NEW YORK -- Add tank-car makers to the list of U.S. industries bracing for the effects from the drop in crude prices.
While 2014's record orders, including an all-time high 42,900 in the third quarter, will drive deliveries this year, according to Susquehanna International Group, manufacturers from Carl Icahn's American Railcar Industries to Warren Buffett's Union Tank Car face a decline. New bookings in 2015 may plunge 70 percent, Macquarie Capital USA said, putting earnings at risk when scheduled deliveries drop in 2016.
Oil prices down 49 percent since June have crimped investment in U.S. fields including the Bakken range, where horizontal drilling and hydraulic fracturing is more expensive than conventional oil drilling. That has hurt industries from steel to heavy equipment. It also has slowed the boom in oil-by-rail shipping, which along with new federal safety rules, had fueled the record orders.
"The confidence of the industry has been shaken quite seriously," Cleo Zagrean, a New York-based analyst for Macquarie Capital said by phone Jan. 15.
Tank-car maker stocks have suffered with the oil price decline, with shares of Trinity Industries dropping 40 percent in the fourth quarter, according to data compiled by Bloomberg. American Railcar shares fell 30 percent and Greenbrier Cos. dropped 27 percent.
"It's having an impact already," said Art Hatfield, a managing director of equity research at Raymond James & Associates Inc. in Memphis. "I think the forward-looking minds are realizing that we may have hit a cyclical peak within the industry."
New freight-car orders fell to 37,431 in the fourth quarter, down 13 percent from record highs, according to data from the Railway Supply Institute, reported Thursday. Leasing company GATX Corp.'s deal with Trinity added 8,950 new car orders in the fourth quarter. Those cars will be delivered over a four-year period beginning March 2016.
Backlogs swelled to a record 142,837 orders, the Washington-based RSI said. These may bolster the industry through 2015.
Throughout last year, buyers piled on requests for cars during an oil boom in North Dakota and Texas. Freight-car bookings and backlogs swelled to record highs even as West Texas Intermediate crude oil prices fell 14 percent between July and the end of September, according to data compiled by Bloomberg.
Orders for cars that carry cement and sand, a resource instrumental in the U.S. shale boom, declined in the fourth quarter from a record, according to Bascome Majors, an Atlanta-based transportation and rail-equipment analyst for Susquehanna International. Falling oil prices might temper future demand for the hopper cars that carry sand, he said.
Oil prices tumbled 18 percent in November and 19 percent the next month, ending the year with the steepest monthly loss in six years, data compiled by Bloomberg show.
"The oil price drop is a significant hit" to the tank-car industry, Macquarie's Zagrean said. As customers re-evaluate the cost of new cars, even extensions on orders can weaken manufacturers' earnings, she said.
Freight-car producer Greenbrier has dodged order cancellations as oil prices fell. Only one customer approached the company about canceling an order but has yet to call the deal off, William Furman, chief executive officer, said in a conference call Jan. 7.
Trinity had not seen any "appreciable impact" on its business from the low oil prices in the third quarter, Stephen Menzies, group president of the company's rail and railcar leasing group, said in an earnings call Oct. 29. The company stands by those comments, spokesman Jack Todd said in a Wednesday email.
Union Tank Car spokesman Bruce Winslow declined to comment on the company's orders. GATX's director of investor relations Jennifer Van Aken didn't return phone calls seeking comment.
In addition to concerns that low oil prices will threaten demand, the industry faces new regulations spurred by accidents including the July 2013 derailment and explosion in Lac-Megantic, Quebec, that killed 47 people.
The U.S. Pipeline and Hazardous Materials Administration plans to issue rules to phase out older rail cars that carry crude in the coming month, Susan Lagana, an agency spokesman, wrote in an emailed statement Jan. 15. The type of tank car most implicated in spills, known as the DOT-111, would be phased out or rebuilt to meet the new standards within two years for the most volatile crude oil, according to the proposal.
Business on 01/24/2015