PKX to Explore Oil in Uzbekistan - Analyst Blog

Korean steel producer, POSCO (PKX) signed agreements with the State-run National Oil Corporation and Samchully for the exploration of two oil fields in Uzbekistan. The fields covering 6,170 km2 are located offshore in the Northeastern region of Uzbekistan.

The oil block exploration project related to the fields in West Ferghana/Chinabad was initiated in February 2010, with KNOC investing 65%, POSCO 20% and Samchully 15% of the total investment. Promotion of energy development in the international arena has been POSCO's prime focus over time. Via this, the company aims at developing additional sources of energy and increasing its self-sufficiency in resources.

Parties involved in the project expect potential reserves to reach 8,400 million barrels. Roughly, three years will be required for the first phase of the exploration activities. This project is POSCO's third oil/gas exploration field project with KNOC, after the Aral Sea block (2007) and Namangan-Chust block (2009).

POSCO seems well positioned to leverage from its expansion into the fast-growing markets in the long run. Its recent joint ventures (Krakatau Steel), acquistions (Daewoo International) and independency in raw material procurement (stake acquisition in Australia's iron ore and coal mines) will be the company's prime growth drivers.

We believe that demand for steel will be escalating in the quarters ahead as the economy revives gradually from the recent crisis. According to the World Steel Association, demand for steel will increase by 13.1% in 2010 and 5.3% in 2011, globally.

POSCO posted rather disappointing third quarter results as revenue increases were more than offset by higher raw material costs. Growth in the quarters ahead will be restricted as the company is likely to face headwinds emanating from its rival steel manufacturers worldwide including Arcelor Mittal (MT), Nippon Steel Corp. and Hyundai Steel Company.

We currently maintain a Neutral recommendation on POSCO, also supported by Zacks #3 Rank (Hold).

 
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