US Steel Steps Up As A Buyer for Lone Star Technologies - Oil and Steel Remain Strong

By Dr. Duru written for One-Twenty

March 29, 2007

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The long wait is finally over! US Steel (X) announced today that it will purchase Lone Star Technologies (LSS) for $67.50 in cash. I have written about LSS several times on these pages and each time I insisted that LSS was an eventual M&A play (click here for a search on all my LSS-related articles). So many of LSS's competitors have now been bought, I am not sure any independent tubular steel manufacturers remain! But you can bet I will be looking.

Now, I had no idea someone would value LSS at over $2 billion, but I am certainly not complaining. The last time I wrote about LSS, I declared that I was going to stake my claim on the stock and grow roots. Previously, I was darting in and out of the stock as it bounced around in a wide trading range. The news that made me set-up camp on LSS was news that Tenaris was buying Hydril - Tenaris' second purchase of an oil-related steel company in a year (the first being LSS's direct competitor Maverick). That news made me realize that a take-over of LSS could happen at any time with no warning, and I could easily miss the boat trying to outsmart and time the market.

There are two other things that surprise me. First of all, I always thought of US Steel as focused on the automobile industry. I know they are a major supplier to GM, and I even dogged them out some time ago for it while wondering aloud whether steel was caught in a bubble. Second, LSS has struck up several partnerships with international steel companies in the past year, and I figured that any acquirer would wait to see how those partnerships played out. On the other hand, perhaps US Steel moved before one of those partners made a move. It will be interesting to see how things play out for US Steel with this acquisition.

All this M&A activity in the steel industry and the oil patch further confirms the strength of these two industries. I have written about both for some time, and it is of course always gratifying to see my theories play out. I last wrote about oil when the Saudis stepped up to say that there was nothing wrong with the oil markets at a time when oil was selling off hard and fast. You should now know that you should listen when the Saudis speak about oil. I know there are a lot of oil bears and doubters who wish they did at that time. Oil and gasoline prices are now racing back toward 2006 highs. If gasoline demand continues going strong and tensions increase in Nigeria and Iran, you can bet oil prices will continue to climb. Ignore those doubters who are still holding out for $40 oil. It is increasingly clear it will take a major economic recession to drive oil back to those "bargain basement" levels again...and consider a return to anything around $50 a "gift."

Be careful out there!

DR. DURU®, 2007