Icahn Tank-Car Maker Joins Industry Defying Oil’s Decline
Surging railroad tank-car orders at companies owned by billionaires Warren Buffett and Carl Icahn are defying an oil price drop that threatens to slow the U.S. drilling boom.
Even with crude falling to a post-2011 low, manufacturers including Buffett’s Union Tank Car and Icahn’s American Railcar Industries Inc. can’t meet demand. The order backlog reached an all-time high last quarter after bookings for 42,900 freight and tank cars, the most in 27 years of data compiled by Bloomberg News.
Producers such as Greenbrier Cos. and Trinity Industries Inc. are expanding as buyers seek more tank cars to move surging oil shipments and get ahead of a U.S. regulatory decision that may take thousands of units already in use off the tracks. The order buildup will ensure a good 2015 no matter where oil goes, said Michael Baudendistel, a Stifel Financial Corp. analyst.
“Deliveries will be sustainable for the next several quarters because the backlogs are so long,” Baudendistel said in a Nov. 4 telephone interview from Baltimore. “It should give them an opportunity to build those cars at high volume and relatively high margins.”
While rail-equipment stocks have slumped this quarter on concern that crude’s decline will damp tank-car orders along with crude output, customers are still lining up. On Nov. 3, Trinity said it will deliver 8,950 cars, most of them tank cars, to lessor GATX Corp. over four years starting in 2016.
That’s almost as many cars as 2009’s industrywide order total of 9,250, according to Railway Supply Institute data compiled by Bloomberg.
“We correctly predicted that lease rates on tank cars were going to go up explosively,” Icahn said yesterday in a telephone interview, recalling American Railcar’s unsuccessful bid for Greenbrier in 2012. Since then, Greenbrier has jumped more than threefold and American Railcar has doubled.
The need for cars is spreading beyond the oil industry as shippers move more grain, chemicals, construction materials and autos, according to Stifel’s Baudendistel. Railroads have added locomotives and cars this year to ease track congestion that has slowed trains and triggered service complaints.
U.S. Silica Holdings Inc., which mines sand used in hydraulic fracturing, has struggled to acquire new cars because of the wait times, CEO Bryan Shinn said on an Oct. 30 conference call with analysts. The Frederick, Maryland-based company has more 6,500 small-cube covered hoppers to move sand, and expects to add about 2,500 by next year.
“Railcars continue to be in short supply,” Shinn said, and lead times now run as long as two years.
Eric Marshall, a fund manager at Hodges Capital Management Inc. in Dallas, predicts elevated railcar demand for at least a couple of years. The drop in railcar stocks in October prompted Marshall to snap up Greenbrier shares. He said Hodges already held a “full position” in Dallas-based Trinity.
“We like the valuations here relative to the earnings and cash flow relative to earnings,” Marshall said. “The fears over trying to time the cycle are probably overdone.”
Trinity plunged 18% in the last month and Lake Oswego, Oregon-based Greenbrier fell 11%. American Railcar, which is 56% owned by Icahn, slid 6.7%. Union Tank Car, owned by Buffett’s Berkshire Hathaway Inc., doesn’t trade separately. Buffett didn’t respond to a request for comment sent to an assistant.
Even Icahn said bullish sentiment on railcar producers is no longer as clear as in the early days of the shale boom, when there were few tank cars to haul oil.
“Two years ago it was a no-brainer,” Icahn said. “Now, it’s no longer a no-brainer.”
The equipment manufacturers missed out on a 2.8% rally in the Standard & Poor’s 500 Index in the last month. Investors are wary because the industry has a “propensity to overbuild” during good times, said Art Hatfield, an analyst with Raymond James & Associates Inc. in Memphis, Tennessee.
With new factory capacity coming online, the cycle for strong tank-car demand may revert as soon as next year, especially if lower oil prices curb U.S. drilling, he said.
“They’re going to start pumping out between 20,000 and 25,000 cars a quarter and I just don’t see the orders coming in at that same level,” said Hatfield, who has an underperform rating on Trinity, Greenbrier and St. Charles, Missouri-based American Railcar. “I think the backlog gets worked down quite significantly next year.”
Unfilled orders stood at about 124,000 at the end of the quarter. In the five years through June, quarterly bookings averaged about 15,000, according to data compiled by Bloomberg.
A drop in oil prices won’t have an immediate impact on U.S. drilling. Even if crude slumped to $60 a barrel, companies would keep producing at existing wells while curbing exploration, Hodges’s Marshall said.
That would prop up a flow of railroad-borne oil that surged to 415,000 carloads last year, more than a 40-fold increase from 2008, according to the U.S. Transportation Department. Carriers including BNSF Railway Co., also owned by Buffett’s Berkshire, and CSX Corp. are among the beneficiaries of new drilling techniques letting producers tap shale-rock formations such as North Dakota’s Bakken region, where there are few pipelines.
Manufacturers are bracing for new tank-car rules that may come as soon as early 2015. Following a series of fiery crude-train crashes, including the Quebec derailment that killed 47 people last year, the Obama administration proposed three design options in July for making the cars safer.
Under the most-rigorous standard, the 80,000 units now in use would be difficult to retrofit, said Dick Kloster, senior vice president of business, strategic development and technical services at rail consultant AllTranstek in Downers Grove, Illinois. Even with the most relaxed rule, about 50,000 tank cars probably would be scrapped instead of upgraded, he said. That could fuel more demand for new, compliant equipment.
“I don’t think all those cars are in the backlog by a far stretch,” Kloster said.
With rail traffic rising at 4.5% this year through September and railroads adding cars to improve service, orders should remain strong, said Stifel’s Baudendistel, who has a buy recommendation on Trinity and a hold on Greenbrier and American Railcar.
Only an economic slowdown that stalls cargo growth will crimp railcar sales, he said.
“If rail traffic continues to rise and the productivity of the railroads isn’t solved, the demand will continue be at a historically high level and the railcar builders will have plenty of volume,” Baudendistel said. “The way things are trending it seems like orders will continue to come in.”
