Follow the Money!

The keynote speaker from Atlanta couldn’t make it because he was “iced in,” the victim of a fluke ice storm that hit the city the day before. But that didn’t dim the mood of attendees at BB&T Capital Markets’ 29th Annual Transportation Services Conference last month in Miami. Like the Miami weather, the atmosphere was sunny and bright, boosted by record attendance and the prospect of a banner year. And why not? All sectors of the transportation industry, including not only maritime but air, rail, trucking and intermodal, are looking up. And it’s due almost entirely to the shale oil boom that’s transforming both the U.S. and global economies.

 

“Crude Corridor”

Norfolk Southern (NYSE: NSC) calls its Chicago – East Coast route “Crude Corridor,” and for good reason. It transports North Dakota (Bakken) crude to refineries on the East Coast along the most direct route available – and in a very respectable 36-40 hours. The “Crescent Corridor” moves goods from New Orleans to New York and Philadelphia. Its main cargo is containers, and in fact intermodal (container movements) is NS’s biggest business. Railroads like the term “corridor” to describe their routes. To me, a corridor means a narrow passageway in an office building or hotel or big house, but now the word has taken on a whole new meaning and has a nice ring to it. I like it.

NS’s mascot is a thoroughbred, and it calls itself the “Thoroughbred of Transportation.” Its new rail/truck transfer facility in Virginia is called Thoroughbred Bulk Transfer. It had record revenues and net income in 2013 and expects another banner year in 2014. Its stock is up 25 percent over the last 12 months, and it pays a nice 2.6 percent dividend. Similarly, CSX (NYSE: CSX), the biggest railroad east of the Mississippi and slightly larger than NS, had record revenues last year and expects another strong year in 2014. Its crude shipments alone increased 50 percent in 2013.

The biggest players in the crude-by-rail trade are the western railways – Burlington Northern Santa Fe and Union Pacific (NYSE: UNP). Seventy percent of North Dakota’s one million barrels a day of crude moves by rail, and Burlington is the main carrier. To own Burlington you have to buy Warren Buffett’s Berkshire Hathaway stock (NYSE: BRK.B). 

Other crude carriers include Kansas City Southern (NYSE: KSU), which serves the Eagle Ford formation in South Texas and whose crude business was up 51 percent last year, and Genesee & Wyoming (NYSE: GWR), a short-line operator with a fascinating history. Those of you from upstate New York will recall Genesee beer (“Let’s have a Genny!”) and, sure enough, that’s where this company began operations in the mid-19th century, hauling rock salt from what would become the world’s biggest salt mine for a company in Genesee County that would become International Salt Corporation. (Trivia question: Where does the name “Wyoming” come from?) 

There are lots of crude corridors, and they’re not all railways. Some are waterways. The rails are mainly east-west, from North Dakota to the West Coast or North Dakota to the East Coast. Waterways are mainly north-south, from the Midwest down the Mississippi and its tributaries to Gulf Coast refineries. Still others transport Eagle Ford crude from ports in Texas to refineries along the Gulf and Atlantic coasts, and this is all waterborne. 

Now here’s a surprising fact and a good example of the rail/marine nexus: About 15 percent of North Dakota’s oil goes to Albany, NY, of all places. That’s roughly 150,000 barrels a day. The oil travels by rail (Canadian Pacific and CSX) to Albany in long unit trains and then by water down the Hudson River to refineries in New Jersey, Pennsylvania, Delaware and even New Brunswick, Canada. Albany has overnight become a major transshipment point for Bakken crude, like St. Louis on the Mississippi and Vancouver on the West Coast. 

All told, according to a story in the New York Times last month, about 400,000 bpd of Bakken oil travels every day by rail to the East Coast; about 200,000 bpd goes to the Gulf Coast, and some 150,000 bpd to the West Coast. Bakken crude has become a lifesaver for Delaware River refineries, which formerly had to depend on high-priced crude imports from the North Sea or West Africa and were in danger of shutting down.

Who Needs Keystone XL?

Trains and barges are the new pipelines. Their ability to move crude from new sources like the Bakken formation in North Dakota and Eagle Ford in Texas has largely obviated the need for additional pipeline capacity. In fact, two proposed pipeline projects in the Bakken were canceled because shippers balked at signing long-term contracts. Pipelines take too long to build (three to five years). They’re too expensive. They’re limited in what they can deliver and where. They can only carry one product at a time (rail cars and barges can carry a variety of products), and they can only go to one place (trains and ships can make multiple stops). It’s easier and cheaper to lay down some track or build new rail/barge transfer facilities than it is to construct a pipeline.

Shippers like the “optionality” and flexibility of rail and water. They want to ship to the highest bidder. Sure, rail is more expensive than pipeline (about $16 per barrel from the Bakken to the Gulf of Mexico versus $11 for pipeline), but barge is about the same and sometimes cheaper. And with Bakken crude selling at well below the benchmark oil price (by up to $25/bbl) because of its inaccessibility, higher transportation costs are easily absorbed. 

So the whole notion of rail and marine being stopgap measures for the shipment of America’s shale oil riches until pipelines can be built is hooey. Pipelines are no longer a threat, and rail/barge movements are here to stay. As if admitting this, one of the nation’s biggest pipeline operators – Kinder Morgan Energy Partners – announced last December that it was purchasing a shipping company – two of them, in fact – American Petroleum Tankers and State Class Tankers from private equity firms Blackstone and Cerberus Capital for a cool $962 million in cash. 

It was Kinder’s first venture into the Jones Act market, and the company cited growing demand for the waterborne carriage of crude and refined products. The acquisition includes five 330,000-bbl product tankers and four 330,000-bbl newbuilds on order from NASSCO in San Diego for delivery in 2015/2016. It immediately makes Kinder a big player in the coastal movement of crude.

So who really needs Keystone XL? There are plenty of alternatives available as demonstrated by the success in moving Bakken and Eagle Ford crude by rail and water. But there is a cost attached to abandoning the project, and not just the economic cost of lost jobs and revenues. The biggest cost may be in damaged relations with our good neighbor to the north. 

Jones Act Players

Now guess who moves a lot of that Bakken crude down the Hudson? Yep, you got it. Kirby Corporation (NYSE: KEX). Kirby’s barges also carry Bakken crude down the Mississippi from Chicago and St. Louis, where it arrives by rail, to refineries in Louisiana. It’s big in the coastal markets too, moving rail-delivered Bakken crude from Vancouver and Anacortes to refineries in California and Eagle Ford crude from Corpus Christi to “refinery row” along the Texas and Louisiana coasts. CEO Joe Pyne says there’s a lot of “unanticipated value” in the shale business – value that has propelled KEX to record earnings and an accelerating stock price.

Kirby has about 26 percent of the inland barge market and 30 percent of the coastal barge market and is the leader in both segments. It’s three times bigger by capacity than its nearest competitor in the inland market – American Commercial Lines. In the coastal market, its biggest competitor is Crowley Corporation, although Crowley is focused on the ATB (“articulated tug barge”) market, meaning cargoes of 300,000 barrels or more, while Kirby’s focus is the under-200,000 barrel segment.

Unfortunately, both ACL and Crowley are private, as are so many Jones Act players. But there are other attractive public companies besides Kirby. Seacor (NYSE: CKH) is one. It has eight product tankers (five under long-term bareboat charters) and up to four more on order from NASSCO that are similar in size and design to the 330,000-barrel, eco-design State Class newbuilds. Seacor also has an inland tank barge fleet that transports both clean (petrochemicals and chemicals) and dirty (crude oil) products. In addition to having the inland and coastal markets covered, Seacor has terminal operations that transfer crude and other products from unit trains to barges. Gateway Terminals is the newest of these. Located on the Mississippi River in Sauget, Illinois, across the river from St. Louis, it has 400,000 barrels of storage capacity and transships both Bakken and Canadian crude.

Niche Investments

Here’s another good company: Rand Logistics (Nasdaq: RLOG). Rand operates on the Great Lakes, on both the U.S. and Canadian sides. It’s not involved in the shale oil business except for the occasional load of frack sand, but it is big in salt. Road salt. Inventories of road salt are depleted right now due to the wicked winter weather, so they will need to be replenished. Aggregates are another big cargo. They’re used in road and bridge construction and also housing. With the amount of infrastructure work underway and the rebound in the housing market, Rand is in a nice place.  

And if you’re really looking for something unusual to invest in, try International Shipholding Corporation (NYSE: ISH). It claims to have the best shareholder returns of any maritime company over the last five years. Moreover, it pays a dividend of $1.00/share for a yield of over three percent. ISH has no fewer than six business segments – everything from pure car and truck carriers (PCTCs) that transport Toyotas between Japan and the U.S. to a rail/ferry service between Mexico and the U.S. that is a big shipper of Corona beer. Among its many blue-chip customers is the U.S. government (the Maersk Alabama – of “Captain Phillips” fame – is one of its leased vessels). The founding Johnsen family has about 22 percent of the stock. Otherwise, it’s all yours. 

Stay on Top of the Daily Maritime News The maritime news
that matters most

Get the latest maritime news delivered to your inbox daily.

Subscribe Now

So there you have it. The logistics business – getting the product to the customer, the heart and soul of economic activity – is booming. Catch it while you can! 

Trivia answer: “Wyoming” is the name of a county in upstate New York, near Rochester. Genesee County is adjacent to it. Hence “Genesee & Wyoming.”