Aluminum heavyweight
Alcoa Inc.
(
AA
) 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
(
ACH
) and
RioTinto plc.
(
RIO
) among others, holds a short-term Zacks #4 Rank (Sell).
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