A recent rise in the number of incidents involving trains carrying crude oil has brought the issue of tanker car safety under the eyes of regulators, and according to The Greenbrier Companies (NYSE:GBX) CEO William Furman around 80,000 tanker cars don't meet current safety standards and need to be replaced or retrofitted. This massive overhaul is going to be a boon for tanker manufacturers like Greenbrier and peer American Railcar Industries (NASDAQ:ARII), but it is likely to be an expensive problem for the likes of GATX Corporation (UNKNOWN:GMT.DL) and even Icahn Enterprises (NASDAQ:IEP).
A booming industry
The oil boom within the U.S. has created a transport problem. Bottlenecks and political wrangling have slowed down the transport of crude by pipeline. In addition, many pipelines do not reach the regions required, leaving producers with only one other option for transportation: rail.
Unfortunately, the demand for oil-by-rail has increased the risk of incidents as the country's rail network becomes overworked. Sadly, this risk has become more real of late as a number of serious incidents have taken place.
Nevertheless, the rising demand for tanker cars to transport oil by rail has been a dream come true for American Railcar and Greenbrier. What's more, if around 80,000 tanker cars now need to be replaced, things could be about to get a lot better.
On your marks
Greenbrier is rising to this upcoming challenge and in the words of William Furman the company is "well positioned to respond" to shippers' retrofitting or new build needs. The company is increasing its production capacity 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.
Meanwhile, thanks to a strong demand for tankers cars, American Railcar is also increasing manufacturing capacity. The company shipped 1,640 railcars during the third quarter of 2013, up from 1,460 the year before.
Unfortunately this could be bad news for GATX
GATX leases 117,000 railcars within the U.S., 22,000 within Europe, and 46 within India, but the company has no production operations like Greenbrier and American Railcar. As a result, it is likely that GATX will need to spend a lot of cash to get its tanker lease fleet up-to-date when new regulations come in.
It's not possible to come up with a figure of how many tanker cars GATX has or is likely to need to replace but with over 117,000 railcars currently on lease within in the U.S., we can assume that the company will have several thousand tanker cars that will need to be updated within its lease fleet.
Actually, GATX was founded in 1919, so it is likely that the company will have a number of older tanker cars that need to be replaced.
But how will Icahn Enterprises be affected?
Icahn Enterprises has been trying to muscle in on the highly lucrative railcar leasing market and formed a joint venture at the end of last year with chairman Carl Icahn. The new venture, called American Railcar Leasing LLC, received nearly $1 billion in assets and cash from Icahn Enterprises, which already has its own leasing operations and 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. However, if the company is forced to retrofit, or even worse, replace its rental fleet due to new industry safety standers, these returns could be significantly lower.
So, to sum up...
With an estimated 80,000 tanker cars within the U.S. in need of replacement or refitting to comply with safety regulations, Greenbrier and American Railcar could be about to report a surge in orders. Unfortunately, GATX is going to be one of their main customers as the company is likely going to need to spend a lot to get its tanker fleet back up to scratch. Investors would be wise to keep an eye on industry developments during the next few months.