Kirby Corp. (KEX) shares were one bright spot on Tuesday, adding 4.5% on a heavy down day for the rest of the market. Shares were buoyed by Kirby's announced purchase of United Holdings LLC and the earnings boost to go along with the announcement.
Kirby is paying $270 million in cash, plus the possibility for an additional $50 million for United, which manufactures, distributes and services diesel engines and other heavy equipment used in the oil exploration industry. The deal is expected to close in April of this year and will add $285-335 million in revenues and $0.15-0.20 in EPS for the year. This brings Kirby's 2011 EPS guidance up to $2.55-2.80 for the year, and makes shares of Kirby worth a closer look.
Kirby Corp. operates in two segments: Marine Transportation and Diesel Engine Services. The Marine Transportation division reported 2010 revenues of $915.1 million (82%), while the Diesel Engine Services Division reported $194.5 million in revenues. The Marine Transport division owns and operates a fleet of 825 barges and 222 towing vessels, making it the largest barge operator in the U.S. Its operations are focused on the Gulf Coast and along the Mississippi River, and nearly 70% of the division's revenues are linked to the U.S. chemical industry. This is an important driver for Kirby, as the U.S. chemical industry is poised for long-term growth driven by lower feedstock costs.
Kirby's tank barge fleet is integral in moving chemicals produced in the U.S. to transport locations for exports around the world. The rest of the revenue is split between refined oil products (8%), black oil products (18%), and agricultural chemicals (5%). The Diesel Engine Services Division services the marine diesel engines used in things like oil and gas rig operations as well as dredging and transportation, the power generation industry, and railroads.
The continued drilling slowdown in the Gulf of Mexico has been negatively affecting this area, with GoM oil and gas customers accounting for roughly 25% of revenue for the Diesel Engine Services Division in a normal year. While this slowdown is a near-term headache, rising oil prices and geopolitical instability in OPEC nations should help persuade the Feds to allow drilling to return to a more normalized pace.
The addition of United into Kirby is genuinely a game-changer. Through United, Kirby expands its Diesel Engine Services Division from $195 million to around $510 million for 2011, based on the midpoint of the revenue guidance. United, whose customers primarily use the diesel equipment for hydraulic fracturing, instantly places Kirby into the high growth world of oil services in U.S. shale.
With industry heavyweights like Baker Hughes (BHI), Halliburton (HAL), and Schlumberger (SLB) as customers, Kirby is now poised to reap the benefits of the shale gas boom, as well as a further push to find new oil and NGLs in the U.S.
Even more promising is that, because fracturing requires such high pressure, the wear and tear on the equipment is immense. Kirby estimates that the fracturing equipment needs to be serviced about twice as often as the diesel engines used to power marine vessels. This means each new piece of equipment placed into the field will mean double the service revenue of new maritime equipment, furthering the explosive growth potential Kirby's Diesel Engine Services division is now exposed to.
Clearly the acquisition of United Holdings is an important step for Kirby. The company is adding exposure to the explosion in onshore oil and gas activity in the U.S., and doing so at a very, very cheap price. Being able to expand revenues by about $315 million this year, and close to $400 million in 2012, as well as gaining exposure to a new, high growth industry ... all for $270 million? Seems like a cheap price.
Kirby shares, currently at $54.21, are trading at just over 20 times the midpoint of 2011 EPS guidance, also seem cheap. Exposure to the growth in the U.S. chemical industry, as well as to natural gas drilling and fracturing in the U.S. shale plays, should afford Kirby a higher multiple. A 25 multiple on the top end of Kirby's EPS range gets you 25 * $2.80 = $70.00. Perhaps Kirby shares will get there by the end of the year as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.