Plenty has been written about the significant increases in crude oil production in the U.S. brought about by exploiting unconventional shales like Eagle Ford, Niobrara, and Bakken. Likewise, there has been ample attention given to the increasing production of petrochemicals in the U.S. by virtue of improved access to oil, natural gas, and natural gas liquids.
Kirby (NYSE:KEX) is a lesser-known beneficiary of these trends. The company is easily the largest operator in both the inland barge and coastal barge markets, with more than 23 million barrels of capacity in its fleet. As volumes increase and pipeline capacity becomes more of an issue, Kirby has a rare opportunity to benefit from strong utilization and pricing. Valuation on these shares does appear pretty heady, but is likely sustainable so long as petrochemical demand remains solid.
Keep On Keeping On
When Kirby reported earnings about a month ago, it was largely a continuation of the positive trends that have been underway for some time now. Revenue rose 11%, with marine revenue rising 14% (to about three-quarters of the total). Weather did impair growth in the inland business and overall ton-miles, but pricing remains good (up 6% on a revenue/ton-mile basis) and capacity utilization is strong at 90-95% of the inland fleet and 90% of the coastal fleet. This growth remains profitable growth, as the company saw a 20% increase in operating income from its marine operations.
The company's diesel engine business remains stuck in a lower gear. Revenue was up 2% from the year-ago period, but up 16% on a sequential basis. Operating income was down 4%, but that was still better than the Street had anticipated.
Turning To Newbuilds
Kirby has been a very active acquirer in both the inland and coastal markets over the years, but the company is now looking to an organic newbuild to help drive future growth. The company has commissioned a new coastal articulated tug barge for a cost of around $75 million to $80 million. This barge will be considerably larger than its current average (185K barrel capacity, against an average of about 83K currently), and management expects delivery in mid-to-late 2015. Importantly, this barge is backed by a four-year charter.
I find this decision to be interesting on multiple levels. First, Kirby management has been at this quite a while and I do believe they understand their markets pretty well. The four-year charter certainly reduces the risk of a newbuild project, but I think it still speaks to solid long-term demand for the company's barging services. Second, I think it's worth noting that there are not that many players in the coastal barge market that could afford a similar project. If large, modern barges become increasingly in demand by customers (whether for capacity, cost efficiency, or environmental reasons), that should only lengthen Kirby's lead on most of its competitors.
Anybody's Guess When Diesel Will Turn Around
Kirby's diesel engine business is harder to track. Halliburton (NYSE:HAL) and Baker Hughes (BHI) both expect onshore drilling activity to pick up, and a large part of Kirby's diesel engine business ties to manufacturing, overhauling, and servicing the engines that power fracking rigs. Energy service companies have been shifting more and more of their fracking work to 24-hour schedules, which I would think ought to increase the strain on the engines and the need for Kirby's services. On the other hand, analysts have been looking for better fracking and drilling activity for a couple of years now, so I would think "cautious optimism" might be the way to go.
Infrastructure Will Matter, Both Good And Bad
Kirby is in an interesting position when it comes to the state of U.S. infrastructure. On one hand, the Mississippi River and Gulf Intercoastal Waterway both need additional infrastructure investment (particularly the Mississippi) and delays in getting that through the federal budgeting process can imperil Kirby's ability to navigate and operate its inland business.
On the other hand, a lack of pipelines and other infrastructure helps demand for the company's services. Barging isn't an option in all cases, but where it is an option it is still meaningfully cheaper than sending goods by rail (by about 40%). Likewise, Kirby benefits from circumstances in Texas and Louisiana where limited pipeline capacity forces large petrochemical companies to use barges as a way of getting around inadequate capacity and/or higher prices.
Growth Versus Value
Kirby's EBITDA rose more than 16% in the fourth quarter, and I believe there are better-than-average odds that the company can use high barge utilization to support strong pricing, driving EBITDA growth in the low double-digits for the next few years. The company's stock has historically traded at 7x to 8x forward EBITDA, but investors likely will continue to be willing to pay a double-digit premium to EBITDA so long as the company's marine revenue, EBITDA, and earnings are growing at a double-digit rate.
The Bottom Line
A renewed interest in pipeline construction would perhaps be bad for sentiment on Kirby's stock, but the reality is that there aren't any easy solutions to the current capacity strains for crude, NGLs, and refined products. Likewise, few of Kirby's competitors have the financial resources to renew and build their fleet, nor operate with the same scale advantages. With that, investors who want to buy Kirby at a meaningfully lower price are probably going to need to see the economy slide toward recession (reducing demand for oil and refined products) or the broader market sell off significantly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.