Kirby Corporation (NYSE:KEX) is in marine transportation and diesel engine services. In marine transportation, Kirby provides both inland tank barging services as well as coastal tank barging services, also known as offshore marine services. It is the largest player in both these sectors in the U.S. In the inland tank barging services, the company occupies about 26% of the market, whereas in the coastal side of the business, it has around 30% market share.
Kirby Corporation (NYSE:KEX)’s stock has grown more than 30% this year. When the stock price shows such significant growth, investors are curious to know if there is further room for stock price growth. I do see several tailwind opportunities going forward for Kirby’s growths, which are presented below.
Profitable petrochemical transportation
According to a study conducted by the American Chemistry Council, petrochemical companies in the U.S., as of March, have announced nearly 100 projects. The value of these projects is over $71 billion, which includes both new and expanded production capacity. These projects include Chevron Phillips’ estimated $5 billion expansion project, The Dow Chemical Company (NYSE:DOW)’s (one of Kirby Corporation (NYSE:KEX)’s largest customers) estimated $4 billion plus investment and Valero Energy Corporation (NYSE:VLO)‘s $700 million new methanol plant. The petrochemical companies are citing the opportunities they see in the petrochemical markets, particularly in the Gulf Coast region, as well as the low natural gas prices in the U.S. for their expansion efforts.
The Dow Chemical Company (NYSE:DOW) will build three new petrochemical facilities on the U.S. gulf coast as a part of the $4 billion expansion plan. This aggressive expansion plan has been inspired by the shale boom. A $1.7 billion ethylene cracker unit is a part of this expansion plan. Two Japanese companies, Mitsui and Idemitsu, plan to build a chemical plant on the U.S. gulf coast. These plants will use the ethylene produced by Dow’s cracker unit.
There are not enough pipelines in the U.S. to transport the entire product coming out of the shale plays. This means that these petrochemical companies will turn to barge, truck, and rail transportation as production levels ramp up and companies continue their expansion efforts. Barges are more efficient than truck and rail for non-pipeline transportation. Being the largest domestic tank barge operator in the U.S., Kirby Corporation (NYSE:KEX) remains strongly positioned in its inland marine business as a result of these developments.
Offshore marine business flexing muscles
The Jones Act requires all vessels operated between U.S. ports to be built and owned by the U.S. companies. In June, Exxon Mobil Corporation (NYSE:XOM) signed a two-year charter with Koch Shipping and Supply for a U.S.-flagged Jones Act tanker, from Koch Shipping and Supply for $100,000 per day. This charter is more than the current average rate of $75,000 per day for tankers and almost 100% higher than the average rates prevailing in 2012. This tanker has a capacity of 339,000 barrels, and is one of only around three dozen Jones Act tankers available for lease.
This charter is indicative of the premium shippers and traders are willing pay in an endeavor to secure capacity, due to incremental crude oil production. Exxon Mobil Corporation (NYSE:XOM)’s willingness to secure expensive long-term capacity is indicative of the potential that exists for domestic crude waterborne transport.
The charter follows the booking of two tankers by Exxon Mobil Corporation (NYSE:XOM) in May. These tankers will be used to haul oil to the U.S. gulf coast via the Suez Canal. Each of these tankers has a capacity to transport 2 million barrels of oil. These activities are indicative of the company’s efforts to increase its transportation capacity.
Another leading indicator is the rush of shipping companies for oil transportation at the Eagle Ford shale play. This facility has seen an unprecedented growth of crude oil production in the last few years. In the first four months of this year, average daily crude oil production at this facility was 536,000 barrels per day, up almost 40% from the average daily figure of 385,000 barrels per day in 2012. This increasing oil production capacity offers Kirby Corporation (NYSE:KEX) an opportunity to improve its offshore marine transportation business, as it is the leading player in this business. This increased offshore activity has improved the utilization rates for Kirby’s barges from 78% in the third quarter of 2012 to 90% in the first quarter of 2013.
This indicates that Kirby Corporation (NYSE:KEX)’s offshore marine fleet will not remain as idle as it used to. This will help Kirby in incremental revenue generation, going forward. The gross revenue/barge/day was $18,577 in the first-quarter of 2013. Kirby has a fleet of 89 barges in its offshore marine segment. Considering the same level of utilization, I believe that the offshore segment will generate revenue of $535.7 million.
|No. of barges||89|
|No. of days||360|
|Total Revenue (2013) (18577*89*360)||$535.7 million|
Improving diesel engine segment
Kirby Corporation (NYSE:KEX)’s diesel engine business provides service to both medium and high-speed engines. Land-based drilling, which is involved in constructing and maintaining high-pressure pumps, is also a part of the diesel engine business. The high-pressure pumps are used to frack shale deposits for oil and gas recovery. This is a relatively new business for the company, and it was under pressure in the second half of 2012. As a result, the operating margin in the diesel engine segment dropped to 3.7% in the fourth quarter of 2012.