Kirby - Q2 2016
July 28, 2016
Transcript
Operator (participant)
Good morning, and welcome to the Kirby Corporation 2016 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press star, then one on your Touch-Tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Sterling Adlakha. Please go ahead.
Sterling Adlakha (Director of Investor Relations and Finance)
Thank you, operator. Good morning, everyone, and thank you for joining us today. With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, Kirby's President and Chief Executive Officer; and Andy Smith, Kirby's Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the Investor Relations section under Financial Highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors.
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December thirty-first, 2015, filed with the Securities and Exchange Commission. I'll now turn the call over to Joe.
Joe Pyne (Chairman and CEO)
Thank you. Thank you, Sterling. Yesterday afternoon, we announced second quarter earnings of $0.72 per share versus our guidance range of $0.65-$0.75 per share. That compares to $1.04 per share reported for the 2015 second quarter. Inland marine tank barge utilization during the second quarter was in the high 80% to low 90% range. Market continues to adjust in response to excess barge supply that has influenced the market over the past 12-18 months. Although a combination of retirements and volume will help bring the market back into balance, the transition has not been as smooth as we hoped it would be.
As I mentioned, as mentioned in our press release last night, inland utilization in July fell significantly, and we have seen aggressive pricing from several carriers at levels at what we believe is at their full cost or in some cases, their cash cost. Such pricing in the market is historically unusual, given the market fundamentals have not fundamentally changed that much since the start of the year, and summer almost always sees a decline in utilization. Pricing at these levels, we believe is unsustainable, and if it persists, will lead to destructive pressure on some less well-capitalized carriers. In the coastal market, tank barge utilization was in the mid-80% range. Utilization continues to be impacted by the amount of equipment trading on the spot market, which adds idle time exposure.
We continue to maintain a cautious outlook for this market as it absorbs new supply that is coming online, through the first half of 2018. Remember that there is a lot of older tonnage in the coastal market. In the land-based diesel engine, engine service business, market conditions remain depressed. Sales from the distribution of OEM engines, transmissions and parts, which have been relatively stable in prior industry cycles, are at historically low levels. Additionally, orders for new pressure pumping units have not yet materialized. The remanufacturing and service side of the business is more positive, and we have seen an increase in inquiries during the quarter, as well as a number of firm orders.
While such limited activity does not lend itself to a materially better outlook yet, however, it does represent the first green shoots in the market, and the conditions will improve in the coming months. In the marine and power generation diesel engine service businesses, the oil field market along the Gulf Coast remains depressed, while in the rest of our market, service activity is relatively stable. In summary, we continue to face an excess supply of equipment in the marine markets and a severe cyclical depression in the oil field market. As we confront these challenges, we will continue to focus on safety, customer service, cost, and capital discipline. In the inland market, we expect the market will get better later this year and benefit from additional retirements, maintenance deferrals, consolidation, as well as volumes from new chemical plants.
For Kirby's part, we will aggressively pursue our costs, aggressively service our customers, and look for opportunities to prudently apply our balance sheet. I'll now turn the call over to David.
David Grzebinski (CEO)
... All right. Thank you, Joe. Good morning to everyone on the call. I'll begin today with a summary of quarterly results in each of our markets, then I'll turn the call over to Andy to walk through the financials in more detail. After he finishes, I'll conclude with an explanation of our outlook and our guidance. In the inland marine transportation market, after a strong start to the second quarter in April, we experienced a modest decline in tank barge utilization into the high 80% range. The modest decline in utilization was largely attributable to a shortened spring season for ag products and soft demand in trading and refinery volumes, which we believe was largely related to high inventory levels. Pricing on term contracts that renewed during the second quarter was down in the mid- to high-single digits on average.
Spot rates were at or below term contract rates during the quarter. Operating conditions during the quarter were seasonally normal, although high cross currents at floodgates and river crossings on the Gulf Intracoastal Waterway led to congestion and added delays at certain points along the Gulf Coast. In our coastal marine transportation sector, demand for the coastwise transportation of black oil and petrochemicals remained consistent with the 2016 first quarter, while refined products demand was weaker, due primarily to lower demand in the Northeast. Relative to the first quarter, tank barge utilization declined slightly to the mid-80% range, a result of the continued trend of more equipment moving off of term contracts and trading in the spot market.
As a reminder, most coastal barge term contracts are time charters, which have 100% utilization, and when equipment moves from time charter to spot, even when it is highly utilized, the average utilization drops. With respect to pricing, term contracts that renewed during the second quarter increased by a low single-digit percentage on average, as several older contracts renewed in the quarter. However, term contracts that were signed a year ago and renewed during the quarter were at modestly lower rates. In our diesel engine services segment, in our marine, diesel, and power generation markets, we continued to see deferrals of major overhaul projects. As has been the case, the Gulf of Mexico oil field service market remained at depressed levels.
In our land-based diesel engine services market, the sale of engines, transmissions, and parts in our distribution business remained at very depressed levels and have yet to show signs of improvement. Likewise, we have not had orders to manufacture new pressure pumping units. On a more positive note, we did see incremental improvement in quote and order activity for pressure pumping unit service and remanufacturing. The number of units serviced during the quarter was small, but we did have an uptick in labor and facility utilization, particularly late in the quarter, and that continues into the early part of this quarter, the third quarter. It remains too early to call this activity a trend, but it does seem that we have at least seen the worst of the market in this cycle.
I'll now turn the call over to Andy to provide some detailed financial information before I come back and discuss our outlook.
Andy Smith (EVP and CFO)
Thanks, David, and good morning. In the 2016 second quarter, marine transportation segment revenue declined 11%, and operating income declined 25% as compared with the 2015 second quarter. The decline in revenue in the second quarter, as compared to the prior year quarter, was primarily due to a 33% decline in the average cost of marine diesel fuel, lower inland marine contract pricing, and an increase in available spot market days for our offshore marine equipment. The marine transportation segment's operating margin was 19.2%, compared with 22.8% for the 2015 second quarter. The inland sector contributed approximately two-thirds of marine transportation revenue during the 2016 second quarter.
Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 80% of revenue, with 51% of those contracts attributable to time charters and 49% from affreightment contracts. The inland sector generated an operating margin in the low 20% range for the quarter. In the coastal sector, the trend of customers electing to source coastal equipment from the spot market over renewing existing contracts continued. However, the percentage of coastal revenue under term contracts was consistent with the first quarter at approximately 78%, partly as a result of lower utilization and revenue for spot equipment. The second quarter operating margin for the coastal sector was in the low double digits. Turning now to our marine construction and retirement plans.
During the 2016 first half, we received 27 barges from the acquisition of SEACOR's inland tank barge fleet, took delivery of three barges, transferred one 30,000-barrel barge from coastal to inland service, and retired a total of 28 barges. The net result was an increase of three tank barges to our inland tank barge fleet, which totaled approximately 345,000 barrels of capacity. For the second half of the year, we expect to take delivery of four 30,000-barrel inland tank barges and to retire or return to charterers an additional 11 barges with 135,000 barrels of capacity.
On a net basis, we expect to end 2016 with approximately 18.2 million barrels of capacity, or roughly the same level we finished the second quarter, an increase, an increase of approximately 325,000 barrels from the end of 2015. In the coastwise transportation sector, our second new 185,000-barrel ATB began operating under a long-term customer contract in mid-June. The first of two new 155,000-barrel ATBs should deliver in late 2016, and our second 155,000-barrel ATB and a coastal chemical barge are both expected to be completed in early 2017.
Also, during the second quarter of this year, we retired an 80,000-barrel barge and transferred a 30,000-barrel coastal barge to our inland fleet, ending the quarter with approximately 6.1 million barrels of capacity. In our press release last night, we also announced that we purchased four coastal tugboats during the second quarter for $26.5 million. The tugs will transition into service with existing barges in our fleet. The addition of these boats will help lower the age of our tug fleet, better align the age of our boats and barges, and improve our operating performance. The average age of the boats we purchased is eight years, and the average age of the boats they are replacing is close to 40 years. Moving on to our diesel engine services segment.
Revenue for the 2016 second quarter declined 46% from the 2015 second quarter, and we had an operating loss in the segment of approximately $2 million. The segment's operating margin was -3.1%, compared with 4.2% for the 2015 second quarter. The marine and power generation operations contributed approximately 65% of the diesel engine services revenue in the second quarter, with an operating margin in the low double digits. Our land-based operations contributed roughly 35% of the diesel engine services segment's revenue in the second quarter, with a double-digit negative operating margin.
On the corporate side of things, our 2016 capital spending guidance remains in a range of $230 million-$250 million, including approximately $10 million for construction of seven inland tank barges to be delivered in 2016, approximately $100 million in progress payments on new coastal equipment, including one 185,000-barrel coastal ATB, two 155,000-barrel coastal ATBs, two 4,900-horsepower coastal tugboats, and a new coastal petrochemical tank barge. The balance of $120 million-$140 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities.
In addition to our capital spending guidance, we spent $81 million on the acquisition of the SEACOR inland tank barge fleet, with an additional $4 million paid in July for a towboat, which was under construction. We also spent $13.5 million to acquire a leased coastal barge from the lessor and $26.5 million to purchase four coastal tugboats. Total debt as of June 30th, 2016, was $799 million, a $24 million increase from December 31st, 2015. Our debt-to-cap ratio at June 30th, 2016, was 25.4%, unchanged from December 31st, 2015. As of today, our debt stands at $786 million. I'll now turn the call back over to David.
David Grzebinski (CEO)
Thanks, Andy. In our press release, we announced our 2016 third quarter guidance of $0.50-$0.65 per share, and we lowered our full-year 2016 guidance to a range of $2.40-$2.70 per share. Let me take a moment and provide a general overview of our approach to guidance this quarter. In the second quarter, we saw strong utilization and firming pricing in the inland market in April, with the rest of the quarter playing out around our expectations, as you saw with our second quarter results, which fell within our guidance range. However, in July, we've seen our inland utilization fall into the low 80% range. Given the lower inland marine utilization, we are seeing a very competitive pricing environment.
We are lowering guidance to reflect these conditions, and on the low end of the range, we are factoring in a continuation of this environment through the remainder of the year. In terms of inland marine utilization, tank barge utilization does typically fall slightly in the summer when good operating conditions reduce congestion and improve efficiency throughout the waterways. However, so far this quarter, utilization has remained in the low 80% range, lower than we would expect. We do think that weaker utilization levels are partly related to factors that are temporary in nature, including high refinery and terminal inventory levels and reduced trading activity in the black oil markets. As it remains unclear how long these utilization levels will persist, we have lowered our guidance. In terms of pricing, we expect spot and contract renewal pricing to continue to be under pressure during the quarter.
As Joe mentioned, we believe spot pricing in the inland market has reached unsustainable levels and that spot rates now reflect pricing that is below cash breakevens for some carriers. If this pricing persists, we believe potential sellers will materialize either through choice or distress. We will deploy our capital appropriately should that occur. In the coastal market, on the low end, our guidance range contemplates pricing declines on contract renewals in the low single-digit % range and utilization in the low to mid-80% range. On the high end of guidance, we are expecting flat pricing on contract renewals and utilization in the high 80% range. For our diesel engine service segment in our land-based sector, we expect to incur quarterly operating loss, losses of a similar magnitude as in the first half of the year. However...
Our results may improve as service activities, which picked up in late June, continue to improve. In our marine diesel markets, we do not expect any improvement in the Gulf of Mexico oil service market this year. In the power generation market and in our other marine diesel engine services market, we expect results to be largely consistent with the 2016 second quarter. In closing, our financial position is strong. We have a strong balance sheet, a young, well-maintained marine fleet, and healthy free cash flow. As both our marine transportation and diesel engine services markets undergo difficult times, we will focus on safe operation, customer service, and cost containment, while looking to deploy cash flow where we can find high return projects in a disciplined and accretive manner.
As we look beyond this year, we are much more constructive on the outlook across our markets. In the past few days, many large oil field operators have stated their belief that the worst of the energy market collapse is behind us. We believe that is the case as well. By the second half of next year, if not earlier, we expect to see volumes increase in our land-based diesel engine business. Similarly, in our marine transportation markets, the worst of the correction, which arose from overbuilding into the crude markets, is likely behind us. While the aggressive pricing in the market this quarter is troubling, it likely yields opportunities that would not otherwise be there, or at a minimum, should force capacity discipline on some operators who have not shown much discipline lately.
A rationalization of supply this year provides a better environment for growth next year, particularly in the chemical markets, where we expect growth to accelerate through next year. Operator, that concludes our prepared remarks, and we're now ready to take questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. As a reminder, we ask that you please limit your questions to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jon Chappell of Evercore ISI.
Jon Chappell (Senior Managing Director)
Thank you. Good morning, guys.
David Grzebinski (CEO)
Good morning, Jon.
Jon Chappell (Senior Managing Director)
David, if I just put some of your last comments together and try to figure out the duration of maybe this pricing pressure. If you said in the guidance that you're expecting spot to remain under pressure for the remainder of this year, but then also that the current rates in many cases are below cash breakeven and unsustainable. I don't want to put words in your mouth, but does that sound like a worst case scenario that's more likely to play out in a shorter period of time than a longer period of time?
David Grzebinski (CEO)
Yeah, yeah, no, that is the worst case scenario. And that's what I said was that was related to our low end of guidance. We actually do think that some of this disruption we've seen, particularly as it relates to high product inventories across the system now, we think that's pretty temporary in nature, and we should get utilization back as the year progressed. But in the low end of our guidance, we wanted to kind of just say, "Okay, what if it doesn't come back?" And that's how we got to the low end.
Jon Chappell (Senior Managing Director)
Is there any way to quantify what part of the precipitous drop in July is tied to inventories alone, and, and I guess therefore, the inability to move cargoes?
David Grzebinski (CEO)
You know, it's difficult to quantify because there are other things, you know, as we mentioned, you know, just the better summer weather, we usually get some increase efficiencies, which drops utilization. But we've also, you know, in the black oil markets, as feedstock prices have moved around and, we've seen, you know, sometimes the arbitrage closes, and sometimes it opens back up, and so the black oil fleet utilization moves around a bit with that. So it's not just inventory levels. And then also you've got, you know, the strong dollar, which can affect imports and exports for that matter, and that can move things around there. So it's short answer, it's hard to quantify it, and how much of it's related to inventories.
But I would say a good portion of it. Yeah, I couldn't put a percentage on it, but it is a decent percentage of it.
Jon Chappell (Senior Managing Director)
Just for clarification, I'm sorry, one last super quick one. When we think about the term versus the spot, when would you say that the term pressure really started? As we think about kind of anniversarying easier comps, did it start middle of last year so that this back half of 2016 should have an easier comp relative to last year? Or did it really start to intensify early this year, where you'd see kind of an easier comp starting in 2017?
David Grzebinski (CEO)
No, we did see it kind of mid last year, the pressure on term contract renewals.
Jon Chappell (Senior Managing Director)
Okay, perfect. Thanks a lot, David.
Operator (participant)
The next question will come from Kelly Dougherty of Macquarie.
Kelly Dougherty (Equity Analyst)
Good morning, guys. Thanks for taking the question.
David Grzebinski (CEO)
Good morning.
Kelly Dougherty (Equity Analyst)
Just a quick housekeeping one to start with. Just wondering why you didn't buy back any stock in the second quarter and how we should think about the buyback plans, you know, relative to your expected free cash flow for the rest of the year?
David Grzebinski (CEO)
Yeah, good, good question, Kelly. As you know, you know, there's times when you're precluded from being in the market and times when you can be in the market. Yeah, it's difficult to say, but you know, if you're working on acquisitions or you have some other information that you're working on or looking at, it can preclude you from being in the market. I don't want to get too specific there, but you know us, we will look at our opportunity set of whether it's acquisitions, buying back stock or whatnot with our cash flow. And you know, we look at that the same way always, and we will be prudent with the deployment of our excess cash flow.
Kelly Dougherty (Equity Analyst)
Do you have... Just a quick follow-up on that one. Do you have an expected free cash flow number for the year? I think you had kind of put out $250+ previously, but now with the lower guidance, is that still a good number?
Andy Smith (EVP and CFO)
A lower free cash flow? Yeah, it's probably gonna be, you know, sort of between $210 million to maybe $235 million, kind of given where you are, depending upon some working capital changes.
Kelly Dougherty (Equity Analyst)
Okay, great. Thanks. And just a kind of a bigger picture question, can you help us think about the margin outlook in both the inland and coastal business, should these, you know, current conditions persist in the back half of the year? And then specifically, I'm trying to get my head around the operating margin impact of more customers opting for spot versus contracted moves on the coastal side.
David Grzebinski (CEO)
Yeah. Well, clearly, pricing has an impact on margins, and you would think they will go down. And that's part of what's in our guidance for the third and fourth quarter. Now, as utilization starts to come back, we do get a pickup from that. So, we think utilization will come back, and most of this is temporary. So, you know, it's a balance, but clearly, we've... And you look at third and fourth quarter, the margin impact is in our guidance. Now, in terms of spot versus contract, you know, the move to more spot actually gives you some leverage when things start coming back because you're not locked into lower pricing.
You know, a lot of what you're seeing in this pricing environment has just been in the spot market, so very few contracts are being signed up at these low levels.
Kelly Dougherty (Equity Analyst)
But more contrary to the spot on the coastal side, though, how do we think about. 'Cause you're basically gonna have fewer revenue days, and, you know, if I'm correct, very similar operating costs. And if it's in a low double-digit range now, does that go to a single-digit range on the coastal side if more customers move over to spot?
David Grzebinski (CEO)
It could potentially, yeah. No, we're in low double digits now, and clearly as the spot, the more spot you have on the coastal side, you just don't get, you know, the continuous voyages. So yes, you don't shed the cost, but you don't have as much revenue. So you're correct. You know, it could go into the high single digits.
Kelly Dougherty (Equity Analyst)
Okay, great. Thanks, guys.
Andy Smith (EVP and CFO)
Hey, hey, Kelly, real quick, just to clarify on my free cash flow number, I want to make sure you understood, that, that does not include the acquisition spend. That's, that's-
Kelly Dougherty (Equity Analyst)
Sure.
Andy Smith (EVP and CFO)
Incremental to that. Okay.
Kelly Dougherty (Equity Analyst)
Sure.
Okay. Thank you.
Operator (participant)
Our next question will come from Jack Atkins of Stephens.
Jack Atkins (Research Analyst)
Hey, guys. Good morning, and thank you for the time.
David Grzebinski (CEO)
Hey, good morning, Jack.
Jack Atkins (Research Analyst)
So, I guess, David, just to kind of think about the pricing dynamics on the inland side a little bit more, you know, you talked about unsustainably low spot pricing, which, you know, sort of at or below the break-even price for some players in the market. Could you give us a sense for really where spot rates and contractual rates are today relative to both the prior peak in 2014 and then the trough during the recession in 2009? So where are we in that continuum with both of those type of rates?
David Grzebinski (CEO)
Yeah, we're, I'm saying, from the peak in 2014, we're probably down 20, maybe even 25%. And then from the last downturn, say, 2009, you know, spot prices are a little below that. You know, part of that is, you know, frankly, we've got some undisciplined players in the market that have impacted it below what we saw in the last cycle. But yeah, yeah, it, that's why we think we're close to the bottom here, because it's hard to envision a very longer, a longer-term pricing environment where you're at or below cost, cash costs. It just, it's not sustainable.
Jack Atkins (Research Analyst)
Okay, okay. And then, you know, that's helpful. And then shifting gears over to the diesel engine side, you know, I, I know a lot of work has been done there, to remove excess operating expenses there, just given the type of cycle we've seen in the oilfield services market. But, you know, as you think about that business potentially recovering, in 2017, perhaps the second half of 2017, I'm curious what you think the land-based, margin, in the diesel engine services segment could look like over the course of the next cycle. I know typically it's been, you know, high single digits. You know, with all the cost actions and rationalization in that business for you guys, what does that, I mean, what, how should we think about that business looking from a profitability perspective coming out of this?
Andy Smith (EVP and CFO)
Hey, Jack, this is Andy.
... With some of the costs initiatives that we've taken on and some of the improvements that we've made in our processes in that, in that business, we think that we can probably easily, you know, add an additional 300-400 basis points of margin to that business over the next cycle.
Jack Atkins (Research Analyst)
Okay, that's helpful, Andy. Thank you very much.
Andy Smith (EVP and CFO)
Yeah.
Operator (participant)
The next question will come from Gregory Lewis of Credit Suisse.
Gregory Lewis (Oil Service Analyst)
Yes, thank you, and good morning, guys.
David Grzebinski (CEO)
Hey, good morning, Greg.
Gregory Lewis (Oil Service Analyst)
Yeah, I guess my first question will be around, you know, on the inland and the coastal side. You know, Joe mentioned that you guys retired an 80,000-barrel coastal barge earlier this year. As we look at both those markets, sort of, you know, over the next 12 months, in terms of what visibility you have, you know, exclusive of retirements, what type of fleet growth do you expect to see in inland and do you expect to see in coastal?
David Grzebinski (CEO)
Yeah. Well, you know, I think, let me take inland first. You know, clearly, we're in an oversupplied market right now. We've got too much equipment. And, you know, in this kind of market, with these kind of prices, as maintenance decisions come up or certainly nobody would want to build into this market right now. No rational player would wanna add capacity in this environment. And I think as you look at maintenance decisions that come up on, say, a 25-year-old or 30-year-old barge, you know, you probably tie it up, at best, and maybe you just retire it and cut it up and sell it for scrap. Because, you know, at this market, those kind of decisions become easier.
This is why we see in these kind of environments, you know, the number of retirements go up and the building go down. You know, as we look at the 2017 order book, we're not hearing much at all, being let in terms of contracts. So in terms of inland fleet growth, I don't think there will be much, if any, at all. And with retirements, it should contract. On the coastwise side, you know, it's a little more balanced in that you've got some new capacity coming in, including some of ours, over the next 12-18 months. You know, I think in total, it's the ones that haven't delivered, maybe it's 14 units.
But there are still over 40 units that are 30 years or older in the coastwise business, and they need to come out. The vetting requirements from our customers are getting tougher, and in the offshore environment, they're even tougher than they are on the inland side. And age is a factor there. So I think you'll see more retirements on the coastwise side. You know, the question is the balance between the new additions and the retirements and how that plays out. But I don't think you'll see overall capacity growth, volume growth on the coastwise side in the barges that are 200,000 and less.
Gregory Lewis (Oil Service Analyst)
Okay, great. And then just one other for me, just since, you know, the focus seems like it's gonna be on margins. You know, you mentioned the four tug barges that you bought for, I don't know, what? $24 million-$25 million, and they're replacing four older barges. Is I'm assuming that that would be margin accretive. Is there any way to sort of. I mean, whether it's they're more fuel efficient, whether it's they break down less, whether they require more maintenance, is that enough to sort of move coastal margins a couple base, some basis points, or is that more just not, like, not really gonna have much of an impact?
David Grzebinski (CEO)
It's probably positive, but I'm not sure it's gonna move the needle. If you think about it, and let me clarify. We bought, excuse me, four tugs, not barges.
Gregory Lewis (Oil Service Analyst)
Sure. Sure, sure.
David Grzebinski (CEO)
So we're acquiring, right, four 40-year-old boats and replacing them with much younger. So what happens is you get a little more depreciation, but the offset of that is you get higher reliability, lower maintenance cost, and just better utilization out of them because there's fewer maintenance days, fewer down days. And clearly, a younger fleet is more attractive for term customers as well. Now, to quantify that in terms of margin, you know, I don't think I can quantify that, and I'm not sure it would be that much, that material, but it certainly is a positive.
Gregory Lewis (Oil Service Analyst)
Okay, guys. Hey, thank you very much for the time.
David Grzebinski (CEO)
Thanks, Greg.
Andy Smith (EVP and CFO)
Thanks, Greg.
Operator (participant)
Our next question will come from Ken Hoexter of Merrill Lynch.
Ken Hoexter (Managing Director)
Greg, good morning. So, Dave, or Andy, when you guys talked about the pricing before in terms of the Great Recession, how about utilization? You talked about it dropping to the low to mid-80s. Where did you see utilization getting to? You know, how low can this go? And then, I guess, in that utilization concept, you didn't talk much about the remaining crude barges. Is there anything left on that side to still come in? Is that what's creating some of this excess capacity? Are they now all in petrochem? And I guess, sticking with that, a lot of discussion on pricing, but nothing on the demand side. Anything happen with the new plants? Is there something that's coming online that you look out, and you see a turn that can drive this?
Thanks for the thoughts there.
David Grzebinski (CEO)
Yeah, sure. Let me take those, try and do them in order. You know, in 2009, I think there was a quarter we dipped into the high 70s. But it was, I think it was just one quarter. So, you know, it's not as bad as that. But, you know, our low 80s is pretty difficult environment in terms of utilization. In terms of crude barges, you know, I think last quarter, we said, we estimated there were about 175 or so barges still moving crude, and that was down from 550. You know, our latest poll indicates it's probably around 140 barges. So sure, you know, that did have some impact. You know, it went from 175 down to 140.
You know, it's interesting. You'll see, you know, you read some of the snippets that people in the Utica are gonna start drilling again. So who knows if we've hit bottom on the crude barges, but clearly, the barges that have come out of crude have been cleaned up and put into clean service, by and large, which has, you know, impacted utilization for sure. Now, to your broader question about demand, if we look across all of our product products that we carry, you know, outside of crude, everything's pretty good. You know, crude's down for sure, but if you look at the chemicals, you know, they're okay. And we do see continued building. I think one of our customers just announced a new joint venture.
They're gonna build a new facility on the Gulf Coast. There has been one or two delays, but by and large, most of the chemical facilities that have been announced and have started construction are still going on. So that's a positive. You know, refined products, outside of this product glut that we're in now, that's impacting kind of some movements, if you look at vehicle miles driven, they're up, and refined products demand is still growing, and I think production has outpaced it here recently, and that's caused this kind of disruption, or product glut, if you will. And then you look at some of the other products. Outside of crude, everything is okay, and you know, fairly healthy.
It's just, we've got a little dislocation now where things have to come back into balance.
Ken Hoexter (Managing Director)
Great. Appreciate that. If I could get a follow-up on your comment on the particular players that are more aggressive. I just want to understand, in that phase, when you're going through this, your take or pay contracts, which kind of are your basis for, I guess, stability or kind of some stability there, what happens to those contracts as they come up for renewal? Do they tend to be higher than average contract pricing, and so that's why you see maybe a little bit more volatility? Or is it just anything that gets touched is just coming down to the current spot levels?
David Grzebinski (CEO)
Yeah, what you're seeing, because there's, you know, equipment availability, some of the term contracts, and this is across the industry, not Kirby specific. But some term contracts aren't getting renewed, and they're just going to the spot market for a while. Now that's not... I don't want to overstate that. That's not, you know, a huge number, but there are a number of term contracts that are going to the spot market because the availability is there. And they're, you know, the operators, the shippers aren't as concerned about availability. Now, as things start tightening up, that will reverse itself, and we would expect that to start happening again later this year.
Ken Hoexter (Managing Director)
Great, Dave, appreciate the insight. Thanks.
David Grzebinski (CEO)
Thanks, Ken.
Operator (participant)
The next question comes from Michael Webber of Wells Fargo.
Michael Webber (Managing Director)
Hey, good morning, guys. How are you?
David Grzebinski (CEO)
Good morning, Michael.
Michael Webber (Managing Director)
Hey, just wanted to go back to some of the, I guess, the pricing pressure conversations you were having a bit earlier, and maybe kind of backing away from kind of the natural inclination, the market seems to have, with kind of find a floor for pricing or kind of setting a bottom. But if I maybe, if we kind of frame this up within the context of the past couple cycles, you know, you mentioned, you know, some of the pricing is unsustainable and ultra-competitive. You know, we're hearing about cash conversion cycles starting to contract as guys are looking to preserve liquidity.
So I guess maybe within the context of those past cycles, you know, how long does it take for the market to really clear that capacity, and for those irrational actors to actually get removed, kind of beyond just the idea of kind of scrapping individual assets? Is that something that's typically, you know, measured in quarters or in years when you guys go back and look at, you know, the past two or three or four cycles, even a part of?
Joe Pyne (Chairman and CEO)
Yeah. David, you want me to take that?
David Grzebinski (CEO)
Yeah, Joe, go ahead. He has the longer-term context.
Joe Pyne (Chairman and CEO)
Having lived through many cycles.
Michael Webber (Managing Director)
Perfect. Thanks, Joe.
Joe Pyne (Chairman and CEO)
Yeah, Well, I, I think, I think firstly, you, you, you need to, to, to separate what, what drove, some of the cycles in the past and what's driving this one. Cycles in the past have been, been principally driven by, by recessions, where volumes have declined, and, and you, you really needed, needed to have kind of a cleansing, of, of the industry. You, you, you, you needed, one, the economy to recover, volumes to improve, and some equipment, to come out. This particular, that downturn is not economically driven. It's, it's, it, it really is affected by, by a couple of things. It's, it's affected by, building the, the barges for a market, the crude oil market, that, that then collapsed as crude oil collapsed.
And it's affected by what I think is an anomaly, which is high inventories and the market adjusting to those inventories. We saw something similar to that in 2008, the end of 2008 and the beginning of 2009, where you did have an economic collapse, but you also had an enormous adjustment in inventories, and that was relatively short. Now, there's some other things that are going on, I think, during this particular period. You have the summer weather effect that David talked about, and that's something that we really haven't seen in the last three or four years because the market's been so tight. There hasn't been enough equipment.
But if you go back to the last 30 years before that, you always had utilization trail down the summer as the system got more efficient, and there was more equipment on the market. Come fall, that tightens up again. You know, I think what's happened here is that you have some operators that are already worried about crude oil equipment that they've built that doesn't have a home for. And then you have this the summer doldrums that have been traditionally seen in the business, and they panic, and they lower prices just to book equipment, which has dragged the whole market down.
I think as you get some adjustments in inventory, as you go into the fall, where the system isn't as efficient, it gets a little less efficient, you'll see utilization get better, and I think pricing will follow it. How long it takes to absorb the crude oil overhang will really be a, it'd be driven by two things. One, equipment going out of the market, and, you know, some of that's happening now. You're already getting maintenance deferrals, so you're gonna see less available equipment going forward in the year.
And then the volumes that David talked about, you know, you've got strong refined products markets, record miles driven in the U.S., and I think people are predicting that that's gonna continue, given the low gasoline prices. And then you have these volumes that are coming, you know, from the chemical business. So it's gonna correct itself. I think you'll begin to see it, you know, at the end of, you know, towards the end of the year. And, you know, 2017, you know, barring any economic issues, should see, you know, continued correction, higher utilization, and more normalcy in the pricing.
Michael Webber (Managing Director)
Fair enough. And just to follow up on that, Joe, you know, you mentioned kind of the petchem cycle potentially starting at some point in kind of 2017, 2018. But when we think about the kind of the enhanced focus around ethane, ethylene, and kind of away from naphtha and some of the cargoes. When you think about barge market share kind of of overall petchem production kind of relative to rail and to pipeline, and when you think about what that mix looks like going forward and yields look like going forward from the petchem space, do you think that barge market share technically grows or contracts, just given what we're likely to be seeing offshore?
Joe Pyne (Chairman and CEO)
Yeah, it should grow. You know, pipelines aren't conducive to the kinds of chemicals that we carry. Barging is much more flexible because you can source it from different plants. You can move it into different markets. A pipeline is, you know, you put it in the pipeline, and it comes out where the pipeline ends. And it also requires, you know, steady volumes of some significant nature, and that's really not the chemical business. Barging has been really the principal way of moving chemicals around because of their flexibility and because of the volumes that you typically see.
Railroads, you know, it, railroads are competitive, depending on where you're moving the chemicals and how much you're moving. Remember that our the smallest barge that we operate is equal to, I think, 16 rail cars. So if you've got less than a barge load, then rail makes a lot of sense. If you're taking it to a place that barging doesn't service, then rail makes a lot of sense. But typically, on most movements, rail is not a competitive factor. So I would think that we're gonna get more than our share.
Michael Webber (Managing Director)
Fair enough. Thanks, guys.
David Grzebinski (CEO)
All right, thank you, Mike.
Operator (participant)
Our next question comes from David Beard of Coker & Palmer.
David Beard (Institutional Equity Analyst)
Good morning, gentlemen.
David Grzebinski (CEO)
Hi, David.
Andy Smith (EVP and CFO)
Morning, David.
David Beard (Institutional Equity Analyst)
Given the, you know, rather sharp downturn, how do you guys prioritize share buyback versus acquisitions? And should we, you know, expect you to lean more towards acquisitions in a time of stress like this?
David Grzebinski (CEO)
Yeah, yeah. I mean, it's a moving target, obviously, right? It depends on the share price. But, you know, clearly, we like to do consolidating acquisitions that set you up for growth long term, and allows us to further leverage our cost structure if we're able to get a good consolidating acquisition. So, you know, on the margin, we do like the acquisitions, but, you know, there's a price, obviously, that our shares are very attractive as well. So it's a balance.
David Beard (Institutional Equity Analyst)
Okay, good. And just sort of a clarification on the history lesson of barge pricing and utilization. You know, I don't know if you can rattle off the times when we've seen utilization at the low 80s and prices below cash breakeven for some operators. I think you mentioned briefly in 2009. Have there been some other periods of time that you can recall that happening?
Joe Pyne (Chairman and CEO)
You know, you have to almost go back to the 1980s where you saw this kind of predatory pricing. In 2001 through 2003, we saw some low prices, but I don't recall them being at cash prices. You know, and we, you know, it I, think, David, we have to clarify that not all, not every deal is done this way. It's just that you have several operators that I think have gotten way more nervous than they should be, based on some decisions they made with respect to, you know, building equipment.
And then this inventory problem, coupled with seasonality, that we talked about, just panic. I can't imagine that they're gonna carry this forward, you know, once they see the market, you know, improve a little bit, which it really should do, just driven by the fact that we're gonna be less efficient going into the fall and the winter.
David Beard (Institutional Equity Analyst)
No, that's very helpful. I appreciate the clarification. Thank you.
David Grzebinski (CEO)
Thanks, David.
Operator (participant)
Again, if you would like to ask a question, please press star, then one at this time. Our next question will come from John Barnes of RBC Capital Markets.
John Barnes (Managing Director and Senior Research Analyst)
Hey, thanks for taking my questions. A couple of things here. You mentioned that maybe a little bit of equipment is moving from contractual environment to the spot environment. You know, for Kirby, you know, can you provide us with what that mix is today and kind of where it's gone from, say, the, I don't know, the peak or most recent peak, something like that?
David Grzebinski (CEO)
Yeah, I think we're, we're right about, what is it? 80%-81% term contract, 80%, and that's, I think, probably down from about 85%.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right. And then, yeah, I guess, you know, you've got this petchem cycle that's kind of developing. You know, I guess my, my question would be, you know, is the current downshift in the cycle severe enough that it hampers or harms the ability to really benefit from that, that petchem boom? I mean, is there, you know, is it going to be destructive enough to price that it really mutes any, any uptake? Or, you know, is the industry going to underbuild for, you know, a couple of years to where, you know, as that cycle really begins to gain some traction, we get back into a, into a much tighter capacity situation, and you're seeing, you maybe experience the same type of, of pricing power we've seen in other, in other cycles.
How do you feel about, you know, how do you gauge these types of times?
David Grzebinski (CEO)
Yeah, I don't think it mutes the chemical cycle. If anything, I think what ends up happening is we get some capacity rationalization out of this. And certainly, it should dampen any enthusiasm to build. And I think that's a positive. I think for some operators that are more highly levered, it really puts them in a tough way, which makes them, you know, less likely to go do something like build new capacity. So, you know, if anything, I don't think this down cycle mutes, you know, the benefit from petchem, and if anything, it helps because it is so stinging right now, bring some discipline into the market.
Joe Pyne (Chairman and CEO)
David, let me just add one more thing. John, I think this is worthy to know. You know, we're down on crude oil because, you know, crude oil prices are such that there are some significant restraints to-
Yeah, drilling for oil in the U.S. And, you know, we tend to think that, that's gonna go on forever, and it, it's not. I mean, the world's demand for crude oil and the U.S. position, you know, barring some regulations that, you know, I don't think we're gonna see, is very important to the world oil supply. And, we have said this in the past, and I think it's worth, you know, saying it again, is that barging is gonna be one of the ways that you're gonna move crude oil to the market. And when the volumes come back, you're gonna move more volumes of crude oil, and that's also gonna have a stabilizing effect on the fleet.
I think that Halliburton said the other day in their earnings call that by 2021, the world needed close to 18 million more barrels of oil. That's an enormous amount of oil, and you know, some of that is gonna have to come from the U.S. shale effort, and we're gonna get some of those volumes.
John Barnes (Managing Director and Senior Research Analyst)
Yeah, I love how, you know, we went from an environment where it was all crude oil all the time, to now it's, you know, it's never coming back. You know, I think we've seen in cycles, I mean, this stuff never goes away permanently. But, you know, obviously, there was, you know, some overbuilding for a while, I guess. But, you know, my last question for you, David, is your comments around the land-based side on diesel engine. You know, when do you think that the, you know, inquiries and all on service and reman work, you know, starts to result in inquiries and orders for new equipment? I mean, the rig count is up.
You know, we've heard that, you know, some of the producers are still, you know, kind of, you know, basically cannibalizing, you know, parts and everything from other, you know, existing equipment or whatever. But when do you think that really begins to materialize in real orders?
David Grzebinski (CEO)
Yeah, well, it's interesting, John. I think it's because it's been so painful in the pressure pumping business. I think capital there is not as plentiful. And what you're seeing, and what we're seeing from our customer base is a lot more reman and service, almost no discussion about any new capacity. So it's kind of like the reason we said we'd get into this business. We thought there would be a lot of reman business, just because capital discipline would work. And I think we're starting to see that play out, where we're getting, you know, a lot of inquiries about repairing equipment and remanufacturing equipment. Now, you know, there's some interesting things going on.
We heard in some of the oil service commentary that you don't need 1,800 rigs to absorb the pressure pumping fleet. They think it's closer to 900. So you know, that's service intensity plus the attrition that's happened in the fleet. So I think on the pressure pumping side, you're gonna see that market tighten up pretty quickly. And they need it. I mean, our pressure pumping customers have been cash constrained. So I don't think that's a long way of saying you know, we're not seeing new equipment orders. I don't think I mean, and they will reemerge, but right now, you know, the demand for reman is growing, and to us, that's very encouraging.
John Barnes (Managing Director and Senior Research Analyst)
Okay, all right. Is the margin on that business still as good? Is it the spread between reman service work and, you know, new equipment, that margin spread still like it was when you first bought the business, or-
David Grzebinski (CEO)
Yeah, I mean-
John Barnes (Managing Director and Senior Research Analyst)
Is there enough service capacity that it eats a little bit of that?
David Grzebinski (CEO)
You know, we still have a volume problem, right? You've got to have enough volume to absorb all your fixed costs. But in general, service margins are usually kind of double digit, whereas, you know, equipment, new equipment is more high single digit. So, yeah, service margins should be higher. The issue is we've got to get to a volume where we're absorbing all of our fixed costs, and then the margins will really start to improve.
John Barnes (Managing Director and Senior Research Analyst)
All right. I know I went over my allotted one follow-up, so I'll let you go. But hey, thanks for taking the question.
David Grzebinski (CEO)
Thanks, John.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Mr. Sterling Adlakha for any closing remarks.
Sterling Adlakha (Director of Investor Relations and Finance)
Thank you, Laura. We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, you can reach me directly at 713-435-1101. Thank you all, and have a nice day.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.