Kirby (KEX)

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Amit Amin

Kirby Corporation (NYSE: KEX) is the largest owner and operator of tank barges in the U.S., with more than 1,000 barges and towboats that are used to transport liquid goods - mostly oil products - on inland rivers. Marine transportation of chemical products in key areas like the Mississippi River System and Gulf Intracoastal Waterway provides over 80% of its revenue. Diesel engine services and overhauls account for the rest. ^[1]

With a fleet of inland tank barges twice as large as its biggest competitor, Kirby offers customers a fast delivery time and benefits from economies of scale in purchasing equipment and marketing its services. ^[2]Around 66% of Kirby’s revenue comes from petrochemical transportation, and higher demand for petrochemicals led to increased production of 3%, 8%, and 1% in the first, second, and third quarters of 2007 respectively.^[3][4][5] Key customer Exxon Mobil as well as many others have production centers on Kirby’s inland river routes. Capturing the greater transportation needs of these companies has fueled revenue growth of 22.4% in 2007.^[6] Kirby earns revenues from renting ships for a flat fee per day and from contracts including crew and fuel costs. Expenses grew at 16% in 2007, 6% less than revenue growth, caused in part by greater usage of Kirby’s barges, and is reflected in income growth of 28% in the marine transportation segment.^[7][8]

Business and Financials

In the first quarter of 2008, quarterly earnings were 46.5% higher than last year, annual operating income was 30% greater, and operating margins were at a high of 18.86%. The company has a market capitalization of $2980 million, and revenues of $1,172 million in 2007 ^[9]

Kirby Corporation operates two business segments:

• Marine Transportation: Kirby Inland Marine operates 32% of the tank barges on US waterways. Kirby transports bulk liquid products; 66% of transportation revenues come from petrochemicals and 20% from black oil products.^[11]

• Diesel Engine Services: Kirby Engine Systems sells diesel engine parts and services and overhauls medium and high speed diesel engines and reduction gears. Kirby serves marine, power generation, and railroad companies through three subsidiaries: Engine Systems, Inc., Marine Systems, Inc., and Rail Systems, Inc. Revenues from this segment account for less than 20% of Kirby’s overall revenue.

Poor weather in 2007 increased average barge delays by 9%, lowering efficiency. Contract prices increased 6% to 10% and spot market rates increased 12% to 13% during the same time period.^[12] Last year, 75-80% of Kirby’s marine transportation revenues came from long term contracts, while 20-25% came from prices based on current market prices, ie. spot market rates.^[13] The cost of new barges has increased substantially due to demand, but has not affected short-term profitability. An aggressive acquisitions strategy combined with high demand for marine transportation has created consistent growth in revenues/ton mile. This is important because it reflects continued growth in barge usage and demand relative to supply, fending off concerns of market saturation.

Trends and Forces

Rising Oil Prices Increase Appeal of Marine Transportation

The average cost per ton-mile of rail transportation is 3 times greater than that of marine transportation, and truck transportation costs are 37 times greater than moving goods by boat. Furthermore, the ton mile per gallon of fuel of one barge is 40% greater than a rail car, and 270% greater than a truck’s.^[15] As fuel prices rise companies have an incentive to choose slower, but more cost-effective, marine transportation. As the largest inland barge operator, Kirby is positioned to increase its customer base as budgets are squeezed by high oil prices. Fuel cost recovery clauses neutralized the impact of more expensive diesel fuel for Kirby’s barges in 2007.^[16]

Rising Steel Prices Raise Replacement Costs of Kirby’s Aging Fleet and May Lead to Market Saturation

In order to take advantage of high demand for inland liquid marine transportation, Kirby has delayed the retirement of many of its barges. The average age of Kirby’s marine transportation fleet has increased to 24 years, 6 years greater than that of competitor American Commercial Lines.^[17] This oversupply of barges has led to a proportional under-supply of towboats. Replacing the company’s older barges will be very expensive due to higher steel prices, with average construction prices 80% higher than in 2000.^[18] In anticipation of even higher prices, many of Kirby’s competitors have announced their intention to purchase and construct more barges. Market saturation will occur if demand does not continue to rise.

Kirby’s Dependence on Petrochemical Transportation Poses Risk

Volatility in domestic production of petrochemicals significantly impacts the company’s marine transportation segment. Although the Jones Act prevents foreign companies from transporting goods on U.S. rivers, rising oil and labor costs strain domestic petrochemical producers. These factors have yet to increase imports from foreign countries, but will do so if production costs continue to rise. Petrochemical transportation would shift from inland rivers to international waters in this situation. The lower volume of domestic petrochemical transportation would hurt the company’s revenues since 2/3 of Kirby Inland Marine’s revenue comes from the transportation of petrochemicals from one domestic plant or refinery to another. ^[19]

The Inland Marine Liquid Bulk Transportation Industry Is Growing Much Faster Than The Dry Bulk Transportation Industry

Kirby Corp. almost exclusively transports liquid products. Liquid transportation currently represents only 15% of the inland marine transportation sector. As an industry on the rise, the volume of liquid cargo transported increased by more than 10% in 2007. L^[20] The volume of dry bulk shipping, on the other hand, fell by approximately 10% in 2007. In light of this inequality, many transportation companies are increasing their position in the liquid industry, which will increase pressure on Kirby's business.

Competition

The smaller Engine Systems component of Kirby Corp. faces significant competition, but has preferential service agreements with many customers and is one of a limited number of resellers of multiple engine parts. The larger Marine Transportation component competes with other tank barge companies, railroad tank cars, tractor trailer tank trucks, and the fleets of companies who operate refined product and petrochemical pipelines. Marine transportation is 3 to 37 times cheaper than land transportation for bulk liquid products, but is also much slower. ^[21]

Comparison to American Commercial Lines

American Commercial Lines (ACLI) transports dry and liquid bulk cargo. Within the liquid bulk industry Kirby Corp. is the largest inland barge operator, with twice the number of barges as ACLI. Its large fleet allows Kirby to capture customers that want a single source for barge services, and it allows the company to quickly reposition ships to meet short deadlines. However, the average age of Kirby’s fleet is 33% greater than that of American Commercial Lines, meaning the company is likely to incur significant maintenance and replacement costs in the next decade. ^[22][23]

Other Competitors

• Canadian National Railway Company (CNI) operates large freight railroads across Canada and the Mississippi River. The company transports dry and liquid products. In 2006, 20% of its revenue came from U.S. domestic transportation, and 16% of its freight revenues came from petrochemicals, a key component of Kirby’s business.^[30]

• The private company Ingram Marine Group is the largest carrier on the inland waterway system, focused on dredging sand, transporting bulk products, and delivering supplies and fuel to the towing industry. The company focuses almost exclusively on dry shipping, but has stated that expanding in the liquid sector is “Key to Sustaining Profitability”.^[31]

References

1. ↑ KEX 2007 10-K, Item 10, Page 51
2. ↑ Hoovers Barge Industry Overview
3. ↑ Thomas News Petrochemical Inventories April 30, 2007
4. ↑ NPR Petrochemical Survey
5. ↑ NPR Petrochemical Survey
6. ↑ KEX 2007 10-K, Item 1, Pg 2
7. ↑ Yahoo! Finance
8. ↑ KEX 2007 10-K, Item 6, Page 25
9. ↑ Yahoo! Finance
10. ↑ KEX 2007 10-K, Item 1, Page 2
11. ↑ Kirby Investor Relations
12. ↑ Kirby Investor Relations
13. ↑ KEX 2006 8-K, Item 2, Page 8
14. ↑ 2006 8-K, Item 2, Page 5
15. ↑ American Commercial Lines JPMorgan Presentation March 19, 2008
16. ↑ KEX 2006 8-K, Item 6, page. 25
17. ↑ KEX 2007 10-K, Item 1, Page 2
18. ↑ KEX 2007 10-K, Item 1a, Page 21
19. ↑ KEX 2007 10-K, Item 1a, Page 7
20. ↑ | Hoovers Industry Overview
21. ↑ American Commercial Lines JPMorgan Presentation March 19, 2008
22. ↑ KEX 2007 10-K, Item 1, Page 2
23. ↑ American Commercial Lines JPMorgan Presentation March 19, 2008
24. ↑ Yahoo! Finance
25. ↑ Yahoo! Finance
26. ↑ American Commercial Lines Investor Presentation May 21, 2007
27. ↑ American Commercial Lines Investor Presentation May 21, 2007
28. ↑ Yahoo! Finance
29. ↑ Yahoo! Finance
30. ↑ Canadian National Railways Factsheet
31. ↑ Ingram Investor Relations