As recently reported in the Wall Street Journal, shipping oil and other petroleum products by barge has grown substantially since 2010. Barges offer oil producers and refiners flexibility not available with pipeline or rail transportation of oil. Even better, barge costs about 30% less than rail. Given the need to get U.S. crude oil to coastal refineries and the cost advantage over rail, use of barges will likely increase. Here are three companies that should benefit from the growing oil barge market.
Moving oil in all kinds of ways
Think "midstream energy company" and Enterprise Products Partners (NYSE:EPD) comes to mind. This company consistently grows its distribution, and the stock generally moves along with it. While not ignoring waterway oil transportation, Enterprise is mainly a pipeline company. Its primary assets and operations focus on both onshore and offshore pipelines delivering oil, natural gas and natural gas liquids. The bulk of its capital expenditures focuses on pipeline and export assets. Its oil barge business is proverbial "icing on the cake" as far as revenues go.
So what about barges? According to its website, Enterprise operates a fleet of 123 oil barges that ply the Mississippi River and Gulf Coast. The company also operates eight ocean-certified oil barges for offshore oil loading. Along with the barges, there are tugboats, a dry dock, and other servicing facilities. The company anticipates 17 new barges to join the fleet between now and 2016. These barge services are part of Enterprise's petrochemical and refined products services division, which generates roughly 13% of the company's revenues.
Also expanding its fleet...
As a smaller sized version of Enterprise, Genesis Energy (NYSE:GEL) expanded its oil barge business last August by acquiring Hornbeck Offshore Transportation. This acquisition adds a fleet of nine barges and nine tugboats that can deliver oil and other energy products along the Gulf Coast, the Great Lakes and to the Caribbean. Genesis had a fleet of inland oil barges; the Hornbeck barges can go where Genesis' original fleet couldn't. The inland fleet will expand by four barges and three pushboats by the second quarter of 2014.
One strategy fit for barge assets within Genesis centers on its Natchez crude oil rail facility. This facility receives heavy Canadian crude oil, or bitumen, for transport to Gulf refineries tooled for heavy oil. As outlined in its most recent investor presentation, the Natchez facility transfers the oil from rail cars to barges that then take the crude to refineries. Many Gulf refineries have more light crude than they can handle, so focusing on moving heavy crude looks like a shrewd move for Genesis.
Like Enterprise, Genesis is primarily a pipeline company. Also like Enterprise, Genesis makes good money moving energy through its pipelines, with a history of consistent distribution increases.
For a pure-play oil barge company...
The largest operator of oil barges in terms of shipping capacity is Kirby Corporation (NYSE:KEX). Kirby operates over 800 inland barges, 72 coastal barges, plus towing vessels that sail along the U.S. inland waterways and the Atlantic, Pacific and Gulf coasts. In addition to oil and petroleum products, Kirby also ships liquid fertilizer and anhydrous ammonia. On top of that, the company offers diesel engine repair and maintenance services to both marine and land-based customers.
What has Kirby been doing for its investors? After taking a hit during the summer of 2012, the company's stock has climbed from about $47 a share in August 2012 to about $100 a share today. This growth in price follows a growth in earnings, from $3.73 a share in 2012 to $4.44 a share in 2013.
What of the future? U.S. energy production continues to demand more transportation services, including barge transportation to the Atlantic and Gulf coasts. Exports of refined petroleum products continue to increase, and Kirby has the assets to capitalize on both of these growing markets. Additionally, Kirby is adding capacity in 2014, particularly to its inland fleet. Lastly, the increased demand for liquid energy transportation has resulted in increased pricing and contracts terms.
Final Foolish thoughts
One unexpected problem from all the U.S. oil production, particularly in the Bakken and Niobrara plays, is the oil is far from Atlantic coast refineries. These refineries have been using rail and barge transportation to make up for the lack of pipeline capacity.
For perspective, many Atlantic refineries use West African this is roughly $2 a barrel more expensive than Brent crude. With Bakken oil typically trading at a slight discount to West Texas Intermediate, itself about $10 a barrel cheaper than Brent, refiners have a major incentive to ditch West African for Bakken crude. Using barges can make that happen faster than building a railroad or pipeline to the refinery. This, in turn, gives midstream companies another way to make money moving oil.
All three of these companies will benefit from increased oil barge traffic, Kirby most of all. Kirby projects earnings of $4.75 to $4.95 a share for 2014, compared to $4.44 a share for 2013. Given the relatively high price-to-earnings ratio of 22 and price-to-earnings growth ratio of 2.14, the market seems to have priced much of this growth into the stock. Might be best to wait for a pullback in price before investing.
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Robert Zimmerman has the following positions: short March 2014 GEL 47.5 puts. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.