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Cheapest Gas Buoys Kirby Shipping Dow Chemicals: Freight Markets

Dow Chemical Co. is among customers calling on vessels and vehicles to haul their gas-derived products to railways, ports and other facilities as they expand production in the U.S., where the fuel costs less than half what it does in Europe or Asia.  Photographer:Frank Polich/Bloomberg
Dow Chemical Co. is among customers calling on vessels and vehicles to haul their gas-derived products to railways, ports and other facilities as they expand production in the U.S., where the fuel costs less than half what it does in Europe or Asia. Photographer:Frank Polich/Bloomberg

The world’s cheapest natural gas means Kirby Corp. barges are making more trips along the Mississippi River and Quality Distribution Inc. tanker trucks are rolling along America’s highways more frequently.

Dow Chemical Co. is among customers calling on vessels and vehicles to haul their gas-derived products to railways, ports and other facilities as they expand production in the U.S., where the fuel costs less than half what it does in Europe or Asia. The share of Kirby’s ships in use has reached the highest in almost three years, and Quality is generating more revenue from each truck than it did before the last recession started.

“Kirby is the 800-pound gorilla on the water, and Quality is the Kirby on the road,” said Kevin Sterling, a senior analyst at BB&T Capital Markets in Richmond, Virginia, who has a “buy” rating on both companies. “They’re both in businesses that are growing despite headwinds of an economic recession.”

Even as U.S. economic growth cools to the slowest pace since the recession ended in 2009, both companies are moving more chemicals, like ethylene and benzene, made from natural gas. Demand for the household goods containing these products, which include water bottles, mouthwash and diapers, tend to “hold up pretty well in a slow-growth environment,” according to Joe Pyne, Kirby’s chairman and chief executive officer.

“The U.S. economy is anemic at best, yet our business is doing well,” Pyne, who has been at Houston-based Kirby since 1978, said in an interview. “Although you do hear rumblings about a global slowdown, we certainly haven’t seen it.”

Shipments Overseas

Railcar loadings of chemical products, a proxy for demand, have risen an average 4.4 percent year-over-year into the week ended Sept. 10, Association of American Railroads data show.

Overseas demand for petrochemicals has also held up. Exports to Brazil, Europe and Asia have gained “appreciably” this year, and overall shipments to other countries are up about 10 percent to 15 percent year-over-year, said Kevin Swift, the American Chemistry Council’s Washington-based chief economist.

“Freight flows all say that the economy is continuing to grow,” said Donald Broughton, a senior transportation analyst at Avondale Partners LLC in St. Louis, who has an “outperform” rating on Quality. “Somebody has to provide the first and last mile because it can’t get everywhere via pipeline and rail.”

Shares of Kirby have returned 28 percent since the end of last year, while Quality is up 9.5 percent. Both are members of the Russell 2500 Index, a small-to mid-cap barometer of U.S. equities that’s declined 9.3 percent in the same period on concerns the global economy is slowing.

With 837 vessels, Kirby owns about a third of the U.S. tank barge fleet, making it the largest and only publicly traded liquid product mover on the nation’s inland waterways. Because of the Jones Act, a federal law restricting domestic marine transportation, Kirby has no foreign competitors.

Petrochemical Transport

Almost 70 percent of Kirby’s transportation revenue comes from petrochemicals, while about 30 percent comes from hauling petroleum products, such as crude oil, asphalt and gasoline, the company said in its second-quarter report.

Quality, based in Tampa, Florida, takes over when chemicals need to be transported on land. The operator of the country’s biggest network of chemical bulk tank trucks, it manages 29 independent affiliates. Quality accounts for about 14 percent of the $4 billion chemical and food transportation market, the company told investors in a March presentation.

“Quality Distribution is a travel agent for chemicals,” said Peter Nesvold, a senior analyst at Jefferies & Co. in New York, with a “hold” rating on the company. “They don’t own the tractors and don’t have drivers directly on their payroll. They get paid to match buyers and sellers.”

Joseph Troy, the chief financial officer at Quality, said his company declined comment for the story.

‘Game Changer’

Fuel from shale formations across North America has sent the country’s natural gas prices down and led Dow and others to build new plants to produce petrochemicals in the U.S. for the first time since 2001. Dow is the third-largest ethylene maker in the country by annual capacity, according to data compiled by Bloomberg Industries.

“The shale gas revolution is a game changer,” the chemistry group’s Swift said. “Outside the Middle East, we have the lowest natural gas costs in the world, which gives us a distinct advantage. If there was a free market in the Middle East, it would be priced comparable to what we pay in the U.S.”

Natural gas at the Henry Hub in Erath, Louisiana, the benchmark U.S. pricing point for New York Mercantile Exchange futures, reached a 6 month-low this week, before gaining 5 cents, or 1.3 percent, to $3.83 per million British thermal units at close yesterday. In Canada, it traded at $3.64 per million Btu. Gas in the U.K. was trading at $8.48 and Germany at $9.72, while gas in Japan was $14.54.

The Marcellus

The Marcellus Shale formation, which stretches from New York to Tennessee, alone contains about 84 trillion cubic feet of recoverable natural gas along with 3.4 billion barrels of natural gas liquids, according to the U.S. Geological Survey.

Production of such gas-derived chemicals as benzene and ethylene will expand 5.6 percent in the U.S. this year and 3.1 percent in 2012, according to Swift’s group’s July mid-year outlook. As intermediates, petrochemicals are used in materials ranging from automotive antifreeze to nylon fiber.

At Quality, revenue per truck is up 4.3 percent on a year-over-year average basis, rising in the second quarter to $3,467, the highest since at least 2004, according to Broughton. He said he expects the figure, which is a proxy for shipment volumes, to climb 5.9 percent for the full year.

Kirby’s utilization, a measure of fleet usage that affects the amount it can charge for transport, exceeded 90 percent from April to June, the highest since the third quarter of 2008, according to its second-quarter report. Pyne said he expects the rate to hold near that level in the third quarter.

Hydraulic Fracking

The shale formations are also adding to Kirby and Quality’s revenue as both become involved in natural gas extraction. Hydraulic fracturing, known as fracking, pumps millions of gallons of water, sand and some chemicals underground to break apart rock formations and release the fuel.

An additional 30 percent to 40 percent of Kirby’s revenue comes from servicing, selling and manufacturing diesel engines. In April, it bought United Holdings, which makes the equipment used in fracking. The purchase increased the engine segment’s operating income by 328 percent from the second quarter of 2010, the company told analysts in a July 28 teleconference.

Opening a gas well with fracking requires a constant flow of fresh water for 21 days, and during the well’s 30-year life it will produce wastewater 24 hours a day, BB&T’s Sterling said. Trucks used in fracking generate about $300,000 per year, compared with $100,000 from chemical trucks, he estimates.

Quality announced on Aug. 1 it would provide logistics services for 100 trucks to move fresh and disposal water in the Marcellus Shale region, which management expects to generate between $30 million to $40 million in revenue in 2012.

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