This Energy Stock has More than Doubled the S&P 500… Without Finding a Drop of Oil
We’ve found a little known energy company that has reaped the rewards of the shale oil boom – without ever drilling a single well.
Its stock has skyrocketed 455% since March 2009. That’s more than twice the gain of the S&P 500 (195%) and nearly triple the gain of the Dow Jones Industrial Average (162%).
And here’s the best part:
This company makes money no matter what happens to the price of oil…
The Real Money Isn’t in the Well
Companies that drill and refine oil see profits rise and fall as the price of oil fluctuates.
Companies that transport oil make a profit either way. They get paid to transport oil whether it’s $80/barrel oil or $110/barrel oil.
To understand why that is, why this stock has exploded and why it will continue to outperform the market, take a look at the shale energy market.
Shale Oil and Gas Production Is Taking Off
Over the coming decades, production of U.S. natural gas is expected to double from 2006 levels. That’s mostly due to shale gas.
The prospect of decades of cheap and abundant natural gas has attracted more than $100 billion in investment to the U.S. chemical industry, according to the American Chemistry Council.
Most of that – about $90 billion – is directed to the construction and expansion of petrochemical plants along the Gulf Coast. The stock we’re talking about is ideally positioned to profit from this expansion, as we’ll soon see.
Then there’s shale oil. From a peak of 9.6 million barrels a day, total U.S. oil production dipped as low as 5 million barrels a day in 2008.
But the shale oil boom has reversed that trend.
In fact, shale oil production has progressed so rapidly that it keeps getting ahead of U.S. Energy Information Administration (EIA) forecasts.
In September the EIA revised is projection for 2014 upward to 8.54 million barrels a day. Just one month later U.S. oil production hit 8.97 million barrels a day.
That kind of growth has strained domestic oil transportation systems, from pipelines to railroads. At the same time, it has created opportunities for other means of transporting oil – like inland shipping.
And one company in particular has been able to make the most of this opportunity…
Why Kirby Dominates the Shale Energy Boom
We’re talking about Kirby Corp. (NYSE:KEX), America’s largest tank barge operator.
KEX is profiting from the shale energy boom in many ways. Shale oil is the most obvious.
Moving oil by barge was an almost non-existent business as recently as 2009. But oil barge traffic has exploded from less than 5 million barrels in 2010 to more than 37 million barrels last year.
While moving crude oil by barge is slower than moving it by rail, it can be up to a third cheaper.
Kirby jumped right in. The Houston-based company moves crude oil from the Midwest via the inland waterways of the Mississippi river system. Last year Kirby started moving Bakken crude from rail terminals in the Pacific Northwest south to refineries along the California coast.
That’s one reason the revenue and earnings per share of KEX have more than doubled over the past several years. The company went from earning $2.15 in 2010 to $4.44 last year.
When KEX reported its third-quarter earnings last week, it raised its guidance for the 2014 fiscal year to $5.14 per share from $5.04.
That’s because apart from moving more oil, another shale-related business – its diesel engines – more than doubled year over year.
Kirby sells and remanufactures both marine and land-based diesel engines. Companies that drill for shale oil and gas using hydraulic fracturing – fracking – have been snapping up Kirby’s diesel engines as they ramp up production.
That pushed Kirby’s diesel revenue from $114.9 million in the year-ago quarter to $232 million.
But even those two factors aren’t the best reason KEX is a top shale energy stock.
Kirby’s Growth Will Be Fueled by Shale Gas
Kirby’s ace in the hole is its petrochemical transport business. Two-thirds of Kirby’s river-based shipping business is petrochemicals.
And while the shale gas boom has boosted this business, the best is yet to come.
You see, most of those new chemical factories will only start coming online next year. And the expansion is expected to go on for several years.
According to the Federal Reserve Bank of Dallas, U.S. petrochemical capacity will increase by one-third by 2017.
And no barge company is better prepared for this windfall than Kirby. It prides itself one being the dominant player in the petrochemical barge business. Much of the new business will be theirs for the taking.
Kirby is planning ahead. It’s currently expanding its overall tank barge capacity to 17.8 million barrels. More new barges are under construction and will keep capacity rising.
In addition, the extra cash flow has allowed KEX to pay down debt. That has strengthened the balance sheet for potential acquisitions.
Kirby even has a firewall against cheap foreign competition, thanks to a 94-year old maritime law. The Merchant Marine Act of 1920, also known as the Jones Act, requires that all goods shipped between U.S. ports be sent on U.S.-built and owned vessels crewed by U.S. citizens.
Kirby stock closed earlier this week at $110.90, up from $19.95 in March 2009. Yet even after a 455% increase, there’s room for KEX stock to run.
KEX has a consensus analyst one-year price target of $131.92. That’s a respectable 19% gain. But given so many long-term catalysts, this stock should reach the $150 to $160 range over the next few years.
PS: Oil and gas aren’t the only way to make a bundle on energy. Kent has a special report on one energy source that’s about to skyrocket right here.