Steel manufacturer Nucor Corp. said it plans to spend more than $700 million on natural gas drilling over a two-year period to meet its contractual obligations with Encana Corp. for low-cost gas supplies.
Last November, in an effort to insulate itself from volatile natural gas prices, Nucor agreed to take a half-stake in some of Encana's gas wells in the United States and signed a contract for more than 20 years (see NGI, Nov. 12, 2012). The companies began their relationship in 2010 with a smaller onshore gas drilling agreement that increased the number of Encana wells.
Charlotte, NC-based Nucor plans to use gas from the Encana wells, and others, to supply its $750 million direct reduced iron (DRI) plant in St. James Parish, LA. The facility, located near Convent, LA, is expected to come online in September and will have a capacity of 2.5 million metric tons per year.
During a conference call with financial analysts to discuss Nucor's 2Q2013 earnings, CFO James Frias said the company was pleased with the Encana deal so far. The $700 million-plus for gas drilling would be spent in 2014 and 2015.
"The performance of wells completed over the past two years has exceeded the projections we used to justify this capital allocation decision," Frias said Thursday. "That, of course, translates into lower gas cost and high returns from our drilling investments. We also expect our natural gas investments to be cash flow positive by 2016, meaning the cash generated from sales will exceed the cost of drilling new wells."
Responding to questions, Frias denied that the all-in cost number in the Encana contract was $4.00/MMBtu. CEO John Ferriola said Nucor "has a great deal of flexibility in the contract. We have some flexibility in the volume and in our drilling. We do have a threshold price, which if the price of gas drops under, we are not obligated to continue to drill. It's at a level in which we feel very comfortable in being able to get a return, even at that threshold level."
Frias said the company hasn't disclosed when it expects to be fully hedged with its natural gas needs for both DRI and steel production, but he estimates Nucor could reach that goal within three or four years.
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