US Steel Upgraded To ‘BB-‘ On Debt Reduction And Liquidity Preservation

Published on

US Steel Corp. Upgraded To ‘BB-‘ From ‘B+’ On Debt Reduction And Liquidity Preservation Amid Strategic Spending – S&P Global Ratings

  • United States Steel Corporation (NYSE:X) (U.S. Steel) has had record trailing earnings and cash flow on the back of favorable price and demand trends, which it has used to significantly reduce debt and maintain a pension surplus.
  • As a result, S&P Global Ratings raised its issuer credit rating on U.S. Steel to ‘BB-‘ from ‘B+’ because it believes a continued surge in 2022 cash flow will bolster liquidity as the company ramps up its capital expenditures (capex) on it’s $3 billion greenfield steel mini mill and other strategic projects.
  • At the same time, we affirmed our ‘BB-‘ issue level rating on U.S. Steel’s unsecured debt and revised the associated recovery ratings to ‘3’ from ‘2.’
  • We also raised the issue-level rating on Big River Steel’s secured debt to ‘BB-‘ from ‘B+’ and affirmed the associated recovery ratings at ‘3.’
  • The stable outlook reflects our expectation of ample liquidity to support the ongoing construction of its mini mill over the next two years, even if steel market conditions moderate.

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2022 hedge fund letters, conferences and more


NEW YORK (S&P Global Ratings) Aug. 26, 2022 -- S&P Global Ratings today took the rating actions listed above. Strong market conditions have persisted through first-half 2022, positioning the company for another year of low leverage. U.S. Steel generated about $1.4 billion of S&P Global Ratings-adjusted EBITDA in the second quarter of 2022, about a 50% increase from the same quarter in 2021. This gain was spurred by continued solid demand in key markets and by persistently elevated hot rolled coil (HRC) prices. However, we expect a moderation in earnings for the second half of the year, assuming prices trend down toward $1,000 per metric ton (/mt) from highs in the $1,500-plus area. We assume prices will further moderate in 2023 and 2024, trending down toward $700-$900/mt; however, this is still higher than historical averages of about $600/mt. As a result, we project earnings will temper in the second half of the year. After the company generated about $2.6 billion of S&P Global Ratings-adjusted EBITDA in the first half of 2022, we project full- year 2022 EBITDA in the range of $4 billion to $5 billion. This compares with S&P Global Ratings' 2021 adjusted EBITDA of about $4.8 billion. As a result, we project S&P Global Ratings-adjusted leverage could remain below 1x for the second year in a row.

United States Steel's Strategic Capex

The company took steps to shore up its balance sheet when it repaid approximately $1 billion of absolute debt during 2021 and ended the year with a pension surplus. The company also continues to provide shareholder returns, as it repurchased approximately $400 million of shares in second-quarter 2022. This completed its $800 million share repurchase program in less than a year, while at the same time announcing an additional $500 million program. Nevertheless, we expect that the company would curtail purchases to preserve the momentum on its strategic capex if necessary.

U.S. Steel is bolstering liquidity as it undertakes its largest capital project ever. The company selected the Osceola, Ark., site for its announced $3 billion, 3-million ton, mini mill 2 project. U.S. Steel projects the new mill could provide an additional $650 million of EBITDA once the mill is fully operational by 2026. While we expect free cash flow will remain meaningfully positive in 2022 amidst record earnings, we project a dramatic drop in 2023 if earnings moderate in a lower pricing environment. Still, the company will aim to deliver on its publicly stated goal to maintain cash balances of at least 12 months expected capex or greater than $1.5 billion. As of June 30, 2022, the company had cash balances of about $3 billion, which was well within their target.

The construction of a new mini mill, similar to the Big River acquisition, should help U.S. Steel with its target to reduce its global greenhouse gas (GHG) intensity by 20% by 2030, highlighted by its strategic repositioning to electric arc furnaces (EAFs) from high carbon-emitting, coal-fired blast furnaces. It also further solidifies our belief that Big River is a core asset for U.S. Steel and a strategic part of the company's future success. As a result, we removed the ICR on Big River Steel, as its credit profile (except for recovery) is now incorporated fully within U.S. Steel.

Our stable outlook on U.S. Steel reflects our expectation of ample liquidity and continued strong cash flow to support the ongoing construction of its mini mill over the next two years, even if steel market conditions moderate. We project the company's extraordinary cash flow amid a period of record steel prices could yield debt leverage (S&P Global Ratings-adjusted) below 1x in 2022 even if steel prices moderate sharply toward $1,000 by year-end 2022. We will closely monitor construction, as on-time, on-budget completion is especially meaningful for a company with a history of unsteady cash flow. The company has put in place targets to ensure proper funding and liquidity, such as maintaining cash balances of greater than next 12 months capex.

We could lower our rating on U.S. Steel if we expect its leverage will increase towards 4x. We believe this could occur if there was an accelerated deterioration in cash flows which severely diminished the company's liquidity buffer for its strategic capital projects. We could also lower our ratings if the company experienced significant cost overruns associated with its strategic capex, which could be funded with additional debt.

We view an upgrade in the next 12 months as unlikely considering the company's risks in capex and earnings amidst a strategic transformation. That said, we could raise the ratings if U.S. Steel were to continue executing on business priorities and capital investments, while maintaining solid credit ratios, which could include debt reduction. Namely we would continue to expect debt to EBITDA of about 2x or better amid the current pricing environment and less than 3x in a more normalized pricing environment, with good indications of double-digit margins and returns for several years, confirming a stronger competitive position from strategically important investments.

ESG Credit Indicators: E-4, S-2, G-2

Environmental factors are a negative consideration in our credit rating analysis of U.S. Steel. The company's competitive position has degraded over the past decade, while more cost-competitive and lower GHG competition has taken market shares for the most commoditized steel products in North America. More recently, the company has rapidly transitioned its production footprint to include more EAFs, while closing inefficient and higher-emitting blast furnaces on the way to its target of reducing its GHG intensity by 20% by 2030. U.S. Steel acquired Big River and its EAF assets in 2021. For the 12 months ended June 30, 2022, Big River accounted for approximately 22% of the company's reported EBITDA and we expect the percentage from EAFs will continue to increase, namely with the announced $3 billion mini mill project at U.S. Steel, which the company expects will add about 3 million metric tons of capacity. Still, the company continues to mine iron ore in the U.S. with the attendant land-use considerations for mining. U.S. Steel has reduced its employee-related injuries by almost 90% in the past 10 years by improving its safety training and procedures in an industry that operates large machinery.