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Hitting home runs with US Jones Act companies

Hitting home runs with US Jones Act companies
The health of the US coastal trades can be seen explicitly from the recently announced second quarter 2013 results for New York-listed Kirby Corporation. Kirby, best known as a consolidator in the brown-water inland and intra-coastal barge business, has made forays into coastal deepsea barge transportation in recent years. Most notably, it acquired K-Sea in mid 2011 and Allied Towing a year, later during the summer of 2012.

The acquisitions were based on opportunities to sell their barging capacity synergistically to the big oil and chemical companies, rather than due to any great foresight about the Jones Act, now booming based on new patterns for shipping crude oil and refined products.

On the most recent conference call, Kirby executives talked about an upbeat environment for pricing, done mainly through medium term contracts. Greg Binion, who runs Kirby’s marine transportation group, told investors and analysts, “With respect to coastal marine transportation pricing, term contracts were renewed during the second quarter increased in the high single-digit range, and in some cases higher when compared with the 2012 second quarter. Second quarter spot contract pricing was on the average 15% to 20% higher than term contract pricing.”

Stock analyst Sam Margolin and his team at Cowen Securities indicated that they were using a day rate on a large barge of $20,600 per day in their models, which was exceeded by actuals of $20,900 per day. Utilisation levels in the coastal fleet reached above 90%, during the just completed second quarter, compared to a much less market-responsive 75%, only a year earlier.

A sampling of the Wall Street stock analysts following Kirby reveals a plethora of “Buy” or “Overweight” recommendations to investors. Evercore’s analyst Jon Chappelle, with allusions to baseball, told clients that: “…we believe that the coastal pricing improvements are in the early innings of the cycle,” in a memo where his firm’s pricing target was increased.

Analyst Doug Mavrinac, from Jefferies, expressed a view that: “…the coastal market should continue to strengthen in 2H 2013 / 1H 2014, as a result of increased crude transport volumes emanating from increased shale production, while a significant portion of the of US Jones Act coastal fleet is expected to be retired in 2014 due to regulatory reasons.” Cowen’s Margolin tied his strong estimates of day rates and utilisation numbers to “…continued east-west Gulf of Mexico crude imbalance…” and “accelerated pipeline delivery into the Gulf of Mexico.”

Broker chatter continues to point to strength in coastwise crude oil movements; after a bleak period in 2008-2010, several Jones Act pure-plays were absorbed into larger entities or otherwise restructured. Sources suggest that the coastwise sector’s strength- generating cash is supporting renewed financing initiatives, which are cash consumers. Kirby, as a listed company, is a proxy for less visible peer companies. A lengthening runway to support capital expenditures can be inferred from Cowen’s report, with the broker saying that coastal strength will outweigh the extended cash return timeline resulting from heavy capital expenditures occurring in 2013.

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