Goldman Sachs Changes Its Mind on These Steel Stocks

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Steel stocks are soaring today after Goldman Sachs upgraded shares of three top steel producers. Goldman sees oversupply issues in the steel sector abating signaling a rebound in profits. Because of this it sees a big upside for investors and upgraded the following three stocks to buy: U.S. Steel (NYSE: X  ) , AK Steel (NYSE: AKS  ) , and Steel Dynamics (NASDAQ: STLD  ) . That sent all three stocks soaring.

Previously Goldman had rated both U.S. Steel and AK Steel as a sell, while it had a neutral rating on Steel Dynamics. The flip from buy to sell on steel is an interesting call. But it is one made with the long term in mind.

U.S. Steel, for example, actually expects to see a weaker fourth quarter as costs will impact any increase in pricing. But over the longer term the company sees positive momentum. One area of particular strength is in the tubular steel markets, which are being affected by America's oil and gas boom.

On the company's third quarter conference call, CEO Mario Longhi noted that tubular market drivers were mostly positive in the quarter. But it was "led by strong oil direct drilling in the U.S., supported by rising crude oil prices and increased drilling in the Gulf of Mexico." He also noted that while multi-well pad drilling is taking down rig counts, these rigs are drilling more wells than ever before. In the quarter the average rig drilled 5.37 wells, which is an increase of 9% over last quarter.

Wells are also being drilled with much longer lateral lengths as oil and gas companies look for the best way to unlock our shale resources. In some cases, lateral lengths have more than doubled to where drillers are going down more than a mile vertically and then two more miles horizontally. More wells and longer laterals are both long-term positives for steel. 

That, however, is just one example of how the energy boom is benefiting steel producers. On Steel Dynamics last conference call, CEO Mark Millett noted that he sees that, "longer term, the availability of an expansive shale gas, there's a potential to make U.S. energy law, providing a tremendous incentive for fixed asset investment and associated job growth, a catalyst to increase steel-related consumption." 

One example of this as he pointed out later on the call is that major railroads are spending heavily for huge infrastructure improvements. He specifically mentioned that this is due to the "shale gas and oil phenomenon" where oil-by-rail is seeing explosive growth. Because of this he sees his company in a great position to leverage the expansion of that market.

The other thing to keep in mind is that the energy boom is keeping energy costs for steel producers low. This is one reason why steel producers like Nucor (NYSE: NUE  ) are taking a stand to keep the U.S. from exporting too much of our low-cost natural gas. For Nucor, it's a competitive advantage to have access to cheap natural gas.

Nucor CEO John Ferriola noted on the company's last conference call that an abundant and low-cost supply of natural gas is a significant opportunity for the country. It has the potential to fuel the resurgence of the U.S. manufacturing sector as well as infrastructure rebuilding projects, both of which are long-term positives for steel producers.

The bottom line is that the energy boom has the potential to really fuel a resurgence in the steel industry. That does make steel stocks a much more compelling investment opportunity over the long-term as Goldman noted. But that doesn't mean that steel stocks are the best way to invest in America's energy boom.

The best way to invest in America's energy boom
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Related Tickers

9/28/2016 4:00 PM
AKS $5.10 Up +0.25 +5.15%
AK Steel Holding CAPS Rating: **
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STLD $25.57 Up +0.31 +1.23%
Steel Dynamics CAPS Rating: ****
X $20.13 Up +0.90 +4.68%
United States Stee… CAPS Rating: **