Executives at U.S. Steel Corp. said last week the company has begun to lock in natural gas prices for the year and predicted that demand for the company’s steel tubes, which are used for oil and natural gas drilling, will remain strong in the first quarter.

CEO John Surma said U.S. Steel was increasingly relying on natural gas to fuel its blast furnaces in North America and had purchased between 100 and 110 million Btu in 2011. His remarks came in a conference call with financial analysts to discuss 4Q2011 earnings.

“We have done some [locking in of natural gas prices for 2012] already,” Surma said. “We have a program where we take a look at what the strips are, and then as things move we hit some targets and we make it a little heavier…So in effect [we are] creating a gas sale short and we try to cover those in the market as well. And so we’re doing that progressively.”

CFO Gretchen Haggerty said the company paid about $4.25/Mcf delivered for natural gas in 4Q2011. Asked how much U.S. Steel could expect to save in 2012, Surma said, “that depends on where the strip goes. But if it’s a $2 difference, you could do the math and just take 125 [million Btu] and it would be a good-sized number.”

Surma said rig counts in the United States have increased steadily since mid-2009 and that demand for its Oil Country Tubular Goods (OCTG) was continuing. That helped the company’s Tubular Products division post operating income of $119 million in the final period of 2011.

“High oil and liquids prices have supported increased drilling activity, with the growth in oil-directed rig counts outpacing the decrease in natural gas rig counts,” Surma said. The company’s new heat treat and finishing facility in Lorain, OH, “is strategically located to serve the Marcellus region and the future developments of the Utica Shale…We’re also continuing our efforts to develop proprietary premium and semi-premium connections as the growth of horizontal drilling increases the demand for these products.”

Haggerty added that results at the Tubular Products division in the first three months of this year “are expected to maintain the solid performance achieved in the prior two quarters as the demand for oil country tubular goods and line pipe remains strong…Overall, we expect shale resource development and oil-directed drilling to continue to drive the rig count, while natural gas drilling is being affected by the high levels of natural gas in storage.”

Surma said there are already indications that natural gas drilling will be redirected toward liquids-rich plays.

“There’s probably some time when that transition takes place,” Surma said. “We’re hoping that those that are really good gas plays continue to be drilled and developed, and that the rigs that may not be used in other gas plays are going to be someplace where the liquids can be drilled. There’s still a lot of good prospects.”

Asked if U.S. Steel would make products for deepwater drilling, Surma said the tubing walls need to be thicker. “It’s a real challenging product to make and we can make it pretty well,” he said. “That’s a very nice margin product for us, so it would be nice if that really came on strong and we’re seeing some signs of it…If another 50,000 tons [of steel tubing were ordered], that’s pretty good business for us.”

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