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Rails Beyond Coal – The Dawning of the Domestic
Intermodal Age
AB HATCH [email protected]
155 W68th St Suite 1117 NYC 10023
www.abhatchconsulting.co / MillerTabak
Green vs Black? The RR Renaissance & “the end
of the coal age”
Wisconsin RR Day/Eau Claire
October, 2012
Rail Assessment
Strengths
 Strong secular growth
 Favorable market
structure
 Supply constraints
 Solid barriers to entry
 Limited alternatives
Opportunities
 Pricing
 Volume Growth
 Service levels /
productivity
 Modal shift
 Consolidation?
Challenges





Capital intensity
Capacity bottlenecks
Port congestion
Service/productivity
Reliability vs. trucks
Threats
 Economic malaise
 Rising capital
requirements
 Regulation
 Maritime trade flows
 Utility Coal
Future Growth Potential
5 Secular stories (in order)….
• 1-Intermodal – International and now Domestic
• 2 –Shale/Oil – Problem and solution?
• 3-Chemicals/Re-Industrialization
• 4 - Grain – the world’s breadbasket
• 5 - Coal? Exports – “legs”?
• Other Rail Opportunities exist but in smaller
scale: The Manifest/Carload “Problem” (hub&spoke) vs. point-topoint “Unitization”/Industrial products/MSW (garbage)
/perishables/others
Rail Intermediate term volume prospects
ABOVE GDP
ABOVE GDP
 Intermodal – Domestic
(++)
 Intermodal – International
 Shale/oil
 Agricultural products
 Export Coal
 Chemicals!
BELOW GDP
 Auto Parts (?)

Domestic Coal (-?)
GDP-GROWTH
 Autos (+?)
 Lumber (+?)
 Aggregates
 Metals (+?)
UNCERTAIN


Paper
Ethanol
Railway Innovation focused on
growth Intermodal is Emphasized
• CP – larger trains
• CN – alliances, routing protocols – the
scheduled railroad!
• BNSF – Logistics Parks, JBHT&Domestic
Intermodal, grain “Shuttles”;
• NS – PPPs, JVs and “Corridors”
• KCS – little engine that can – Mexico,
Lazaro, Houston…
• CSX – MSW, RailEx, Trop Train,
Near Term
• Q1 – EPS +30% despite: coal, grain,
economy- beats Street expectations
• Q2 – up ~20/20 RRs again beat
expectations, reiterate Goals/Targets
• H2 outlook perhaps a bit more muted
• End of coal decline? But not grain? Where
are we in recovery? Pricing?
• Cash flow – still “balanced” use? Capex
will still be supportive of growth segments
Current Issues
• Rails in the Recovery – or in another slowdown? Is 2012
“just another” 2011?
• What’s true? RR (cyclical) traffic or business
headlines?
• End of the Coal Age?
• Capex – Strategic or Tactical plans prevail? $13B!
• PTC
• After the Rereg Fight what? STB? TSW?
• Govt role –partner? Or preoccupied &broke?
• The Green mantle – two-edged sword….
• PE &Infrastructure – and activist? – funds: back for
good? CP….
• New “Golden Age”? Service
Underlying Themes or “Givens’
• Green is here to stay
• Oil Prices will remain high (price points at $65,
$45, $25/bl)
• Governments spending will be problematic
• Infrastructure will be challenged
• Trade will be dynamic but remain strong
• Near-sourcing and in-sourcing remain themes
• Trucking Productivity has peaked
• Driver shortages are a secular/demographic
issue exacerbated by govt regs (CSA/HoS)
Carbon Footprint– from cocktail
chatter to decision point
• 2003 – 221/F500 report on carbon; 409/F500
in ’09
• Green supply chains enforcement by Wal-Mart
(from $2B transport spend to $4B+ by ’11); GE,
P&G, etc….advantage intermodal
• Anticipating future EPA regs (12/23/11) and
emissions law – advantage cheap & plentiful
Natural Gas
• Rails – Double-edged Sword – green
developments hurt coal, help intermodal & shale
• One major result is:
Coal in Trouble
• Domestic in secular decline due to
regs/legislation, accelerated by weather,
economy and, especially NG price
• Exports tied to global economy (ie; China);
competition – and infrastructure access
• What was once “stable” and base
business is the most uncertain
• Solution: invest elsewhere….
Every picture distorts a story?
Exports to the rescue?
Shale
• Frac Sand, brine & water, pipe and aggregates
inbound
• In cases of Oil, “Rolling Pipelines” out….
• Hess – 286 cars, 9 trainsets now, 27 in a few
years (followed by Phillips 66, others)
• Pipeline companies developing rail terminals in
ND
• Tar Sands and pipelines
• Chemical Industry – secondary impact
• Industrial Development – tertiary impact
Estimated Delta In RR
Revenues/Prologistics Group
Approx Annual
Carloads
2008
Approx
Rev/Car
Change In Rev
2011
Coal
8,320,000
7,120,000
$1,700
($2,040,000,000)
Oil
6,000
92,000
$3,700
$318,200,000
Sand
160,000
360,000
$3,500
$700,000,000
Total
8,486,000
7,572,000
($1,021,800,000)
Shale Plays
15
Why move crude by rail?
•
Moving a barrel by rail can cost $7 to $14, compared with $2 to $5 by pipe,
depending on destination. But that price difference pales in comparison to a $15 to
$30 premium for reaching the right markets
•
Producers are working shale everywhere and rail transload terminals are a costeffective, very quick way to start moving crude to market
•
Flexibility to serve all markets using existing N.A. rail infrastructure. Existing rail
routes have capacity to reach East and West Coast markets in the U.S. that may
not have sufficient pipeline capacity.
•
Isolation of commodity to provide a “pure barrel” to the destination
•
Speed to market – 12 months to build a unit train rail terminal
•
Comparatively low entry level capital requirements
•
Source: Watco
What, me worry?
•
•
•
•
•
•
•
Coal – its price not community
Quick then suddenly – 10% hit?
Activists – what's next?
Compensation: shale (+++)?
Compensation: chemicals?
Compensation: export coal?
Compensation: domestic intermodal?
Revenue Share
Percent of Total Revenue for Major US Railroads
* 2012 estimated based on first half of year
Source: AAR analysis of 10-K reports for BNSF, CSX, KCS, NS & UP
Intermodal Growth Drivers
Domestic and International
•
Globalization
•
Trade
•
Railroad Cost Advantages
•
Fuel prices
•
Carbon footprint
•
Share Recovery From
Highway
•
Infrastructure deficit & taxes
•
Truckload Issues; regulatory
issues, driver issues
US Railroad Intermodal Traffic
TOFC-COFC Units
Millions
Recessions
* 2012 estimated based on first 35 weeks of year
Source: AAR analysis of 10-K reports for BNSF, CSX, KCS, NS & UP
Modal Shift Projection
% of Market Share
Current Rail Intermodal Market
Projected Market Shift
Current Truck Market
TRANSLOADING REACHING
NEW HIGHS
Source TTX, IANS, Piers
Ron Sucik
RSE Consulting
International Intermodal
• Still game in the old vet
• Even with near-sourcing
• Even with changing flows (which may
disadvantage rail)
• Retail still tied to Asia
• MLB still tied to rail service
• Growth of 1-2.5X GDP
Intermodal Issues 2012+
• International: trade flows, retail sales, exports & balance
– UNP’s vision vs NRF, TTX
• Panama Canal? On time? How much? Etc….
• Emerging Developments – Rupert, Lazaro, Miami
• Domestic – development of “Corridors” & “Gateways”,
etc
• Domestic – bimodal partners, shipper developments
• Domestic – service & pricing?
• Q1/12 – up 5.9% (domestic +9%, int’l +3%, IMC+11%)!
• “There’s somethin’ happening here….”
Re-industrialization?
•
•
•
•
•
•
Near-Sourcing: Mexico, CA
Gas effect round two:
CHEMICAL INDUSTRY
Fertilizers
Steel/Autos/White Goods etc
Northeast, etc back “in play”
Growth is Expensive
• Huge Capex - $50B in the last 5 years in the US
– through the Great Recession!
• AND: Comeback of the share repo/DPS?
• EPS beat the Street consistently, yet:
–
–
–
–
–
–
Uneven returns in the Modern Age
Recent improving trend line
Misunderstanding Intermodal profitability 2004-8
Threats to ROIC threaten capacity
Street begins to call for capex reduction?
Suppliers 2012 looks solid – can they hold on till true
recovery?
Rail Capex in 2011/12/13?
• Record $12B last year
• Record $13B this year – many rails
pegging at 17-18% of revenues (rising by
double digits)
• Corridor developments, NG, terminals,
locos, cars, shale buildouts, etc
• PPPs – in decline?
• Still emerging as DPS plays, buying in
shares
Railroad Capital Expenditures
Class I Railroads
Billions
$12
$10
$8
$6
$4
$2
$0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Railroad Facts & Analysis of Class I Railroads, AAR
RR CoC vs. ROIC – RR Stocks have done
well but… they still trade at a discount to all
stocks
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
81
82
83
84
85
86
87
88
89
90
91
92
93
94
Cost of Capital
95
96
97
98
99
00
01
02
03
04
Return on Investment
Source: Surface Transportation Board
Note: Cost of equity estimation method changed by Board effective 2006 and 2008.
05
06
07
08
09
10
ROI is everything
• Rails must retain price (@”rail-inflation
plus” levels, or +3-5% YOY)
• Productivity – through capex, IT,
scheduling, service
• Must remain de-regulated (even if not
directly an intermodal issue)
Simple Math
• Rates
• Returns
• Capital Expenditures
• Capacity
• Service
ARE ALL CONNECTED!
Virtuous Circle (’03-07) or Disinvestment?
Election 2012
•
•
•
•
•
•
Republicans pro-coal
Dems pro-gas
Labor not a near term issue
Tea-Party and Infrastructure
PPPs?
$- no matter who wins, who can pay?
www.abhatchconsulting.com
ABH Consulting/www.abhatchconsulting.com
Anthony B. Hatch
155 W. 68th Street
New York, NY 10023
(212) 595-0457
[email protected]
www.railtrends.com
CP
• OY. 2nd (3rd) Proxy Fight since 1954
• Not a takeover
• HH track record vs recent CP (OR, weather,
M&A, growth)
• HH goal 65% OR by 2015
• CP goal 70-72% in three years (YE’11 83.1%;
C1 avg 71%)
• (as example) CSX goal 65% OR 2015
• CP’s new management team yet to be
revealed….
Positive Train Control (PTC)
• “Unfunded Mandate” – part of 2008 safety bill
• Overseer is FRA – who puts cost/benefit ratio at 22:1
• Rails have put cost of installation and maintenance at $10B – and
rising (UP, CSX have increased 2011 capex based in PTC)
• Possible benefits in capacity, velocity, fuel consumption as well as
safety; many of those captured by other technological advances
• Covers all rail interaction with passengers and TIH as of 2008; short
lines exempted
• Technology proven only in limited scope (BN/Wabtec: ”ETMS”)
• Initiated after Chatsworth accident – obvious public benefits
• Contrarian viewpoints exist – the new “Digital Railway”
• Efforts to reduce footprint, extend deadline….
New Transport Bill
• Rumor! Tue – too little/too late (or
“calamity averted barely and not for long”)
• Tiger 3 20% RR decline ($104mm)
• PTC deadline to be extended from 2015 to
2020? Not yet….
• No TSW change
• No Freight Plan
• Govt’s declining role (in infrastructure!)
Warren’s $44B “all-in” bet
• Advantages of going private? (capex
cycle) – will we see now?
• Influence in DC - “Robber Baron” vs.
“Sage”
• Bets not (just) on economy – rereg, coal,
western intermodal
• Bought on the cheap! – How does the
investment look today, folks?