Rail cars scarce in oil boom

LITTLE ROCK — Warren Buffett and Carl Icahn are reaping the benefits of surging demand for railroad tank cars to haul shale oil from beyond the reach of existing pipelines.

Buffett’s Union Tank Car Co. is working at full capacity and Icahn’s American Railcar Industries Inc., which has a production facility at Paragould, has a backlog through 2014. Trinity Industries Inc., the biggest rail-car producer, began converting wind-tower factories last year to help meet demand for train cars that can transport the petroleum product.

All three are benefiting from a shale-oil boom that’s poised to make the U.S. the world’s largest crude producer by 2020. Rail carloads of crude tripled last year to more than 200,000, and demand for tanks designed for it soared, helping both Trinity and American Railcar outstrip the Standard & Poor’s 500 Index.

“People who want to ship oil can’t get them,” Toby Kolstad, president of the consultant firm Rail Theory Forecasts LLC said, referring to rail cars. “They’re desperate to get anything to move crude oil.”

The shortage is exacerbated by makers who are keeping many of the tank cars they produce to supply their own leasing businesses, where rates in some cases have more than quadrupled to $2,500 a month. The manufacturers also are wary of increasing production too much and getting caught with unsold cars as they did in an earlier coal boom.

Rail shipping has become the method of choice at new production sites because obtaining permits and rights of way can slow pipeline construction and make it more costly, said Brad Delco, an analyst with Stephens Inc.

Oil produced from hydraulic fracturing allowed the U.S. to expand oil production last year by the most since the first commercial well was drilled in 1859. Domestic output grew to the highest level in 15 years, while carloads carried by Union Pacific Corp., the country’s biggest railroad, surged to 140,000 last year from 2,400 in 2010.

“It still feels very much like an emerging market,” said Beth Whited, vice president and general manager of Union Pacific’s chemicals business. “There are large numbers of requests coming in really every week to our crude oil team here” asking for service to new locations.

“Customers are very anxious to see us increase capacity, and those who have driving needs for that have been willing to pay a premium,” Stephen Menzies, group president for Trinity’s rail and rail-car leasing units, said during a conference call.

American Railcar said third-quarter orders for tank cars reached 8,800 industry wide, almost double deliveries. The industry’s backlog was about 46,700 at the end of that period, making up more than 75 percent of its total unfilled orders.

The company’s own backlog of 7,630 total rail cars was the largest since 2008’s second quarter and its production schedule included tank orders through the first three months of 2014, Chief Executive Officer James Cowan said during an Oct. 25 conference call. Icahn holds a stake of about 56 percent in the St. Charles, Mo.-based company.

“The investment thesis of oil by rail will be something that will continue for many years because of the fact that infrastructure doesn’t exist in many of these newer areas,” said Eric Marshall, the director of research at Dallas-based Hodges Capital Management Inc. He helps oversee $750 million of assets, including Trinity shares.

Many tank-car makers have been cautious about adding capacity because they don’t want rates to fall at their leasing businesses, said Arthur Hatfield, a Memphis based analyst with Raymond James & Associates.

“All these companies have a lot of lease fleets that have a lot of value attached to them,” he said. “They don’t want to add a lot of capacity, flood the market with cars and then have those cars sit in the marketplace trying to get leased.”

Short-term lease rates have jumped as high as $2,500 a month, more than four times the normal rate, said Kolstad, of Portland, Ore.-based Rail Theory. To limit risk if the boom doesn’t last, leasing companies are seeking five year paybacks on cars instead of 30 years, Hatfield said.

“Leasing rates aren’t based on traditional models right now,” Kolstad said. “They’re basically looking at the probability of a pipeline and a short-term phenomenon. Nobody is taking a risk beyond five or six years.”