Recovery in Oil Prices Benefited the Tubular Segment of U.S. Steel

November 27th, 2017 by Trefis Team
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The Tubular segment of the U.S. Steel (NYSE:X) has remained a highlight for the company in its third quarter results which was released at the beginning of this month. Recovery in global crude oil prices has helped improve the shipment volume and price realization of the Tubular segment of U.S. Steel.

The U.S Tubular segment produces steel pipes (Oil Country Tubular Goods or OCTGs) used in oil and gas drilling, the demand for which is directly proportional to global crude oil prices. Crude oil prices have seen a downturn since 2014 due to the global over supply situation. As a result of this downtrend, the top line of the Tubular segment was significantly affected. Revenue contribution of the Tubular segment to the total revenue of the company came down from 17% in 2012 to 4% in 2016 due to the increasing pressure on oil drilling activities in the U.S.

Crude oil has seen a recovery in its prices this year due to the production cut initiated by the Organization of Petroleum Exporting Countries (OPEC) since January 2017. OPEC decided to cut crude output by 0.8 million barrels per day from January 2017 which accounts for approximately a 2% reduction of global oil supply. [1] The improved pricing environment for crude oil has helped recover the oil and gas drilling activities in the U.S., which in turn has translated into higher demand for OCTGs and an increase in the Tubular Product division’s shipments. Furthermore, an increase in demand for OCTGs has resulted in better price realizations for the company from its Tubular segment.

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You can view our base case for dividend yield for U.S. Steel here and create different scenarios using our interactive platform

There is persisting speculation of OPEC extending their production cut beyond their March 2018 deadline which would help stabilize oil prices in the upcoming year. [2] With this improved outlook, we expect the revenue contribution of the tubular segment to the total revenue of U.S. Steel to increase going forward.

We have a $25 price estimate for U.S. Steel, which is 13% below the market price.

Notes:
  1. OPEC cuts help push oil prices to 2-year highs, Financial Times [↩]
  2. Oil prices firm on expected OPEC cut extension, Economic Times [↩]