United States Steel Earnings Call Insights: Impact of Gulf Drilling and Kosice Strategies

United States Steel Corporation (NYSE:X) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Impact of Gulf Drilling

Shneur Gershuni – UBS: I’ve got two questions. The first one on Tubular, the second one on flat-rolled, starting with Tubular, the fourth quarter was definitely a difficult quarter. I understand that it’s expected to be better, but it sounds like it’s going to be challenged compared to some of the numbers we’ve seen in previous quarters. There is supposed to be a pickup in drilling activity in the Gulf of Mexico, this year. I was kind of wondering when we would see that impact and then despite the fact that, the flattish to downish rig counts we might actually see more well counts and longer laterals and so forth, as U.S. Steel expected to benefit from that as well too or is the tepid guidance, a lot of it has to do with the imports coming in and sort of taking away some of the opportunities?

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John P. Surma – Chairman and CEO: I’ll take a stab. There’s lots there Shneur. I think the Gulf of Mexico has been a good news story for us already. I think the rig count was at 50 and maybe went back to 48 in the last day or two. There must be something moving some place but, that’s the best level of activity in the Gulf I in quite some time and it’s a very good place for us. We have some of the larger diameter (heavy to wall) capabilities at both Fairfield and also in Lorraine and we are booking those mills quite well for that business. So we’ve already had some of that, the more that goes on in the Deep Gulf in particular the better it suits our particular facilities and more is better. So we encourage them to continue to keep drilling and those are great prospects and once they discover a well and develop it in a big platform and 16 or 18 additional wells that’s good for us and we hope that, that would continue. In terms of the I need to really ask as how much footage will be drilled and what does that mean for us and we have I guess at the rig count for 2013, we see what other prognosticators who probably did more than we do, say we’d take a look at what the oil field service folks have said couple of them have already reported and we look at that pretty carefully of course. There is certainly a move to longer laterals where that’s geologically possible because the productivity is quite good and they are really good at doing it. That suits our product really well, our alloy heat treat shipments were at a record level for us in 2012 and that’s one of the reasons. And additionally the rig efficiency in terms of how long it takes to get down to get out, to get fracs and to get in production is really, really good I mean they’ve turned this into an outstanding operation in terms of manufacturing process as we see it. It may well be that even with lower rig counts that the actual number of wells drilled could be higher the amount of footage could well be similar or higher than last year. So I think in our view the overall demand probably is similar to last year maybe little bit higher. We think the demand and things that we are particularly good at, Deep Gulf and some of the alloy heat treat demand should be as good as last year. we hope there is of course the specter of imports which are well over 50% as I noted the extent of that’s mostly on the lower end carbon it’s not in our zone directly although we do some of that, but it does effect the overall structure from a pricing standpoint in inventory level. So, we’re very mindful of that and we’re mindful of where it’s coming from and what their costs are, we think and what the prices are we can see and that’s something we have to take in mind and decide if we take action that may well be something we do. So, I think, you’ve diagnosed it pretty well. All those things are in there. We think the picture for 2013 can be pretty good, but just looking out for the first quarter we’re coming from a slower start and we’ll see how we do quarter-by-quarter.

Shneur Gershuni – UBS: And a follow-up question with respect to Flat-rolled. I guess, I was little confused about the guidance for Q1. You sort of commenting that it would be close to breakeven. Given the amount of maintenance that was spent last year you would have expect sort of an increase in your capabilities in 2013 the natural gas to coke switching and so forth. Then finally a tailwind on improved met coal costs, kind of wondering why we end up kind of flattish. Is the tailwind on coal cost not as good as we would have thought and so forth? I was wondering if you can expand on that a little bit.

John P. Surma – Chairman and CEO: A fair question. I’ll make a few comments and Gretchen may want to add on from her perspective, but just a couple of things. One would be that you mentioned coal, I mean we do expect lower coal cost for the year. We won’t get all of that benefit in the first quarter. There are some carryover inventory that we haven’t chewed through. So, we typically give you figures that say what our overall purchase cost will be. We think on average for the year, the first quarter would be the highest, still lower than fourth quarter, but higher than the second, third and fourth 2013 and we’ll come out to an average that’s probably 20% or so below where we were last year. So, we have some tailwind, if that’s the term, in the first quarter but not as much as you might have expected and we’ll get more of that in the second, third and fourth quarters. We do have continuing benefit from optimizing our fuel blends on the blast furnaces as I commented on. We continue to push the envelope on gas and on injection coal and on coal blends. Our coke rates are quite a ways down and I think we have very, very competitive carbon cost in terms of overall reduction cost, but there are some other things that were benefits in the fourth quarter. Small items we don’t talk about a lot to be inventory adjustment or few other item, Gretchen may want to mention that were good in the fourth quarter that we don’t plan necessarily on in the first quarter, but, and we do have slightly lower maintenance cost in the first quarter versus the fourth quarter, although, this is the quarter we typically do a good bit of work at our Minnesota ore operations because we’re not in a shipping position necessarily. We get a lot of the orders worked on there on the different lines and that’s well underway and we’ll spend some money on that during the core investment. Those are few items and Gretchen I think you want to add there?

Gretchen R. Haggerty – EVP and CFO: No, I mean I think you’ve captured it right. We do expect a benefit from lower coal cost this year, but John described exactly right. It’s not going to all come through right in the first quarter, and these small items we had some favorable items in the fourth quarter that aren’t going to repeat themselves and there is really no one single item to call out and we did have, the one thing, we did have like an extra month worth of benefit from re-measuring our labor contract which was probably on the order of $5 million. It’s that kind of thing that we’re absence.

John P. Surma – Chairman and CEO: We do expect I think slightly higher scrap cost and natural gas cost. Those are both going the other way, so, but they are not huge amounts for us, but they all add up to something.

Kosice Strategies

Evan Kurtz – Morgan Stanley: Just a question on the Kosice, I’ve heard a lot of reports floating around in the news of some people looking at that asset. Just wonder if you can give us some color on how you think strategically about the Kosice and how that fits in with the portfolio?

John P. Surma – Chairman and CEO: As I said in my comments, it is an excellent facility with excellent productivity, capability. We spend a good bit of capital there over the years trying to improve the product range and so we got a good position in automotive now thin plates and electrical motor lam etcetera and we are doing some other things now. We’ve got a good color code line. We are trying to choose some of those capabilities up. So, I think, it is an outstanding facility, it is in a difficult part of the world, but really good cost structure, good energy position. In the part of Europe it has probably been about as good as any part of Europe that comes with overall demand. So, it is a good facility. Historically, it has been in pretty good place and as a result of that we guess we’ve had some expressions of interest in the facility to see if it might be worth more to somebody else than it would be to us. We think we have a responsibility to our shareholders to explore that in the context of our overall capital allocation that’s what we are doing, but really no decision made at this point. So, that’s really all we can tell you. It is an excellent facility, not surprising others might be interested in.

Evan Kurtz – Morgan Stanley: Would you be able to walk me through maybe some of the liabilities associated with that facility as far as maybe benefit liabilities and any financial liabilities and so forth?

John P. Surma – Chairman and CEO: I’ll let Gretchen comment. When we acquired the facility in 2000 it was free and clear and that structures are such – social structures are such that we don’t really have those kinds of things that they already are the minimal, so it is a pretty clean operation for executives.

Gretchen R. Haggerty – EVP and CFO: And we have disclosed that we do have some upcoming capital commitments on the environmental side that we’ve estimated over the next number of years to be on the order of $400 million or so. So, that would be probably the base line of (indiscernible).

Evan Kurtz – Morgan Stanley: And then maybe just one other question. You didn’t talk really about the DRI much on this call, but I know in the past you’ve talked about as something that you might invest in the future here in the U.S. Any update on that and is that something that we could perhaps see as early as 2013?

John P. Surma – Chairman and CEO: Nothing formally to update. I mean the technology and the economics around natural gas and DRI are still really good. So, like I mentioned it was not intentional. It’s very good technology and it’s got a really good place in North America, I think, because of our energy position. It’s possible we might have something to talk about this year trying to find the right time, the right place and for a project of that magnitude just given our capital position, we’ve been very cautious about getting into any major new projects just given all the uncertainties in a world that we have to deal with, but we still find the technology and the opportunity very, very attractive, and we would like to find a place for that inside of our production profile. We’re just trying to figure out the right way and the right place to do that, and there maybe some things behind that in terms of pallet investment to make sure we have got the right material as well that could be helpful, so we’re looking at lot of things, but it’s excellent technology the economics are really good and we’ll continue to look at it.

A Closer Look: United States Steel Earnings Cheat Sheet>>