There’s nothing as boring as watching a barge lazily drifting down a river … that is, unless it’s carrying oodles of cheap WTI crude oil to refiners on the Gulf Coast.
Surging oil production in the land-locked Bakken Shale is finding a new outlet on one of America’s first highways — the Mississippi River. Believe or not, just like the explosion in crude-by-rail traffic, the decidedly old-school way of transporting goods via boring old barges is seeing huge growth as refiners crave more and more domestic crude oil for their operations.
And just as crude-by-rail has changed the railroad sector’s fortunes over the last few years, crude by barge could be equally as big. Not only could it be a key midstream player on our road to energy independence, but considering this barge building bonanza is just now heating up, it could be a great jumping-in point for intrepid investors.
Old Man River
After the hydraulic fracking revolution unearthed a plethora of natural gas and shale oil across North America, constrained infrastructure became a huge problem. While some of those kinks are being worked out via new pipelines and gathering systems, refiners are being forced to think outside the box.
Which is where those boring barges come in.
Tank barges are being used to move rail-shipped crude oil from North Dakota and Canada to ports along the Mississippi River. Inland and coastal tank barging takes natural gas or crude oil and transports it to Gulf Coast refineries. The process has experienced a steady stream of growth after becoming a cheap option for many crude oil consumers to move fracked energy directly to refineries.
After shale oil and natural gas have been refined, inland barges are used to transport these refined products — like gasoline and jet fuel — back up the river to manufacturing hubs in the Northeast.
That has prompted many midstream and downstream firms to announce plans for additional barge capacity at new terminal facilities. Refiner Tesoro (NYSE:TSO) recently announced plans to build a new crude-by-rail and marine offloading facility in southwestern Washington state, while midstream superstar Kinder Morgan (NYSE:KMP) will build a new barge dock at its Pasadena terminal. That new facility will relieve current congestion in the Houston Shipping Channel by increasing the capacity to handle up to 50 barges per month.
All of this up- and downstream growth has raised utilization rates to historic levels. During 2012, overall tank barge utilization rates in U.S. coastal and inland waterways hit the 80 to 90% capacity mark, while rates for small inland tank barges — holding 10 million to 30 million barrels of crude — hit 95%.
This year, utilization rates have expanded further and several analysts estimate that additional barge capacity will need to be built to handle the amount shale oil being unearthed in the Bakken and Eagle Ford.
3 Ways to Tap That Growth
Kirby Corp.: The biggest winner could be shipper Kirby Corp. (NYSE:KEX). The firm is the nation’s largest domestic tank barge operator, with a fleet of 904 tank barges and 241 towboats. Overall, the petrochemicals sector accounts for about half of its barge revenue. That puts it in a good place to profit from the surge in crude-by-barge volumes.
Kirby’s first-quarter earnings reached $56.6 million or $1 per share, compared to $50.9 million or 91 cents per share for the same period in 2012. However, analysts at BB&T estimate that Kirby’s EPS will hit $5 per share for the entire year based on improving coastal dynamics and the company’s entry into offshore markets. Kirby can be had for a P/E of 20, which doesn’t take into account BB&T’s bullish EPS estimates.
Enterprise Products Partners: While it is mostly thought of as a pipeline play, Enterprise Products Partners LP’s (NYSE:EPD) midstream reach is vast, including inland and coastal barges. The firm’s marine services unit invested $25 million on its fleet this year and now has 64 tugboats and 136 barges under its umbrella. Roughly 70% of those were used along the Gulf Coast and down the Mississippi River in order to transport crude oil and refined products like gasoline.
Enterprise isn’t resting on its laurels, however. EPD has recently teamed up with Oiltanking Partners LP (NYSE:OILT) to build a new dock along the Houston Ship Channel so that more vessels may access the terminal.
Enterprise is particularly cheap because it’s a premier player in the master limited partnership space. However, its first-mover status with barges does help justify the slight premium and slightly below-average (for MLPs) dividend yield of 4.35%.
Trinity Industries: Many investors have already flocked to Trinity Industries (NYSE:TRN) for its railcar building and leasing operations. Its fleet of tank cars has garnered much attention as the crude-by-rail boom has rallied over the last few years. Investors have another reason to cheer for Trinity — it’s also one of the largest manufacturers of inland and coastal barges in the country.
That unit is the company’s second largest business — behind railcar construction — and reported revenues of $147.4 million during the first quarter. More importantly, Trinity has received $66 million in new barge orders, and as of March 31 had a backlog of $483 million. However, that backlog should continue to grow as more tank barges are needed to continue shipping mid-continent crude oil south.
Shares of TRN have surged about 19% this year, but still can be had for a forward P/E of just 9.25. Considering Trinity is a dual play — both rail and barge crude shipping — that’s mighty cheap indeed.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.