American Railcar: Oil and Icahn

07/23/2014 7:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

US demand for tank railcars has boomed in recent years because of surging demand to transport crude oil, refined products, and chemicals by train, explains Elliott Gue, editor of Capitalist Times.

American Railcar Industries (ARII)—one of our favorite small-cap stocks—generates about 85% of its revenue from the manufacture of hopper and tank railcars as well as related components.

Domestic oil production has jumped to almost 8.5 million barrels per day in mid-2014 from about 5.5 million barrels per day in mid-2011.

However, many of these new sources of production are located in remote regions with limited pipeline capacity to handle booming production. As such, producers increasingly rely on scheduled unit trains.

The upsurge in the number of railcars transporting crude oil has resulted in a handful of high-profile accidents and spills that have garnered significant media attention. As a result, regulatory changes provide another potential catalyst for American Railcar Industries’ tank cars.

Canada has instituted regulations that would ban the use of older railcars for transporting flammable liquids, and odds are that the US will require operators to retrofit or replace tank cars built prior to 2011.

Newer cars have more protection against rupture during derailment and should help to reduce the incidence of spills. Regulations governing tank car replacement would bolster new orders for American Railcar Industries.

Meanwhile, the firm’s maintenance and services business continues to grow by leaps and bounds. This business line is well-positioned to retrofit older tank cars to comply with any new regulations.

Meanwhile, American Railcar Industries also stands to benefit from growing demand for hopper cars to transport the crush-resistant silica sand that’s critical to hydraulic fracturing, the well-completion technique that has fueled the shale oil and gas revolution.

With demand for proppant booming as producers’ ramp up drilling activity, orders for hopper cars should pick up substantially over the next few years.

Icahn Associates Corp, an investment vehicle controlled by legendary financier Carl Icahn, controls more than 55% of American Railcar Industries’ outstanding stock.

The activist investor’s involvement in the company is likely behind the board’s recent decision to boost the quarterly dividend to $0.40 per share from $0.25 per share. We are adding American Railcar Industries to our Wealth Builders Portfolio.

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