Kirby (KEX) Corp., the biggest owner of tank barges on U.S. waterways, says its chemical-carrying vessels are running at full capacity as slumping prices for natural gas used to make the products spur record exports.
The U.S. shipped $14 billion of chemicals in the first two months, 4.2 percent more than a year earlier and extending the record $86.9 billion sold in 2011, Census Bureau data show. Kirby’s barges will earn the most since at least 2004, according to Evercore Partners Inc. (EVR), an investment bank. Shares of the Houston-based company will rise 20 percent in 12 months, the average of 11 analyst estimates compiled by Bloomberg shows.
Natural-gas slumped to a 10-year low in New York last month after the fourth-warmest winter on record cut demand as supply expanded. That’s driving down feedstock costs for Dow Chemical Co. (DOW) and other U.S. producers at a time when competitors using crude oil are paying the most ever. The cargo surge is aiding President Barack Obama’s 2010 goal of doubling exports by 2015.
“Kirby is completely unique in the public market as a way for investors to play the comparative advantage in U.S. natural gas prices,” said Jonathan Chappell, an analyst at Evercore in New York. “Improving manufacturing and petrochemical production means more movement on barges.”
Kirby barges will earn 8.04 cents per metric ton of cargo moved a mile in 2012, an industry measure known as ton-mile, 5.9 percent more than in 2011, Chappell estimates. Its fleet, accounting for 26 percent of U.S. inland tank barges, will have a utilization rate of 95 percent this quarter, the most possible, said Steve Holcomb, the company’s vice president for investor relations.
Shares of Kirby rose 20 percent to $65.39 in the past year in New York trading, compared with a 21 percent drop in the Lloyd’s List-Bloomberg Top 50 Shipping Index Value of the 50 largest companies operating everything from oil tankers to container and chemical carriers. The stock will reach $78.36 in 12 months, the estimates compiled by Bloomberg show.
The company will report record profit of $226.5 million in 2012, 23 percent more than last year, the mean of 10 analyst estimates shows. Eleven of 14 analysts covering the company and tracked by Bloomberg recommend buying the stock, while the rest have a “hold” recommendation.
The U.S. met 81 percent of its energy demand in 2011, the most since 1992, according to Energy Department data compiled by Bloomberg. The country became a net exporter of refined petroleum products for the first time since 1949 last year, adding to demand for Kirby’s vessels. Shipments of gasoline, diesel fuel and other products surpassed imports by an average of 439,000 barrels a day in 2011, according to the department.
Petrochemicals including benzene and styrene, used to make everything from plastics to paints, account for 65 percent of the cargoes on Kirby’s tank barges, Holcomb said. First-quarter U.S. chemical production rose 1.3 percent from a year earlier, estimates the American Chemistry Council, a Washington-based industry group. The capacity of the barge fleet increased by an annual average of 1 percent or less over the past 19 years, according to Kirby.
Demand for chemicals, and the barges that carry them, may weaken on signs that the global economic recovery is weakening. China’s first-quarter gross domestic product rose 8.1 percent, the slowest pace in almost three years, while India’s economy expanded 6.1 percent in the fourth quarter, from 8.3 percent a year earlier. The 17-nation euro region will contract 0.3 percent in 2012, the International Monetary Fund estimates.
The relative advantage of chemical companies using natural gas would be eroded should prices rally. Gas for delivery in December is trading at a 37 percent premium to supply for June, data from the New York Mercantile Exchange show. That compares with a 2 percent discount in Brent crude, the European benchmark, according to ICE Futures Europe data.
The jump in barge earnings is spurring more orders at ship yards, accelerating capacity expansions. About 230 vessels will be delivered this year and 100 scrapped, translating into net fleet growth of about 4 percent, Evercore estimates. Analysts for now don’t expect that to dent Kirby’s earnings, predicting profit of $256.5 million in 2013, a 13 percent advance, the mean of 10 estimates compiled by Bloomberg show.
Fleet growth is limited because federal law requires them to be built in the country. The regulation, known as the Jones Act, also prevents foreign-owned ships from competing with Kirby for cargoes within the U.S. The next-biggest owners of tank barges are American Commercial Lines LLC and Canal Barge Company, both privately owned.
Rising barge profits contrast with slumping earnings for other types of shipping, where owners face a capacity glut. Rates for Capesizes hauling iron ore dropped 71 percent this year as the fleet swelled 14 percent, data from the Baltic Exchange in London show. The cost of a tanker carrying 2 million barrels of oil has declined for four straight years, in which time the number of vessels expanded 18 percent, according to data from London-based Clarkson Plc (CKN), the world’s biggest shipbroker.
“Once we do have a more sustained recovery in the U.S. and get back to 2008 levels, that will just be extra gravy on top,” said Kirby’s Holcomb.
Demand for chemicals is driven by the consumption of manufactured goods. The Institute for Supply Management’s factory index climbed to 54.8 last month, the best reading since June, according to the Tempe, Arizona-based group. Readings greater than 50 signal growth. The unemployment rate fell to 8.1 percent in April, a three-year low, the Bureau of Labor Statistics said May 4.
Kirby’s largest customers are Dow, the biggest U.S. chemical maker by revenue, and Exxon Mobil Corp. (XOM), the country’s largest oil company, Holcomb said. Dow’s factories ran at 84 percent of capacity last quarter, 12 percentage points more than in the final three months of 2011, Andrew Liveris, chief executive officer of the Midland, Michigan-based company, said on a conference call last month. Exxon will report record sales of $493.6 billion this year, seven analysts predict.
“There’s growth in an industry that’s not seeing a lot of new barges being built,” said Douglas Mavrinac, an analyst at Jefferies & Co. in Houston. “Petrochemicals plants are producing more and also exporting more, and that’s going to go in and out on a Kirby barge.”
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