NUCOR AND ENCANA INK LONG TERM AGREEMENT FOR ONSHORE NATURAL GAS DRILLING
Nucor Enters Long-Term Natural Gas Agreement
CHARLOTTE, N.C., Nov. 6, 2012 /PRNewswire/ -- Nucor Corporation (NYSE: NUE) announced today that we have entered into a long-term agreement with Encana Oil & Gas (USA) Inc. for an onshore natural gas drilling program in the continental United States that we believe will ensure a reliable, low cost supply of natural gas for our existing and expected future needs for more than 20 years.
Under the terms of the agreement, Nucor will pay its share of costs plus an additional amount of carried interest as each well is drilled, subject to a cap on carry paid for each well and a cap on total carried interest. Either party may suspend drilling if natural gas prices fall below a predetermined threshold. Encana, a proven leader in drilling technology and environmental stewardship, will be the operator and will provide expertise to drill, complete and operate the wells. This new agreement is in addition to an earlier and smaller onshore natural gas drilling agreement with Encana that was established in 2010.
By entering into this new agreement, Nucor will be better able to manage its exposure to natural gas volatility and overall energy demand for its manufacturing operations. The agreement will ensure a sustainable competitive advantage in natural gas costs for Nucor's direct reduced iron facility currently under construction in Convent, Louisiana, which is on track for startup in mid-2013 and will significantly increase Nucor's usage of natural gas. This new facility, together with our ability to ensure a long-term low cost of natural gas, is an important phase in the execution of Nucor's raw material strategy of providing 6-7 million tons per year of low cost, high quality iron units to our steel mills. Nucor may build additional DRI capacity at the site in Louisiana, further boosting natural gas usage. Additionally, Nucor currently is a substantial consumer of natural gas at its steel manufacturing operations located throughout the United States. The drilling of natural gas wells resulting from the two agreements is expected to provide enough natural gas to equal Nucor's usage at all of our steel mills in the U.S. plus the usage of two DRI facilities, or alternatively three DRI plants. Although it is not possible to guarantee the production volumes, the agreements are for drilling in areas with proven reserves. In addition, the production of the wells that have thus far been drilled and are producing under the 2010 agreement is exceeding the expectations that Nucor modeled for that investment by more than 60%.
Commenting on the transaction, Nucor's Chairman and CEO, Dan DiMicco noted, "We are always searching for ways to improve our competitive position and drive sustained value creation over cycles. The increased exposure to natural gas prices that will accompany our current and potential DRI production, combined with the tremendous advances that have been made in the natural gas industry, have created a unique opportunity to leverage our strong balance sheet to create what we believe will be a lasting competitive advantage for Nucor. This is a win-win proposition for both Nucor and Encana, and we look forward to a long and productive relationship."
Nucor and affiliates are manufacturers of steel products, with operating facilities primarily in the U.S. and Canada. Products produced include: carbon and alloy steel - in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating and expanded metal; and wire and wire mesh. Nucor, through the David J. Joseph Company, also brokers ferrous and nonferrous scrap. Nucor is North America's largest recycler.
Certain statements contained in this news release are "forward-looking statements" that involve risks and uncertainties. The words "believe," "expect," "project," "will," "should," "could" and similar expressions are intended to identify those forward-looking statements. Factors that might cause Nucor's actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: (1) the sensitivity of the results of our operations to prevailing steel prices and the changes in the supply and cost of raw materials, including scrap steel; (2) market demand for steel products; (3) energy costs and availability; and (4) competitive pressure on sales and pricing, including competition from imports and substitute materials. These and other factors are outlined in Nucor's regulatory filings with the Securities and Exchange Commission, including those in Nucor's December 31, 2011 Annual Report on Form 10-K. The forward-looking statements contained in this news release speak only as of this date, and Nucor does not assume any obligation to update them.
SOURCE Nucor Corporation
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Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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Ground Broken for Nucor Steel Plant in Louisiana
At a ceremony in Convent, LA, ground was broken this week for the first phase of Nucor’s new $3.4-billion multiphase iron and steel manufacturing facility in St. James Parish, one of the largest industrial projects in Louisiana history.
The Nucor project will result in more than 1,250 new direct jobs, averaging approximately $75,000 per year and $3.4 billion in capital investment. Gov. Bobby Jindal, Nucor Corp. President and CEO Dan DiMicco , Louisiana Economic Development Secretary Stephen Moret and St. James Parish President Dale Hymel attended the groundbreaking ceremony.
http://businessfacilities.com/news/ground-broken-for-nucor-steel-pl...
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Permalink Reply by Skip Peel - Mineral Consultant on
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A precursor to additional like cross-industry agreements....maybe? And just where will EnCana source the natural gas to meet the agreement? The Haynesville.....maybe?!!! LOL! You're welcome, dbob.
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Permalink Reply by dbob on
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BNSF, UPS, and FedEx are all good candidates. US Steel and Mittal are probably also good candidates
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Permalink Reply by Skip Peel - Mineral Consultant on
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Transportation? Trains, planes and trucks? Interesting. And heavy industry and chemical/plastics committing to domestic expansion based on cheap power and raw materials. Who'da thunk it.
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Permalink Reply by dbob on
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No planes, but trucks obviously, and trains, while less obviously, are a really good candidate if it can be made to work in trucks.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I'll take two out of three.
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Permalink Reply by Joe Aldridge on -
I guess my question is: Who is going to set the price of the gas produced from the royalty/mineral/land owner's standpoint? Will there be an arm's length agreement or is the mineral owner going to get the shaft because of the hedge?
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Permalink Reply by Skip Peel - Mineral Consultant on
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The agreement sets the price and increases demand for Haynesville gas by creating a new market. We don't often talk about domestic markets for nat gas but it is becoming a key factor now that there are significant new sources scattered across the country. As an example gas from the Marcellus will have a competitive advantage for supplying the NE U.S. Gas from other fields needs to find alternative markets. Thus the strong interest by Haynesville operators for LNG export from the Gulf Coast. Lessors only get the indirect benefits of hedges as they affect supply and demand. Hedges are beneficial when they support prices greater than the prevailing market price but detrimental when they require gas to be sold below market price. I'm sure lessors would be happy with the former but less so with the latter.
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Permalink Reply by Joe Aldridge on
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I guess my point is if the hedge is at $3.00 on a long term basis or the life of the well that Nucor participates in then when the price rises on the free market it seems that the mineral owner is going to be screwed. So I think it would be important to put a clause in the lease that the price paid to the lessee would be pegged to a free market price. The problem is: What would be the effect on these current leases that are in effect with Encana and Nucor is signing on to participating in.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Hedges are volume specific not location specific and therefore generally have little correlation to a lessors basis price. In other words they don't relate to individual leases. Mineral owners could engage an experienced O&G attorney to write a lease clause concerning hedges but the chances of an operator accepting it would be zero IMO. The potential benefit of this type of sales agreement is to guarantee EnCana a market and sales price for their Haynesville production long term which should translate into a steady schedule of drilling new wells instead of shutting in production or maintaining leases on marginal production to meet "production in paying quantities" requirements. The state and local economies also benefit when industry locates in LA based of dependable and stable energy supply and price.
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Permalink Reply by Joe Aldridge on
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Skip,
The way I read the announcement is this is well specific. They are participating on a well by well basis to lock in gas at a specific price from those wells. I don't see how this is good for those mineral owners that would be locked in at a low hedge price; especially, if the price of gas doubles or triples in the fairly near future. This could happen near term with the re-election of Obama and the prospect of the EPA shutting down fracking.
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