New Profit-Making Opportunities In Sight As This Huge Infrastructure Project Nears Completion
Large infrastructure projects can mean a boom for the economy and users of the new structures once they're done but construction can seem to go on forever. Shares of companies that will benefit from the new structures are bid up only to come back down when mega-projects get delayed and run over budget.
One such project has gone nearly two years over schedule and more than a billion dollars over budget. Once a hot subject among investors, this project has faded into the background after more than eight years of construction.
But a new progress report shows light at the end of the tunnel. The building consortium has given a completion date for early next year. And one company stands to gain on multiple fronts while the project's completion could touch off a rebound for an unloved industry.
An Expanded Panama Canal And A Boom For East Coast Shipping
Despite news of leakage in the third lock, representatives of the building consortium insist that the Panama Canal expansion will be completed by April 2016. The project has run over-budget and way past its original October 2014 deadline, but now completion is in sight.
The new canal will support ships carrying 12,600 containers, nearly three times the current canal's capacity. Shipping capacity for crude products could jump by 24% with the expanded canal able to handle ships carrying up to 680,000 barrels of crude against a current max capacity of 550,000 barrels. Agriculture shipping could benefit as well on shipments as high as 84,000 tons compared to 57,000 tons previously.
The canal expansion project touched off a wave of projects across the Gulf of Mexico and eastern seaboard to increase port capacity. Shipbuilders have also been hard at work building out larger freighters to take advantage of the opportunity. The American Association of Port Authorities (AAPA) estimates that over $29 billion is being spent on 125 port-related projects to modernize ahead of the coming traffic. Ports in Miami and Houston have already started projects in anticipation of the larger vessels, and ports in Savannah, Georgia; Charleston, South Carolina, and Craney Island, Virginia have projects in the works.
Increased shipping through the canal is expected to be a boom for gulf and east coast port shipping as well as inland waterway shipping. Barge shipping is cheaper than other forms of transportation, moving a ton of cargo 514 miles per gallon compared to just 202 miles per gallon for rail and 59 miles per gallon by truck. Beyond cost efficiencies, the environmental impact of waterway shipping is one-seventh that of trucking and more than 200 times safer than rail when measured by injuries per billion ton-miles.
Who Wins In The Panama Canal Expansion?
Currently, ports on the west coast handle 673,318 twenty-foot equivalent units ( TEU ) a month compared to 658,768 TEUs per month at east coast ports. West Coast port arrivals destined for the Midwest and eastern regions must then be shipped by rail and road transportation, increasing costs considerably.
A work stoppage at West Coast ports earlier this year had shipping scrambling for alternative routes. Combined with the new lower-cost alternative from the canal expansion, marine freight carriers and barge operators are preparing for increased volume.
Kirby Corporation (NYSE: KEX ) is the leader in inland and barge transportation with a position in petrochemicals and dry agricultural commodities, operating along the U.S. Gulf Coast and through inland waterways such as the Mississippi River. The company books 70% of sales on marine transportation on coastal and inland waterways. The barging market is protected from foreign competition through the Jones Act and should benefit from increased volume in agricultural shipping and the potential for higher rates on higher demand.
Revenues have fallen slightly on lower crude prices but the company has been able to manage costs and margins have improved. The company generates nearly $500 million in operational cash flow and free cash flow has improved even against record capital investment.
Dry bulk carriers could also gain on the general increase in shipping away from rail transportation. Seaspan Corporation (NYSE: SSW ) has been able to weather the downturn in shipping better than others. The company has been able to reduce debt aggressively by $877 million over the last two years and has more than 16% of its market cap in cash. The company has 14 Panamax ships up for contract renewal through 2016 which could help it take advantage of any rebound in shipping rates.
Risks to Consider: The Baltic Dry Index is sitting around multi-year lows on weak commodity prices and reduced shipping. Bulk carriers servicing Gulf and East Coast ports may still struggle even on a marginal boost from the Canal expansion.
Action to Take : Take advantage of the potential for increased demand on inland and coastal barge shipping by positioning in Kirby ahead of the completed expansion of the Panama Canal.
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