Greenbrier Cos Inc. (GBX) and American Railcar Industries Inc. (ARII) can’t expand their fleets fast enough as demand for sand used in the hunt for oil and natural gas helps power U.S. railcar production to a three-year high.
“Everybody is asking for cars right now,” Dale Davies, chief financial officer at American Railcar, said in a telephone interview from his Saint Charles, Missouri, office. “Everybody is trying to ramp their capacities up as much as they can. We’re pretty much full for 2012.”
Companies involved in oil and natural gas production such as Chesapeake Energy Corp. (CHK) are thriving even as 9 percent unemployment, a depressed housing market and stagnant incomes restrain the economy. Their demand for railcars is creating jobs and boosting earnings at railway suppliers as the industry piggybacks off the drilling resurgence from Pennsylvania and Wyoming to North Dakota and Texas.
Trains transport as much as 2,500 tons of sand for a single hydraulic fracturing project, which involves splintering open tiny cracks about a mile beneath the earth’s surface to unlock stores of petroleum and natural gas. When the so-called fracking is complete, a different set of railcars hauls out the thousands of barrels of newly discovered fuel.
“Energy transformation is afoot in North America,” William Furman, chief executive officer at Lake Oswego, Oregon- based Greenbrier, said on a Nov. 3 conference call with analysts. “Demand for railroad, railcars and railroading has uncoupled from the overall economic drivers which have long linked the industry to gross domestic product and the economic health of the nation.”
Highest Since 2008
The need to move fracking components has helped push the number of railcars waiting to be built to 65,044, the highest level since 2008 and the seventh consecutive quarterly increase, according to Steve Barger, an analyst at Keybanc Capital Markets Inc. in Cleveland, citing Railway Supply Institute statistics.
Shares of Greenbrier, American Railcar and Trinity Industries Inc. (TRN) have outpaced the Russell 2000 Index (RTY) since the end of 2010 even after they lagged behind from August through September amid growing concern that the economy was slipping into a recession.
“Given the strong correlation between industry backlog and the share prices (84 percent), we think strong bookings in the third quarter will drive upside to the shares, supporting our belief that the pullback in the group has been driven more by macro concerns rather than actual deterioration in industry fundamentals,” Barger wrote in an Oct. 16 research note.
The energy industry may require 50,000 new railcars in the next three to four years in addition to the ones already in backlog, said Barger, who recommends shares of Greenbrier, Trinity and American Railcar. Orders for small cube covered hoppers, the containers used to transport sand, may total 30,000. Tank cars to ship the oil would make up the rest, he wrote.
“If you want a car, you’re going to pay a higher price for it right now simply because there are no available build spots left,” Barger said in an interview.
Greenbrier’s backlog was about 15,400 railcars by the end of August, the company said last week. At Trinity, it stood at 27,885 railcars by Sept. 30, the Dallas-based company said. American Railcar and FreightCar America Inc. (RAIL), the other publicly traded U.S. manufacturer, reported 7,100 and 6,311 backlogs in the same period.
“The manufacturers can now be a little more choosey about what they take because their backlogs are growing, which makes their price margin more significant,” said Paul Bodnar, an analyst at Longbow Research in Independence, Ohio, who has “buy” ratings on Trinity and Greenbrier. Hoppers currently cost between $70,000 and $90,000, while tank car prices range from $80,000 to $110,000, he said.
Hydraulic fracturing has opened up vast regions of the U.S. to drilling, helping make the U.S. less dependent on imported oil.
The Marcellus Shale formation, which stretches from New York to Tennessee, contains about 84 trillion cubic feet of recoverable natural gas, according to the U.S. Geological Survey. The Bakken formation, located in North Dakota and Montana, has about 3 billion barrels to 4.3 billion barrels of recoverable oil, the USGS estimates.
“We have a hard time finding labor,” Chesapeake Chief Financial Officer Nick Dell’Osso said during an Oct. 4 investor conference. “We have a hard time contracting for railcars. We have a hard time finding truck drivers and diesel mechanics. When the rest of the economy seems to be falling apart, it creates an interesting dichotomy for us.”
A typical completed well in the Bakken will produce about 1,000 barrels of oil per day in its first year before dwindling to about 100 barrels per day in five years, according to the North Dakota Department of Mineral Resources. Barger said the tank cars can generally carry about 750 barrels of crude oil.
While each project varies, fracking one well may require between 125 tons to 2,500 tons of sand, according to Jim Gipson, a spokesman for Chesapeake. The mineral, along with several other components, is used to hold open fissures in shale formations, allowing gas and oil to escape.
About 7.2 million tons of frack sand were consumed in 2009, the most recent year for which data are available, according to Thomas Dolley, a mineral commodity specialist at the USGS. Production grew more than 300 percent from 2001 to 2009. It likely doubled from 2009 to 2010 and will increase again this year, Dolley said.
Hoppers can carry about 100 tons of sand, Keybanc’s Barger said. One fracking project may require as many as 25 carloads.
“The frack-sand market has resulted to grabbing anything that will feasibly work,” Bodnar said a fleet operator in the Midwest told him. Some shippers have even resorted to employing containers not typically meant to haul sand, he said.
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