Daily Blog

I Can See (Them) for Miles and Miles and Miles – The Tank Cars are Coming

Crude-by-rail has had a huge impact on the market for tank cars.  Currently there are 53,000 tank cars on back order and more orders are coming in. That’s up from a backlog of 48,000 just a couple of months ago. The tank car manufactures are enjoying every bit of it but for the first time since the ethanol boom, they can’t keep up. In the old days it took 9 months to deliver a new car. Now, there is such a backlog that manufacturers can’t deliver a new car for 24 - 30 months.  Today we will review the rapidly evolving tank car situation based on a recent presentation made by Travis Brock from Strobel Starostka, a construction and rail services firm deeply involved in in the crude-by-rail markets.

If you’ve been following the RBN crude by rail blogs (latest Crude Loves Rock’n’Rail – Bright Future in Shales) you know how important rail is to the hydrocarbon supply chain.  There are nearly 1.5 million revenue generating rail cars in North America and of those, 315,000 or 21% are tank cars carrying some kind of petroleum product. Today, over half of all new orders are tank cars and probably destined to be part of unit trains thanks mostly to the energy industry and more specifically the shale boom. By the end of 2015, when the current back orders are filled, the North American tank car fleet will be up to 368,000 cars. Lining them up end to end, they would stretch over 4,200 miles. That’s equal to two full round trips between Mont Belvieu, TX and central North Dakota.  Or all the way from New York to San Francisco and a quarter of the way back again.   That’s Miles and Miles and Miles.  Just our 53,000 back ordered cars would string out 600 of those miles.

Let’s do a little math

Back in one of the early Crude Loves Rock’n’Rail blogs we stated that a typical rail tank car carries 660 Bbl of light sweet crude and about 500 Bbl of bitumen crude.  Let’s say that all of the 368,000 cars mentioned above carried crude oil.  They don’t – many move petroleum products, NGLs and all sorts of other liquids – but stay with us for a simple exercise in numbers.  If we have 368,000 cars in a couple of years that can carry 660 barrels each, that’s 242 Million barrels of crude capacity.    That’s 3.5 times the storage capacity in Cushing, OK.  Just the 53,000 back ordered cars will represent 35 million barrels of crude.  There could be a lot of crude in them thar rails.

Here’s another fun fact for your next crude-by-rail trivia party.  One unit train is like a pipeline that can move 5,000 to 7,000 barrels of liquids per day.  There are a lot of assumptions that go into that rule of thumb, but it is pretty useful for thinking about this business.  The math assumes that you’ve got a unit train of 100-118 railcars.  And assume an average route – say 4-5 day transit time each way and 1 day loading time or 2-3 round trips a month. So, 100 cars X 675 barrels per car X 2.5 turns divided by 30 days = 5,500 bpd.

Our 53,000 tank cars on backorder could technically make up 530 unit trains and could handle an average of nearly 3MMbpd (530 unit trains X 5,500 bpd). That’s more than 3.5 times the total liquid production coming out of the Bakken right now.   

Huge tank car demand jump

By the end of April 2013, compared to the same time in 2012, petroleum related rail traffic in North America had increased by 35%.  Here’s an example of why.  In July 2011, 66% of the production out of North Dakota moved by pipeline. Today, it’s running 3 to 1 rail to pipe. Production has grown by 223 Mb/d in less than a year. That’s an increase from Jan – Dec of 2012 of 40%.  So that growth is averaging 20Mb/d each month. Until things change that means this continued growth (just in the Williston Basin) requires an additional 400 rail cars each month. Again, this assumes each unit train can move (on the average) 5-7 Mb/d. The good news is that the industry is keeping pace so far but if things keep going at this rate that might not be true in the not too distant future.

Who’s making the tank cars?

The top rail car manufacturers are Trinity Industries, Union Tank Car,  Greenbrier Companies and American Railcar Industries.  These companies are learning fast and they lease a lot of rail cars rather than sell them.  That allows them to profit from the rail lease market where some rates have more than quadrupled. They are doing what they can to avoid what happened during the coal and ethanol boom and bust - getting caught holding the bag and lots of empty parked cars. As we will see, they are seeking (and getting) 5 year payouts as opposed to the 30 year payouts in years past.

$7.4 Billion is a lot of Money

Our 53,000 tank car backlog will cost about $140M per car.  For 53,000 cars that means a total investment of $7.4 billion. The cost per car is up $20,000 or a 17% increase in two short years. A majority of that has already been spoken for via sales or through leases.   And in both cases the manufacturers learned how to take on very little risk.   Here are the latest specific new build prices:

31,800 gallon General Purpose: $134,000 - $138,000

25,500 gallon Coiled/Insulated: $139,000 - $143,000

28,400 gallon Coiled/Insulated: $140,000 - $144,000

No more 30 year payouts

Demand is so strong that buyers and lessors have willingly signed up for deals that will quickly pay out the cost of the tank car. In recent years (using average prices and terms) long term leases have doubled in price to $1,400/month, and short term leases are 4 times what they were averaging – up to $4,500/month. The most expensive coiled/insulated (CI) cars are actually being offered at lower lease rates because manufactures feel like the more specialized cars will have a more secure economic life than general purpose cars. 

Let’s assume that the 53,000 tank car backlog are all part of long term leases. That means the rail manufacturers (and or leasers) will see $143M per car over the life of the lease or $ 7.6 B for the entire lot.  (Avg LT lease = 8.5 years X $1,400/month = $142,000).

Join Backstage Pass to Read Full Article

Learn More