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Why It’s Concerning That ConocoPhillips Reduced Capex Budget

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ConocoPhillips reduces its capex guidance

Recently, ConocoPhillips announced that it will reduce its 2015 capex by 20%. ConocoPhillips is the third largest integrated energy company in the US. It’s also the fifth largest refiner globally. Let’s see why ConocoPhillips’ decision to reduce its capex budget is a worrying sign for steel plays.

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Why it’s a worrying sign

ConocoPhillips’ announcement means a reduction of close to $2.5 billion in capital expenditure next year. A large part of this capex would have gone into buying rigs. As discussed previously, steel is necessary for making these rigs. Industry analysts expect other exploration companies to reduce their capex targets for next year as well. This would reduce steel demand from energy companies.

This is a worrying sign for steel makers like ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE). Since US Steel (X) is the biggest supplier to energy companies, this trend will have a big impact on the company.

The increase in steel demand from energy companies has been a key driver for steel plays. Crude oil production has increased steadily in the US. The above chart shows the trend in crude oil production in the US and the rest of the world. As you can see, crude oil production in the US has been growing at a faster pace compared to the rest of the world.

Is the fall in US Steel share overdone?

US Steel’s share price has fallen much more than the share prices of its peers. In the next part we’ll analyze how investors can play US Steel after the decline in its share price.

Investors can also access the metals and mining industry through the SPDR S&P Metals and Mining ETF (XME).

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