2 Companies That Will Benefit From Rising Oil Production and 1 That Won't
On the face of it, it would appear that many investors consider the only way to the United States' domestic oil boom is via domestic exploration and production companies such as EOG and Pioneer Natural Resources.
However, there are other ways to play the revolution, and these range from oil pipelines to refiners and railroad companies.
Nonetheless, the most obvious of these opportunities, such as GATX, the largest railcar leasing company in the world, and Kinder Morgan Energy Partners, one of the largest hydrocarbon storage and transportation partnerships within the United States, currently look overvalued at current prices.
That said, there are other opportunities available in the market.
The runt of the litter
Unfortunately, one company that is suffering from rising oil and gas production is FreightCar America . FreightCar primarily focused on the production of railcars that transport coal and grain. This is unfortunate as the use of coal for the generation of electricity is now declining as natural gas takes its place as a cleaner more cost effective method of power generation.
Indeed, the company only delivered 937 railcars during the third quarter of 2013, which is around half the number of railcars delivered during the third quarter of 2012.
Still, the company's order backlog exploded during the quarter with an order for 4,000 rebuilt coal cars. This one order more than doubled the company's order backlog which only stood at only 2,065 at the end of the second quarter.
Unfortunately, high operational gearing including a gross margin of only 8% and high corporate costs mean that FreightCar America is struggling to turn a profit. In particular, the company reported a net loss of $7 million for the first nine months of this year on sales of $210 million.
In comparison, during the same period last year, FreightCar America turned over $561 million, to report a net profit of $20 million.
The shining star
In comparison, American Railcar Industries is blossoming. American Railcar differs from FreightCar as American manufactures tanker cars for the transportation of oil. This is a market currently experiencing strong demand. Indeed, the total industry backlog for tanker cars is nearly 48,000, nearly three years worth of manufacturing capacity.
American Railcar itself put together 1,640 railcars during the third quarter, 280 of which are for the company's highly lucrative rental fleet.
American Railcar is also pushing into the railcar leasing market, which is highly lucrative. In particular, industry leader GATX Corporation achieved a 14% return on leased railcar assets within North America during the company's fiscal third quarter.
American Railcar is as of yet unable to achieve similar returns as its fleet is nowhere near the same size as that of GATX. For example, during the fiscal second quarter American Railcar reported an operating profit of $4.3 million for its leasing division on assets of $321 million, a return on assets of 5.3%.
Still, American Railcar is investing heavily in its rental fleet, adding an additional 280 cars to its leasing fleet during the third quarter. In addition, the company has 2,430 new railcars in its backlog destined for its leasing fleet, which should increase the company's rental fleet by approximately 60%.
All in all, this should improve the company's leasing efficiency, driving up margins and ramping up recurring leasing revenues. Fleet growth, along with record lease rates should be highly beneficial to American Railcar's earnings during the next few years.
Pipelines are also interesting plays
If railroads are not your cup of tea then Oiltanking Partners could offer growth at a reasonable price. Oiltanking is engaged in the terminating, storage and transportation of crude oil, refined petroleum products and liquefied petroleum gas.
Oiltanking has been ramping up capital spending during the last year or so to increase its operational capacity. It would appear that this spending is starting to pay off. However, I should say that at the end of the company's third quarter, total debt had exploded 352% year on year but on a debt-to-assets basis the company looked comfortable with total debt only amounting to 38% of assets.
Still, this debt has not been wasted and sensible investments have driven up year-on-year net income and operating cash flow 75% and 83% respectively.
However, the company has not stopped growing yet, recently announcing $200 million of additional crude expansion projects. This should increase the size of the company's crude distribution network by 30% on an asset value basis.
The company's new projects involve $100 million of two new crude oil pipelines connecting its Houston terminal with Crossroads Junction, a critical distribution point for the Houston market. In addition, the company plans a $100 million expansion of its Appelt facility to add a total of 3.5 million barrels of new storage.
Oiltanking's spending is expected to shine through this year with analysts predicting EPS growth of 30% for 2013 and 10% growth for 2014.
The oil boom in the U.S. is not just benefiting the producers and refiners; there is also a rising demand for oil transportation and storage. American Railcar and Oiltanking partners offer good plays on this industry. Both companies are well managed and are achieving a good return on equity, with recurring income streams -- all round solid plays on a growing industry.
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The article 2 Companies That Will Benefit From Rising Oil Production and 1 That Won't originally appeared on Fool.com.
Fool contributor Rupert Hargreaves owns shares of American Railcar Industries. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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