Tuesday, November 6, 2012

Encana/Nucor JV: Is This the New Model?

Today, steel producer Nucor Corporation announced that it had entered into a long-term production joint venture with Encana Oil and Gas to provide natural gas for its U.S. steel making operations.  Nucor will invest $542 million over the next three years and could invest approximately $3.64 billion over the 13 to 22 year term of the agreement.  The announcement was silent on the gas fields involved, but since Nucor is building a massive new plant in Convent, LA, I think the Haynesville Shale might see some renewed interest from Encana.

This agreement is similar to a smaller deal executed between the two parties in 2010.  It also includes provisions where either party can suspend drilling operations if the price of gas gets too low.

While we've seen JV deals involving independent producers partnering with larger domestic and foreign energy companies as well as with financial investors, this might be the first really big deal with a manufacturing consumer.  Given that manufacturing is on the upswing in the U.S. largely because of cheap natural gas, this deal may be a sign of things to come.

The transaction allows Nucor to hedge its forward consumption of gas for around 20 years, which helps it justify large capital expenditures in new facilities and allows it to manage one of its largest operational expenses.  Normally hedging would be accomplished through financial instruments, but those only provide protection for a few years.  Actually owning a piece of the production gives Nucor long-term protection.

Will this be the new model for producers to raise capital and manufacturers to hedge risk?  Not many consumers have the wherewithal to execute a deal like this, which vertically integrates a company into the energy industry.  Also, there may not be that many appropriate opportunities available on the supply side.  But I'm sure there are going to be a bunch of smart bankers running around flogging deals like this in the coming year.  Stay tuned.

2 comments:

Robert Hutchinson said...

John:

I got screwed by Bloomberg's change too. To make things worse, my local newspaper, which used to publish the HH spot figures daily, went to a three day a week publication schedule this month and doesn't post the HH spot online. I checked with the newspaper and they said they get the spot price from their subscription Bloomberg service, to which I don't have access.

The EIA has spot data, but it only seems to be updated weekly.

If you find something online, please let me know. You can email me at haynesvilleplay (at) gmail (dot) com.

RH

Anonymous said...

Will do and thanks for the quick reply