Shale's Triumph: 3 Steel Picks - Analyst Blog

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Last week, Chicago Mayor Rahm Emanuel said a revolution as big as the Internet was underway in the U.S. Speaking to CNBC, Emanuel said: "Washington's not talking about this; the biggest revolution equal to the internet is… energy independence in the United States. The cheap natural gas is going to basically allow us to re-shore manufacturing."

Energy Independence

On the same day, BP Plc ( BP ) said the U.S. will achieve energy independence in 2035. Its Energy Outlook 2035 report reveals that the nation will be able to meet all its energy needs by 2035. This is because demand growth for energy will fall within this period. At the same time, shale oil and gas production will rise at a fast clip.

The report goes on to emphasise how new shale technology has changed the terms of trade for energy resources. It says that in the next twenty years, Asia and Europe will emerge as the primary importers of fuel. On the other hand, OPEC countries will have to reduce production in order to prevent a price plunge.

The Cost Advantage

Higher domestic production of shale has created a significant cost advantage for U.S. manufacturers. According to a report from the Boston Consulting Group, higher production of natural gas has meant that prices have declined by around 51% since 2005. As technological advancements kick in, costs are expected to go down further.

As a result, producers located outside the U.S. now operate with natural gas prices that are 2.6 to 3.8 times higher than domestic prices. On the other hand, lower prices in the U.S. will benefit not just industries such as chemicals and plastics which use products directly derived from natural gas.

Companies which supply the equipment needed to extract shale at such a rapid pace will also gain.  At the same time, they too will benefit from lower energy costs.

3 Steel Picks

The proliferation of shale producers, both large and small, means that companies which supply products such as high quality tubes will have a ready and expanding market. Below we present three companies gaining from the shale revolution, each of which also have a good Zacks rank.

United States Steel Corporation

United States Steel Corporation ( X ) is a producer of both flat rolled and tubular products. It has several domestic and international production facilities. The company's largest plant in the U.S. is Gary Works, located in Gary, Indiana.  In 2010, it was the thirteenth largest steel producer in the world.

U.S. Steel holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 77.90%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 22.95.

AK Steel Holding Corporation

AK Steel ( AKS ) has nine plants located in Indiana, Kentucky, Ohio and Pennsylvania, which form the bulk of its operational capacity. These facilities are steelmaking and finishing plants and also produce tubes. The company is a producer of carbon and stainless steel which is ultimately converted into welded steel tubing.

Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 136.20%. It has a P/E (F1) of 25.76.

Olympic Steel, Inc.

Our third choice is Olympic Steel, Inc. ( ZEUS ). The company is a processor and distributor of a variety of value added steel products. This includes carbon and stainless flat rolled sheets. It acts as an intermediary between steel producers and end users such as OEM manufacturers, as well as automobile and heavy equipment producers.

Besides a Zacks Rank #2 (Buy), Olympic Steel, Inc. has expected earnings growth of 23.10%. It has a P/E (F1) of 19.54.

As the production of shale oil and gas continues at a rapid pace, energy costs will remain low. At the same time, the demand for materials required in shale production will remain high. This is why these three stocks will make good additions to your portfolio.



AK STEEL HLDG (AKS): Free Stock Analysis Report

BP PLC (BP): Free Stock Analysis Report

UTD STATES STL (X): Free Stock Analysis Report

OLYMPIC STEEL (ZEUS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AKS , BP , X , ZEUS

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