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Analysis: Higher costs may slow Kirby, winner of U.S. energy boom

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(Globalpost/GlobalPost)

By David Randall

NEW YORK (Reuters) - A slow boat down the Mississippi may have been the best way to ride the U.S. energy boom.

Houston-based Kirby Corp, the leading operator of inland barges in the United States, has been one of the winners from the country's expanding energy industry. Yet analysts and investors now question whether the rally in its shares, which are up about 38 percent for the year to date, will continue.

"There's a lot of optimism in the shares, but the jury is still out on whether the growth in the market is justified," said Michael J. Baudendistel, an analyst at Stifel who covers the company.

At issue is whether the company can continue to grow as the cost of acquiring its smaller rivals spikes.

Thanks to hydraulic fracturing, which has opened previously untapped sources of oil and natural gas, the United States continues to produce more petroleum products than the current system of pipelines, railroads and refineries can handle.

That glut has led to some of the highest demand for inland barges on record, with tank barge utilization rates topping 90 percent this year after falling to approximately 50 percent during the financial crisis in 2009, according to Houston-based consultancy RBN Energy.

Overall, analysts expect the company to increase its earnings per share by 13.6 percent over the next year, compared with a median of 0.9 percent among other marine services companies like Seaspan Corp and Diana Shipping Inc, according to Thomson Reuters data.

Analysts have an average target price for the company of $92.36, a nearly 10 percent gain over its current trading price of about $84 per share. The company's shares trade at 18.6 times its estimated earnings compared with an historic average of approximately 15 times earnings.

RISING PRICES

While Kirby's fleet of nearly 900 inland tank barges accounts for about 70 percent of its shipping revenue, the company is notching its largest gains in coastal traffic. Overall, the usage rate of Kirby's 81 coastal barges remained above 90 percent during the second quarter of 2013, compared with a 75 percent utilization rate in the same quarter of 2012, said Douglas Mavrinac, an analyst at Jefferies.

The Port of Corpus Christi, Texas for instance, brings in approximately 500,000 more barrels of oil per day from the nearby Eagle Ford Shale fields than it can refine into products like gasoline and jet fuel, Kevin Sterling, an analyst at BB&T, estimated. The excess oil is sent to a refinery some 550 miles away in St. James, Louisiana on Kirby barges, he said.

"The pipeline and railroad infrastructure simply doesn't exist to handle this, and that gives Kirby significant pricing power," he said.

Those gains contributed to the company's decision to raise its 2013 guidance to $4.15 to $4.35, up from $4.10 to $4.30, when it announced quarterly earnings on July 24. And thanks to a nearly century-old U.S. law known as the Jones Act, which requires ships moving between U.S. ports to be made, owned and crewed by Americans, Kirby's business is largely protected from foreign competitors.

Yet Kirby's efforts to expand its coastal fleet, which has been largely fueled by acquisitions over the last few years, may be hamstrung by rising costs.

Hornbeck Offshore Services, for instance, sold its barge business in late July for a sum which valued each vessel at $260 a barrel, well above Kirby's track record of acquiring vessels for between $150 and $180 a barrel, according to Michael Webber, an analyst at Wells Fargo who covers the company.

"With valuations moving higher sector-wide, we think opportunities to deploy capital at attractive levels are fewer and farther between, meaning Kirby's growth should start to slow," Webber wrote in a note to clients.

Its diesel engine business, meanwhile, remains well below its previous levels, a fallout from low natural gas prices slicing demand for pressure pumping units used in drilling. The company said on its recent earnings call that it believes the market has "bottomed," yet a lasting improvement "still seems multiple quarters away," Webber added.

VALUATION

"The only cheaper way to move something by rail is to move it by barge, and Kirby's size makes it a stand out in the industry," said Eric Marshall, a portfolio manager of the $672 million Hodges Small Cap fund. Pipelines, another low-cost option, do not exist in many of Kirby's markets, he added.

Marshall has owned the stock since late 2008, when shares dipped into the low $20s, and has held it since, giving him an approximately 280 percent return.

New investors may want to be cautious, said Baudendistel, the Stifel analyst, who rates Kirby a hold.

"This company has a lot going for it, but there's a big premium implied in the share price," he said. "That said this is one of the highest-quality companies we cover."

(Reporting by David Randall; Editing by Leslie Gevirtz)

http://www.globalpost.com/dispatch/news/thomson-reuters/130812/analysis-higher-costs-may-slow-kirby-winner-us-energy-boom