U.S. Steel X
November 16, 2001 - 12:54pm EST by
2001 2002
Price: 15.25 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,373 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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U.S. Steel is an extraordinary value at current levels based on a "piece parts" analysis of its underlying assets. Those asset values will be realized when the company is officially separated from USX Marathon Group (NYSE:MRO) at the end of this year. What follows is a simple listing of the underlying assets from the company's balance sheet and footnotes. I include a low-ball estimate, a mid point estimate and a best-case estimate for each asset. As you will see, the company has amassed quite a shopping list of steel producing and non steel assets since its founding.

I. Slovak Operations: The company bought major steel producing assets from the Czechoslovakian government in the late '90s for 2x EBITDA. These sell approximately 4.5 million tons of steel primarily into the European auto market. The operation is profitable generating $200 of EBITDA currently. There are no currency controls, so the company can move its capital freely into and out of Czechoslovakia. The company has made improvements that make these mills competitive with any in Europe.
· Low Ball Valuation: $300 million at 1.5x EBITDA
· Mid Point: $400 million purchase price.
· High End: $800 million 4x EBITDA.

II. Oil Country Tubular Goods (OCTG): A very cyclical business which is just coming off of very high demand levels. They produce almost 1 million tons of OCTG per year. I have called around to some of the major distributors as well as to Nabors (AMEX: NBR) and Grey Wolf (AMEX: GW) the largest U.S. land drillers and am convinced that the best way to describe demand and inventory levels at this point would be "dismal". Nonetheless, there is some value.

· Low Ball Valuation: $600 million private purchase comp. Lone Star purchase of Carvill operations was done at comparable valuations on a price per tonnage capacity basis.
· Mid Point: $750 comparison with Lone Star Steel, Maverick, NS Group etc.
· High End: $1,200 2x private value.

III. Timberlands: This asset represents 250,000 acres of land, primarily in Alabama and Minnesota. I'm not entirely sure that the company's management knows the history of how this asset ended up on the company's balance sheets or precisely what is there. The best I can say is that management very much wants to realize the value here as there is not even tangential use for this land in the company's base business.

· Low Ball Valuation: $175 million at $700 per acre.
· Mid Point: $300 million at $1,200 per acre
· High End: $350 million. High-end management estimate.

IV. Iron Ore: Iron Ore producing properties which are 32% owned 68% leased. Most of the leases expire in 2058.
· Low Ball Valuation: $175 million. Conservative comp on production/reserves with CLF.
· Mid Point: $190 million. Mid priced comp on production/reserves with CLF.
· High End: $210 million. 5x EBITDA.

V. Transportation / Transtar: Composed of 5 short haul rail roads and one barge line. While the company does use these assets in its operations 70 to 75% of revenues are earned from other customers. Most likely this portion would involve a sale leaseback or sale with long term contract pricing arrangement.
· Low Ball Valuation: $192 million. Book value on 9/30/2001.
· Mid Point: $250 million. 5x EBITDA annualizing the current run rate.
· High End: $300 million. Management body language.

VI. Coal: U.S. Steel has coal mining operations that produce roughly 15% of the volume of Massey Energy (NYSE: MEE) and have 40% of Massey's reserve levels. Both firms operate in roughly the same geographic areas.
· Low Ball Valuation: $243 million. Using recent 6/6/01 sale of West Virginia reserves (Fork Creek) by Penn Virginia.
· Mid Point: $270 million. Based on 15% of MEE production at MEE's EV of $1.8 billion.
· High End: $720 million. Based on 40% of MEE's reserves at MEE's EV of $1.8 billion.

VII. Base Steel Business: To state the obvious, this is a cyclical low profit margin business, that on its back at present with steel fetching recessionary level prices of $200 per ton for hot rolled steel (the most easily priced commodity)to $400 per ton for cold rolled steel. To make the case as conservative as I reasonably can, I take each ton of production capacity and assign it a value of roughly $100 per ton; one half of what (hot rolled) steel currently fetches on the open market. Thus:
· Low Ball Valuation: $1,150 million. Production capacity priced at $100 per ton or 0.5x sales price per annual ton.
· Mid Point: $1,265 million. Production capacity at $110 per annual ton.
· High End: $1,380 million. Production capacity at $120 per annual ton.

VIII. Joint Ventures: This consists of a 50% ownership in USS Posco, a 50% ownership in a JV with KOBE - ProTech, a 50% JV with Rouge - Double Eagle a 50% ownership in Olympic a 16% ownership in a JV with Republic Steel and finally a 10% ownership in Clairton LP - Coke. These are very difficult to value with any certainty, since we have no operational data and no significant comps. I assign them a value of zero.

Adding up all of the assets above I get the following valuations:

· Low Ball Valuation: $2,835 million or $29.40 per share.
· Mid Point: $3,425 million or $36.00 per share.
· High End: $4,960 million or $53.00 per share.

The company has substantial pension assets and postretirement liabilities so it is worth looking at the company's Enterprise value in detail so that you can compare it to the asset valuations above:

Balance Sheet:
Pension -$2,627
Postretirement $1,535
Debt $2,432
Debt Transfer to MRO -$900
Cash -$254
Net Balance Sheet $186

Shares 90
Share Price $15.24
Equity Value $1,373

Enterprise Value $1,559


USX Marathon Group created its current convoluted corporate structure to defend itself from a hostile takeover by Carl Ichan who clearly recognized the underlying value of the corporation's assets. The dissolution of this structure by year-end is the catalyst that will cause investors to focus on this company's assets as a separate entity. The current management is well incented to realize the value on its balance sheet. After repeated meetings with management we feel that they realize that if they don't monetize these assets in the near future someone else will.
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