As the U.S. gears up to become the number one oil producer in the world by 2020 on the back the shale gas revolution, tank car manufacturers are poised to benefit as more crude oil gets transported by railway to take advantage of cheaper prices in the midcontinent United States. Tank cars are specialized rail cars designed to haul liquefied freight and are manufactured by a small select group of companies.
Given that current crude-by-rail volumes are approximately 500,000 to 600,000 barrels a day, while the U.S. produces 6.6 million barrels a day (and U.S. refineries refine 14.8 million barrels per day), the potential for railway companies to increase its exposure to the crude oil transportation business can be exponential. The current consensus is that the lack of available tank cars is causing a bottleneck in the crude-by-rail supply chain, while other impediments to growth include the lack of offloading terminals to deliver the product, absence of rail access to origination sites, and the need for coastal refiners to re-configure their plants to be able to process heavier crude that is produced in the U.S. midcontinent.
FTR Associates data through the Bloomberg service show that there is currently a backlog order of roughly 47,000 tank cars for the tank car manufacturers. In the third quarter of 2012, 4,500 tank cars were delivered and the time for an order to be processed and the tank cars to be manufactured has now lengthened to around 15 – 18 months.
A strong signal that the crude-by-rail story is developing can be seen by an increasingly number of refiners choosing to own or lease these tank cars directly rather than leaving it to the rail companies. For example, Valero Energy Corp (VLO), a mid-size U.S. refiner, announced on January 15 this year that they will be buying 2,000 additional railcars in order to increase rail shipments of inland crude not served by pipelines. This brings its current fleet of tank cars to 9,000 and management hopes that the additional capacity will help ship more of the prolific Eagle Ford crude to its refineries.
Furthermore, Phillips 66 (PSX), another refining company in the U.S. announced plans earlier in 2012 to purchase 2,000 railcars for the same purpose. This increasing demand for tank cars means that delivery of tank cars grew significantly in 2012 to approximately 18,000 deliveries, and current backlog suggest more than 23,000 deliveries of tank cars will be completed in 2013. This is in comparison to the less than 10,000 tank car deliveries in 2010 and 2011 and the approximately 20,000 tank cars currently transporting crude oil on railways.
There are very few companies on the public market that is exposed to tank car manufacturing, with one of the main ones being Greenbrier Companies (GBX). On January 7, 2013, the company announced that it has received orders for 4,200 rail cars valued at over US$430 million with 1,250 of them being tank cars. The company now expects to deliver 13,000 rail cars in 2013 with a backlog of 9,700 rail cars valued at US$1.1 billion. Greenbrier was also subjected to an acquisition offer by Carl Icahn and American Railcar Industries Inc. (ARII) with the bid on the table being $22 a share. The Board rejected the offer in December 2012 as not being sufficient and Icahn has since sold off most of his stake from 9.9% to 3.4% of the company. As a result, shares of Greenbrier has plummeted back to around $17 a share – a 22% discount to the price at which a famed investor was willing to pay.
Here is a list of publicly listed rail and tank car manufacturers:
1. Greenbrier Companies (GBX, Earnings, Analysts, Financials): Engages in the design, manufacture, and marketing of railroad freight car equipment in North America and Europe. Market cap at $488.33M, most recent closing price at $17.96.
2. American Railcar Industries, Inc. (ARII, Earnings, Analysts, Financials): Designs, manufactures, and markets hopper and tank railcars in North America. Market cap at $754.94M, most recent closing price at $35.36.
3. FreightCar America Inc. (RAIL, Earnings, Analysts, Financials): Through its subsidiaries, manufactures, rebuilds, repairs, sells, and leases freight cars used for hauling coal, other bulk commodities, steel and other metals, forest products, and automobiles primarily in North America. Market cap at $296.39M, most recent closing price at $24.74.
4. Westinghouse Air Brake Technologies Corporation (WAB, Earnings, Analysts, Financials): Provides technology-based equipment and services for the rail industry worldwide. Market cap at $4.28B, most recent closing price at $89.40.
5. Trinity Industries Inc. (TRN, Earnings, Analysts, Financials): Provides products and services to the industrial, energy, transportation, and construction sectors primarily in the United States, Canada, Mexico, the United Kingdom, Singapore, and Sweden. Market cap at $2.97B, most recent closing price at $37.68.
(List compiled by SiHien Goh)
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