Profit From the Oil-by-Rail Boom

During the first week of October, the Association of American Railroads released its report on railroad traffic for the month of September. The report revealed that railroad traffic was up 4.4% year on year and the weekly average of intermodal units on the rails was the second-highest level ever recorded; only the Labor Day holiday prevented September from being the highest-volume intermodal month in history. 

The volume of aggregate (sand and gravel, in part due to fracking activity) carloads on the rails expanded 10% year on year, the volume of auto-related carloads expanded 12%, and petroleum and related product carloads expanded 10.4%. However, it was not all good news as carloads of coal and grain declined 3% and 11% respectively during the period.

All of this is good news for global railcar leasing company GATX Corporation and domestic railcar leasing company American Railcar Industries (NASDAQ: ARII  ) , which specializes in the production and leasing of tanker cars for the oil and gas industry. However, declining carloads of coal and grain are bad news for FreightCar America (NASDAQ: RAIL  ) , which specializes in the production of coal and hopper (grain) railcars. 

A growing industry
Oil-by-rail is a rapidly growing industry. Political uncertainty surrounds many pipeline construction projects, and rail remains the only viable way to transport oil from many backwater oil wells. This has driven a huge investment in the rail car tanker industry with The Greenbrier Companies (NYSE: GBX  ) leading the charge. At the beginning of the year, the company announced that during the last quarter of 2012 it received $160 million worth of orders for tanker cars. To put that in perspective, $160 million is just under 10% of the company's total sales for 2012. The company is also expanding production to meet demand for tankers cars and management is targeting an annual build rate of 3,800 tanker cars by year end 2013: a 280% increase on 2012's total production of tanker cars..

Billionaire support
Meanwhile, Icahn Enterprises LP (NASDAQ: IEP  ) has recently formed a joint railcar leasing venture with its chairman Carl Icahn. Icahn Enterprises will provide cash and railcar assets worth $737 million to the new venture, American Railcar Leasing LLC, which is designed to capitalize on the highly lucrative railcar leasing industry. Icahn Enterprises already holds a controlling interest in American Railcar Industries, which itself has a large and growing leasing fleet of 32,500 railcars generating an average return on investment of nearly 10% annually. According to one estimate, the new American Railcar Leasing LLC will generate operating income of around $120 million for Icahn Enterprises during fiscal 2014, which is a return on investment of 16.3%...not bad.

Wrong side of the fence
Unfortunately, FreightCar America is set to lose out as the company does not manufacture tanker cars. Actually, the company specializes in coal and hopper (grain) railcars, two commodities with falling cartloads being transported. Indeed, during the first half of this year, FreightCar's revenues collapsed a staggering 80% from the same period the year before as the number of railcars delivered by the company collapsed from 2,800 during the second quarter of 2012 to only 700 during the second quarter of 2012. All of this is bad news, and with the volume of coal and grain transported on the railroads set to continue to decline, it does not look as if FreightCar's position will improve anytime soon.

Foolish summary
The oil-by-rail boom within the US is gaining traction, and there are numerous ways to profit. However, the best way would appear to be through either Icahn Enterprises or American Railcar Industries, both of which have sizable, highly lucrative railcar leasing fleets.

On the other hand, FreightCar is unlikely to benefit from this boom, and the company is struggling with falling demand for its coal and gain railcars. 

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  • Report this Comment On October 17, 2013, at 3:39 PM, DanielGl wrote:

    Pick yourself up a copy of this months RailWay Age before you comment again about falling grain carloads. Sure they fell because last year we were in drought and the harvest was very weak. This year the harvest will be a bin buster in all commodities across the board. Railroads have retired older smaller grain hoppers 263,000lb capacity and have not been buying near enough 286,000lb cap cars. This will change soon. I for one will think that AGAIN they will get caught short car wise for the harvest and hopefully they can find enough relics in the storage line to make up the shortfall.

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