U.S. Steel Corp. lost a staggering $1.5 billion in 2015, and analysts are questioning whether it will continue to burn through cash in 2016.
The Pittsburgh-based steelmaker projects it will break even on Earnings Before Interest, Taxation, Depreciation and Amortization, or EBITDA, this year if market conditions don't deteriorate further.
But an analyst, Axiom Capital's Gordon Johnson, has questioned whether that's realistic.
Business intelligence firm Argus downgraded U.S. Steel stock to a hold from a buy after it announced its sixth annual loss in seven years. Most analysts give it a buy or hold rating, and there's been a 9 percent increase in investors shorting, or betting against, U.S. Steel stock this month, according to MarketBeat. Analysts are suggesting it might get dire for the 115-year-old company if market conditions don't get better soon.
The steelmaker says it has $2.4 billion in liquidity and that it's in a strong position. Steel production has been picking up in 2016 as new tariffs take effect on foreign steel, but analysts remain skeptical. They've begun to question the viability of the business because of the ongoing weak market conditions the domestic steel industry has been facing.
David Gagliano, an analyst with BMO Capital Markets, tried during the recent fourth quarter conference call to drill down on how U.S. Steel would preserve cash if weak market conditions persist for a while, such as if it would close more mills, sell off assets or borrow money from the capital markets.
"But really what I am getting at is contingency planning beyond that," Gagliano said during the conference call.
"In case this environment somehow magically stays in place beyond the next 12 months, I think the working capital improvements may potentially fade. There is a risk that cash burn potentially increases significantly, and then there is concern about liquidity, in my opinion. And so I am just wondering what the timing is when those contingency plans start taking effect."
Matt Vittorioso, an analyst with Barclays, said during the conference call that U.S. Steel's liquidity was strong now but questioned what would happen when the company reduced its working capital and inventory. In November, Vittorioso told Bloomberg, "Folks are beginning to question the viability of the business, just given how weak steel fundamentals are."
U.S. Steel executives say they are confident after the company cut $815 million in operating expenses last year, as a result of its ongoing Carnegie Way initiative to cut cost.
"Our company is headed to a position that we are comfortable with," U.S. Steel CEO Mario Longhi said during the conference call.
"I mean, many of the new products we are launching are geared to be more valued-added. If you look over time, there has been more penetration in automotive. When we look at the competition and our facilities and what we're investing, right now we're operating at a good level.”
U.S. Steel was on the defensive during the conference call.
"We got this," Executive Vice President and Chief Financial Officer Dave Burritt said.
"We are managing cash extraordinarily closely. We look at it daily. We have rolling forecasts. We are on it, we got this. We are going to adapt to whatever the economic circumstances are, and we will have the trigger points that will tell us what we need to do. We are still in great cash position."