Kirby - Q2 2017
July 27, 2017
Transcript
Operator (participant)
Good morning, and welcome to the Kirby Corporation Q2 2017 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. Please note, this event is being recorded. I would now like to turn the conference over to Brian Carey. Please go ahead.
Brian Carey (Head of Investor Relations)
Good morning, everyone, and thank you for joining us. 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 call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our Q2 earnings press release, and is available on our website at 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 31, 2016, filed with the SEC. I'll now turn the call over to Joe.
Joseph H. Pyne (Chairman)
Thank you, Brian, and good morning. Yesterday afternoon, we announced 2017 Q2 earnings of $0.48 per share, including $0.01 per share in acquisition costs for acquisition of Stewart & Stevenson. This is versus our guidance range of $0.40-0.55 per share. That compares with $0.72 per share reported for the 2016 Q2. The results in the quarter reflect recent trends in all our businesses. The inland marine tank barge market continues to bounce along the bottom of what has been one of the worst markets for over 30 years, while the coastal market weakened further from the Q1. The marine diesel engine market was relatively steady, but has some weakness as a result of softer marine markets, including the dry cargo market.
David Grzebinski (President and CEO)
With respect to the land-based diesel engine business, we saw continued strong service demand, producing results which offset the additional weaknesses seen in our coastal business. U.S. rig count continues to rise during the quarter. It appears to have plateaued recently.
Brian Carey (Head of Investor Relations)
I think, operator, we may have lost Joe.
David Grzebinski (President and CEO)
Yeah.
Operator (participant)
All right, sorry for the technical difficulties. We will give a call back to Joe in one moment.
Brian Carey (Head of Investor Relations)
So let-
David Grzebinski (President and CEO)
Let's see if Joe shows up here in a second. Otherwise, this is David Grzebinski. I'll continue with some of the details of the quarter and recap our Q2 results in each of our markets, and then turn the call over to Andy on financials. Following Andy's call, comments on the financials, we'll open up, well, I'll give an update on the outlook, and then we'll open it up to Q&A. In the inland marine transportation market, our utilization ranged from mid-80% to high 80% level during the Q2, as operating conditions improved as a result of better weather, increasing our efficiency and lowering utilization relative to Q1.
Utilization declined in the quarter as a result of this improved operating efficiency, but also because of some decreased seasonal demand for the transportation of agricultural chemical products, as well as a return of the black oil fleet to its normal levels in the back half of the quarter, as refinery turnaround activity in the Gulf Coast wrapped up. Pricing on term contracts that renewed during the Q2 was down in the mid-single digits compared to the 2016 Q2. Spot prices were essentially consistent with the 2017 Q1. In our coastal marine transportation sector, demand for the coastwise transportation of black oil and petrochemicals was relatively stable compared to the 2017 Q1 and the 2016 Q2. Demand in the refined petroleum products market was lower year-over-year, but flat sequentially.
We expect to see an oversupply of tank barges and barrel capacity in the coastal barge market through year-end, and few short-term demand catalysts to alter the fundamentals of the market. We continue to aggressively manage costs by temporarily idling equipment where it makes commercial sense, including temporarily laying up barges. Coastal tank barge utilization was in the high 60% to mid 70% during the quarter. Regarding coastal market pricing, generally, spot rates remain below contract rates; the degree to which varies based on geography, vessel size, vessel capabilities, and the product being transported. As an example of where spot pricing was in Q2, spot rates for vessels in the 80,000- to 100,000-barrel range in clean product service were approximately 20%-25% lower than Q2 a year ago.
That's the Q2 of 2016. Pricing on both term and spot contracts was stable compared to the Q1 of this year. In our land-based diesel engine services market, pressure pumping unit remanufacturing remained strong, with the number of units at our facility for remanufacture averaging approximately 110 during the quarter, even as we increased our throughput. Parts sales associated with remanufacturing work improved modestly from earlier in the year, as customers' inventories of parts have finally begun to diminish. In terms of new equipment manufacturing, we received 1 frac spread order in Q2, the second of the year, and expect it to deliver in Q3. One frac spread generally consists of 20 to 28 pieces of new equipment made up of pressure pumping units and a few pieces of ancillary support equipment.
Customers continue to show interest in new frac spreads, but have been slow to commit to orders. In our distribution business, demand for rebuilt transfer transmissions remained elevated in Q2, surpassing our all-time high. On the other hand, the sales of engines, parts, and new transmissions remained fairly weak in comparison to prior recoveries and expansions. That being said, we are encouraged by recent customer activity, including some meaningful Q3 orders. We are excited about the potential for combining the increased efficiency and near-term and near-peak margins we saw in Q2, with higher revenue as product sales begin to improve.
In our marine diesel engine business, performance was seasonally weaker than the 2017 Q1 and the 2016 Q2, primarily due to increased deferrals of major overhaul projects, consistent with the relatively weak inland tank and dry cargo barge markets, as well as the weaker coastal marine markets. Service activity and parts demand in the power generation market was in line with the 2017 Q1 and lower than the 2016 Q2, due to a lack of new engine sales in the first half of this year. However, operating margins were only slightly lower sequentially and improved year over year. Andy will now walk through the financials in further detail, and I'll come back for a discussion on the outlook.
C. Andrew Smith (EVP and CFO)
Thanks, David. In the 2017 Q1, Marine Transportation segment revenue declined $47 million or 12%, and operating income declined $37 million or 51% as compared with the 2016 Q2. The decline in revenue and operating income in Q2 as compared to the prior year quarter was mainly due to continued lower inland marine pricing and coastal marine utilization. The Marine Transportation segment's operating margin was 10.8%, compared with 19.2% for the 2016 Q2. The inland sector contributed slightly more than two-thirds of marine transportation revenue during the 2017 Q2.
Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 75% of revenue, with 48% attributable to time charters and 52% from apportionment contracts. The inland sector generated an operating margin in the mid-teens for the quarter. In the coastal sector, many customers continued to source their barge needs in the spot market rather than renew existing term contracts. The percentage of coastal revenue under term contracts was consistent with the 2017 Q1 at approximately 80%, primarily as a result of lower utilization and revenue for spot equipment. The Q2 negative operating margin for the coastal sector was in the low single digits.
In regard to our marine construction and retirement plans, we took delivery of one 30,000-barrel inland tank barge and retired 16 over the course of Q2. The net result was a decrease of 15 tank barges in our inland tank barge fleet, for a total reduction of approximately 269,000 barrels of capacity. For the remaining six months of the year, we expect to fold in the nine pressure barges and four 30,000-barrel barges from the recently closed asset purchase, take delivery of four additional 30,000-barrel inland tank barges, and retire 10 more barges with approximately 183,000 barrels of capacity. That we expect to end 2017 with a total of 856 tank barges, representing 17.6 million barrels of capacity.
In the coastwise transportation sector, there were no new additions to the fleet. We sold one 18,000-barrel barge during the quarter, ending the quarter with approximately 6.1 million barrels of capacity. In terms of coastal fleet additions, we now have just one remaining barge on order and expect to take delivery of that 155,000-barrel ATB in Q3.
In our Diesel Engine Services segment, revenue for the 2017 Q2 increased 125% from the 2016 Q2, and operating income for the quarter was $16.4 million, as compared with an operating loss of $2 million in the 2016 Q2. The segment's operating margin was 11.5%, compared with a negative 3.1% for the 2016 Q2. Our land-based operations made up approximately 75% of the diesel engine services segment's revenue in Q2, with an operating margin in the low double digits. The revenue composition of this quarter is largely similar to the 2017 Q1, but we saw sequential margin improvement as we experienced improved operating leverage from high throughput.
The marine and power generation operations contributed approximately 25% of the diesel engine services revenue in Q2, with an operating margin in the mid-teens. On the corporate side of things, we incurred approximately $707,000 in acquisition-related charges in Q2, as well as about $187,000 in the write-off of deferred financing costs as a result of expanding our revolving credit facility. Our capital spending guidance for 2017 remains unchanged at $165 -185 million. We do not expect any changes to our quarterly tax rates. Our guidance uses a rate of approximately 40% for Q3 and approximately 38% for Q4. For the full year 2017, our guidance uses a tax rate of 38%.
As of June 30, 2017, total debt on our balance sheet was $591.5 million, a $131.3 million decrease from December 31, 2016. Our debt-to-cap ratio at the end of Q2 was 19.3%, a 3.8-point decline from December 31, 2016. As of today, after closing our asset purchase, our debt stands at $654 million. I'll now turn the call back over to David.
David Grzebinski (President and CEO)
All right, thank you, Andy. In our press release last night, we announced our 2017 Q3 guidance of $0.40-0.55 per share, and narrowed our full-year 2017 guidance to $1.80-2.10, and that's down from, or narrowed from $1.70-2.20 per share, but it essentially leaves the midpoint unchanged. This does not include any impact from the acquisition of Stewart & Stevenson. But in brief, we are taking a more conservative stance on our annual guidance, lowering our expectations on the coastal marine business, given the realities of the market, tempering our inland pricing expectations, but offsetting this with strength in our land-based diesel engine services market.
In the inland marine transportation market, we expect utilization in the mid-80% to low 90% range for Q3 and full year, a range that assumes stable demand across the inland fleet. We look for delay days to remain low in the early part of the Q3 and gradually increase through the Q4 as operating conditions deteriorate with weather and potentially a more active hurricane season compared with 2016. We are confident that supply and demand in the inland barge industry is moving towards balance. Though we hoped it would result in modest pricing gains in the second half of 2017, we are modifying our guidance to a more conservative expectation, where pricing does not improve this year. As a result, the difference in the range in our updated guidance is dependent on tank barge utilization and contemplates flat pricing.
The downturn in the inland marine market has been one of the worst in 30 years, with pricing at unsustainably low levels. We will be active and disciplined as we assess opportunities to grow our inland marine franchise and emerge from this cycle more efficient and better able to serve our customers. In the coastal market, on the low end of our guidance range, we contemplate, and this includes temporarily laid-up equipment, on the low end of the range, mid-60% utilization, and then on the higher end of the range, low 70- to mid-70% range. We assume term and spot rates hold steady through the end of the year, and that renewing contracts reprice at spot levels.
We are guiding to full-year mid-single-digit negative operating margin on the low end, and a negative low single-digit operating margin on the high end. We are focused on aggressively managing costs in the coastal marine business until the market improves. For our diesel engine services segment in our land-based sector, we expect service work from pressure pumping unit remanufacturing and transmission overhauls in the third and Q4s to remain consistent with the first half of the year. The new pressure pumping units from the frac spread ordered in Q2 are expected to ship in Q3. Barring a change in current trends and demand for pressure pumping horsepower in the onshore oil and gas market, we expect inquiries regarding sales of new pressure pumping equipment to result in at least one additional frac spread order for the year.
We also expect to see some increased demand for new product during the next two quarters. Regarding Stewart & Stevenson, we expect to close in the Q3. We are excited about the potential of combining our businesses with theirs in this very constructive market. On our Q3 call, our Q3 Earnings Call, post-closing and upon the completion of a purchase price allocation study, we will be able to publish guidance for Stewart & Stevenson for the remainder of 2017. In our marine diesel markets, we do not expect any revenue improvement relative to the 2017 Q2. In the power generation market, we expect results that are relatively consistent with 2016, though slightly lower sequentially due to the deferrals that we are seeing by marine customers.
In summation, our Q2 2017 results reflect a continuation of trends seen in late 2016 and in Q1 of 2017 in all of our markets. The inland marine business is safely and successfully meeting customer needs while maintaining profitability in a very low pricing environment. Though our coastal marine market faces weak market fundamentals for the near-term future, we are focused on aggressively managing costs without sacrificing our ability to respond to an eventual market rebound. The land-based diesel engine services business has hit its stride in a healthy oil field service markets. Our financial position is very solid, with free cash flow, excluding acquisitions, expected to be comparable to 2016, and a balance sheet that provides us with flexibility. Our debt to total capitalization ratio has steadily moved lower since the start of the year.
Assuming the close of the pending Stewart & Stevenson acquisition, and including the debt incurred from our recently closed inland barge acquisition, our debt to total capitalization ratio will be in the range of 26%-28%. Let me conclude our prepared remarks by saying we are committed and have the balance sheet to pursue the right acquisitions for our marine, for our inland marine market. We expect to emerge from this downturn larger and more efficient, with unparalleled customer service in this industry. Okay, Joe Pyne has rejoined the call after we solved our technical issue. Joe, if you want to make any comments, the line's open to you. Otherwise, we can go to Q&A.
Joseph H. Pyne (Chairman)
No, David, I would go to Q&A. I think that we've covered the significant points.
David Grzebinski (President and CEO)
All right. Operator, if you could open the call to questions and answers.
Operator (participant)
All right, thank you. We will now begin the question-and-answer session. Please limit your questions to one question and one follow-up. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gregory Lewis, with Credit Suisse. Please go ahead.
Gregory Lewis (Managing Director)
Yes, thank you, and good morning, gentlemen.
David Grzebinski (President and CEO)
Hey, good morning, Greg.
Gregory Lewis (Managing Director)
Hey, David, could you talk a little bit more about what's you're seeing in inland? You know, clearly, it sounds like you've thrown in the towel a little bit on pricing in the second half of 2017. And just really trying to understand, you know, what is happening there, as well as in the guidance, when you talk about flat pricing, it sort of sounds like the base case. What gives you comfort that we're going to be able to see flat pricing in the back half of the year?
David Grzebinski (President and CEO)
Well, I think, let me say this, that things are still going as we expected. You know, our utilization is running 85% to low 90s in that range, which is good. We're seeing the chemical plants come along, so the demand continues to inch higher. So we're just bouncing along the bottom. We thought we'd just be prudent and say, "Hey, look, it's going to take a little longer for pricing." But, you know, everything's lining up for an inflection. I think many of our competitors are struggling, and we're seeing, you know, pricing, spot pricing that can dip down sometimes to cash flow breakeven, maybe a little above, and that's just not sustainable.
But we thought we'd be prudent to, for the back half of the year and just say, maybe this extends a little longer. But everything is marching towards, towards balance and an inflection point. I will remind you that, you know, in the last two cycles, it's the 2008, 2009 cycle and the 2000 to 2003 cycle, when we were in this utilization range, 80%, 85% to 90% utilization range, we were able to get pricing increase. So I think it's just a, just a temporary pause, and, and we're getting closer and closer. It's just we felt it was prudent to, to go with a, a more conservative outlook on that, for the back half of the year.
Gregory Lewis (Managing Director)
Okay, but it sounds like the trends are still there. And then just on the coastal, I want to say earlier this year, it sounded like the goal was to sort of get margins to sort of like a breakeven. Has anything changed, or have you seen anything that makes the company think that's gonna be, obviously, it's difficult, but I mean, what degree of confidence do we have that we can maybe get those EBIT margins in coastal to kind of cash breakeven over the next, I don't know, two, three, four quarters?
David Grzebinski (President and CEO)
Yeah. Well,
C. Andrew Smith (EVP and CFO)
Well, hold on. Just real quick, Greg, just on an EBITDA basis, I think our margins are in the, you know, almost the mid-teens.
Gregory Lewis (Managing Director)
Sure.
C. Andrew Smith (EVP and CFO)
But, so-
Gregory Lewis (Managing Director)
I was referring to EBIT.
C. Andrew Smith (EVP and CFO)
Yeah, so on a cash breakeven... Well, you said, I just wanted to make sure, because you said cash breakeven.
Gregory Lewis (Managing Director)
Oh, okay. Sorry.
David Grzebinski (President and CEO)
Yeah. As Andy says, our EBITDA margins are around mid-teens. But our operating income, to your point, is at a loss. In the Q1, we lost, what is it? About $5 million or so in the coastal business. In Q2, it was about $3.5 million in that business. We have been aggressively cutting costs and temporarily laid up a few boats and barges. You know, it's just a slog here. We've got too much equipment chasing business out there. We know there's some older equipment that has to come out. You know, I think our last count, there were 33 barges over 30 years old. It's just gonna take some time.
I think the industry's feeling the pain, so that older equipment will come out. And as we've mentioned before, we've got ballast water treatment systems that have to be installed starting in 2018, and I think that will add to the impetus to retire some of this older equipment. You know, in terms of our outlook for it, it's just been a slog. We're still going after costs aggressively, but we wanted to be realistic about how bad it could be.
Gregory Lewis (Managing Director)
Okay. All right, guys. Hey, thank you very much for the time.
C. Andrew Smith (EVP and CFO)
Thanks, Greg.
David Grzebinski (President and CEO)
Thanks, Greg.
Operator (participant)
Our next call comes from Jon Chappell with Evercore. Please go ahead.
Jonathan Chappell (Senior Managing Director)
Thank you. Good morning, guys.
C. Andrew Smith (EVP and CFO)
Hey, Jon.
David Grzebinski (President and CEO)
Hey, Jon.
Jonathan Chappell (Senior Managing Director)
David, I wanted to ask Greg's first question maybe a little bit differently. So it seems like you're insinuating maybe there's a little bit of a pushback to the initial expectations on the timing of the inland recovery. But anecdotally, I mean, we've kind of been hearing about some increased inquiry from the petrochemical side. So is this - first of all, is that wrong? And second of all, is the maybe more conservative outlook more tied to maybe the capacity side of things, and has anything really changed on your outlook on capacity?
David Grzebinski (President and CEO)
No, I think that's a good question. On the supply side, of the inland side, we have not seen the shipyard order book grow at all, and typically, you see it grow a little bit throughout the year. I think at the beginning of the year, we said there were about 40 barges gonna be built on the inland side, and the bulk of those would be for Marathon's building them for their own account. We haven't seen that change. It's still 40 barges. I think, you know, equipment is being retired. I know we've retired, what is it, 31 barges, Andy?
And, you know, I think maybe the retirements have been a little slower than we might have expected, but it, that's really hard for us to gauge because we don't have insight on who's retiring equipment. It's just hard to tell what people are doing. But demand continues to inch up. We are seeing the petrochemical plants come online, and we are talking to customers about their future needs, which are growing. You know, even some of these ethane straight to ethylene to straight to polyethylene plants are building barge docks, and, you know, they may have some pressure cargos or some other cargos that come out of those ethylene plants anyway. You know, not everything, when you crack ethane, you still do get some other byproducts.
Now, it's not as much as if you're cracking heavier, heavier feedstocks, but there's still some incremental barge demand there. So, you know, the good news is we see that continuing. Utilization is actually okay. It's we, we're seeing a little pressure from, say, an undisciplined competitor that's probably pushing prices down where they don't need to be. But everything is still marching towards balance. We're just being a little more conservative about that expectation.
Jonathan Chappell (Senior Managing Director)
Okay. And then, in that vein, and also, I thought it was quite noteworthy, both in your commentary and in the press release, you're talking about your commitment to making the acquisitions at the right time, a little bit, maybe more upfront than in the past. So, but, you know, I think you've said also in the past that no one really wants to sell at the bottom. So I believe you've mentioned that, like, the best acquisition environment is when we're a little bit off the bottom. So if there is a six-month delay or so into next year, is it realistic that, you know, consolidation in this industry is also pushed back to that 2018 timeframe? Or is the pressure point becoming so high that it may actually be accelerated a little bit?
David Grzebinski (President and CEO)
Yeah, nobody, to your point, nobody likes to sell at the bottom, clearly, but we've seen, you know, a number of people in the industry do some one-off asset sales. I mean, you saw us do one, and there's some other one-off asset sales happening in the industry. And I think what that's about is people managing kind of their debt burdens. So it's becoming more acute for some players in terms of their financial position. So some things may happen before we emerge from the bottom, and we get the inflection point. But by and large, nobody wants to sell at the bottom, and you kind of need to come out of the bottom. But that said, it's active.
There's a lot going on, and there's a lot of pain in the industry right now. We'll see. But you know this, John, you've heard us say it: It's really hard to predict acquisitions, but this environment is probably the best we've seen in a long time. You may recall back in the 2008, 2009 time frame, and Joe's on the line, he can add to this, but you know, Joe was on point saying, "Hey, we wish the downturn had been a little longer, 'cause so we had more pain to get acquisitions done." I think we've got that going on now, and it's plenty painful out there, so I think we'll see some things happen. I don't know.
Joe, Joe, you're online, so you can, you can add some more color there.
Joseph H. Pyne (Chairman)
Well, I think the point we were making was that the 2008 and 2009 recession was deep, but it was short. And you had some operators that were pressed, but then the recovery kind of lifted all boats. With respect to the downturn this time, it's been longer. It's been deep. You're seeing pricing at levels that we really haven't seen since the early 2000s, and they're just not sustainable. So, I think in the next three to six months, you may see some pressure, and in fact, with respect to some operators, some intense pressure with their ability to kind of meet their obligations.
That in itself may push or stimulate some consolidation opportunities that are a little different than the scenario of an operator that sells when the market starts improving. 'Cause in that scenario, they just don't have a choice.
Jonathan Chappell (Senior Managing Director)
Right. Okay. I appreciate that. Thank you, Joe. Thanks, David.
David Grzebinski (President and CEO)
Thanks, John.
Operator (participant)
Our next call comes from Jack Atkins with Stephens. Please go ahead.
Jack Atkins (Research Analyst)
Hey, guys. Good morning. Thanks for taking my questions.
David Grzebinski (President and CEO)
Hey, Jack.
Joseph H. Pyne (Chairman)
Hey, Jack.
Jack Atkins (Research Analyst)
You know, David, I guess just, just to start for a moment, to go back to the, you know, the acquisition, the, the marine acquisition that you guys announced during the Q2. Could you maybe comment on, on that, I think that specialized equipment that you purchased, sort of what, what that equipment does for you? Does it fill a, fill a niche in your, in your asset portfolio? Just sort of a little bit more color on that, I think, would be, would be interesting.
David Grzebinski (President and CEO)
Sure. Yeah, so we purchased nine pressure barges, four 30,000-barrel clean barges, and three essentially brand-new towboats in that acquisition. You know, the pressure barges are, they fill a niche for us. We have a fairly large pressure barge fleet, and some of these new chemical plants will have pressure-type products coming out, so this helps us. We've had a couple customers in particular that we do most of their business or if not all of their business that have indicated the need for pressure barges. So that fits very well into our portfolio at a very good time. And, of course, the new horsepower for...
or the new towboats, if you will, really fit nicely. We're able to retire some old equipment that we had planned on retiring anyway. So, you know, for us, it was, you know, just one of those nice little bite-size transactions that just fit perfectly into our needs.
Jack Atkins (Research Analyst)
Perfect. Okay, that's, that's, that's helpful, David. Thank you. And then sort of shifting gears to the diesel engine services business for a moment. Obviously, seeing a strong cyclical upturn in that business, this year, and that's very encouraging. I guess, you know, as we kind of go through this earnings season, we've heard, I think, two or three oil and gas E&P companies start talking about cutting CapEx already. And just sort of curious, given the short cycle nature of the fracking market, you know, as you guys kind of look out maybe later this year beyond into next year, are you worried that maybe we're starting to see a peak of the cycle for land-based equipment?
Or do you think there's maybe some more legs to this, given how poorly treated that equipment's been over the last couple years?
David Grzebinski (President and CEO)
Well, I think we'll see some legs with it because just what you just said, that there's a lot of equipment that's been ignored and, you know, I think we're in a horsepower shortage. And even if the rig counts kind of tempers itself, like it feels like it's doing right now, there's the, you know, the number of DUCs out there, the drilled and uncompleted wells, is a huge backlog. So, I think it's got some legs or some staying power. And unlike past cycles, I don't think it's a sharp upturn, which is good. I think we're seeing our customers in the industry be a little more capital disciplined, very thoughtful about remanufacturing and a mix of new and remanufacturing.
I think it's a very healthy market from that perspective. Our customers, I think, are being very thoughtful about how they deploy capital and how they use their equipment. I'll also comment, you know, there's been two oil company execs. I think BP said, "Lower for longer," and Shell just said today, "Lower forever," which I think plays to the shale plays. If you think about all the big offshore fields and the price deck that's needed to justify big projects like that is higher than some of these shale plays. And the shale opportunities in the US have pretty decent break-even prices. So, I think we'll see a pretty long period where shale production in the United States is the global swing producer. I think that's, you know, that's not months, that's years.
So we're pretty optimistic about it, and we do like kind of the methodical discipline that we're seeing in the industry, particularly with our customer group.
Jack Atkins (Research Analyst)
Okay, great. Thanks again for the time.
David Grzebinski (President and CEO)
Thanks, Jack.
Operator (participant)
Our next call comes from Michael Webber with Wells Fargo. Please go ahead.
Michael Webber (Managing Director)
Hey, good morning, guys. How are you?
David Grzebinski (President and CEO)
Hey, Michael.
Michael Webber (Managing Director)
David, I wanted to LOOP back to research to inlands, and I don't want to beat a dead horse here because I know we did do questions on it. But, you know, the idea of a 2017 recovery or start of a recovery in pricing is a pretty big tenet to the story for the better part of the last 12 to 18 months. I think it warrants kind of going back and looking at it. If I guess, if the answers to the first two questions around, you know, why, you know, it seems like you guys are walking back the idea of a 2017 recovery.
If the answers to those are that utilization is trending like you thought, that demand is relatively firm, and that supply can, you know, the supply mitigation is tough to see, but generally in line, is the implication there that there was just a bit of a hope trade embedded in that expectation for a 2017 recovery? I'm just saying it doesn't quite add up, that if everything is kind of in line and you're backing up a recovery out of prudence, does it imply there was a lack of prudence in the initial guidance? Or just, or is there something fundamentally missing from the mix that you had a reasonable expectation for, you know, kind of six to nine months ago?
David Grzebinski (President and CEO)
No, I think we're being a little more conservative here, but also, you know, we've had an undisciplined competitor in there that is in an environment where we'd normally see pricing increases. This competitor is doing what we don't think they should be doing, and most of the industry doesn't. But you know, it's a reality, and we just thought we'd be a little more prudent with that outlook.
Michael Webber (Managing Director)
Okay, so that undisciplined competitors have that pressure has continued throughout the better part of the year, and that's kind of the element that was maybe missing or understated from the earlier guidance?
David Grzebinski (President and CEO)
Yeah, I think that's, that's fair.
Michael Webber (Managing Director)
Okay. Appreciate that. And just as a follow-up on the coastal side, obviously, it's a tough market, and the floor on utilization in the high 60s, I believe, is a new low and probably kind of beyond your all's control to a degree. I'm curious, you know, when you look at that mix, you know, is there, you know, unlike, say, inland, where there is, you know, a potential bump to a varying degree from petchem. On the coastal side, is it more realistic to expect a 2019 or 2020 recovery there as opposed to 2018? And then kind of as an aside, you know, you've got Loop now seeking contracts for long-term crude exports.
Does that, does that, you know, potentially push a recovery in, in the coastal market, out even further, or, or is it too early?
David Grzebinski (President and CEO)
Yeah, it's too early to call it, but it, you know, nineteen's probably within the kind of range. You know, there is just too much equipment that that came on in the last two years, if you will, and it just takes a lot longer to get that older equipment out. And, yeah, we're starting to see it. We saw some some older equipment retire this quarter, but we're still just long equipment. We've also seen some kind of unusual, unusual may be a stretch, but we've seen, you know, some refined products demand move around a bit.
You know, as you know, up in the Northeast right now, the Europeans are dumping a lot of refined product into the Northeast, and you've even seen a very rare, rare thing with the Colonial Pipeline not being full. I don't remember the last time I've heard of Colonial Pipeline not being full. So we've seen a little bit of that demand kind of wobble around. I think when you look at the fundamentals of why so much capacity got built, it was, in some respects, in anticipation of crude moves here domestically, and that triggered some of that building. And to your point that, you know, that crude's not there, and we've got the extra capacity.
But again, we've got, you know, 30-plus barges that need to retire, and I think, like Kirby's doing, we're looking at our old assets and retiring them. And everybody's trying to stretch the life as long as they can, and then retire it. But in this market, you will take out old equipment.
Michael Webber (Managing Director)
Gotcha. Okay. That's helpful, David. Appreciate the time.
David Grzebinski (President and CEO)
Hey, thank you, Michael.
Operator (participant)
Our next question comes from Doug Mavrinac with Jefferies. Please go ahead.
Douglas Mavrinac (Managing Director)
Great. Thanks, operator. Good morning, guys.
David Grzebinski (President and CEO)
Hey, Doug.
Douglas Mavrinac (Managing Director)
David, my first question is gonna be a follow-up to Mike's question on the coastal side, but from a slightly different perspective. So when you're looking at that market, you're potentially approaching or what could be required to approach a more balanced supply-demand scenario. You know, in your earlier comments, I think it was in response to a question that you had, you touched on the ballast water treatment mandate that's upcoming. And so my question specifically is: how significant could that be, in terms of, you know, maybe encouraging owners of tonnage, given how long the market is, towards, you know, maybe pursuing more retirements and capacity removal?
So, can you touch on what the Ballast Water Treatment mandate states and how significant that could be in terms of playing a role in that regard?
David Grzebinski (President and CEO)
Yeah, essentially, as kind of a review for those on the phone that aren't familiar with the ballast water treatment rules. Essentially, starting in 2018, every coast-wise vessel that comes in for its major shipyard period has to add a ballast water treatment system. If you have an old 25- to 35-year-old barge that needs that system, you're looking at a capital outlay of probably $1.5 -3 million. You know, that's a lot of money for an old barge that, and particularly in this market, where you're struggling to put her to work or keep her at work. So it's just another headwind that operators will have to face.
When you bring an old barge into a shipyard, it's typically got more maintenance issues than, say, a newer barge, for obvious reasons. So when you look at the cost of the shipyard and then add, you know, capital addition on top of it, you start looking at, well, gee, am I gonna earn my return on that additional maintenance cost and that initial, and additional capital? And you say, "Well, I'm not, so let's not do it. Let's just go ahead and retire the barge." So that's kind of the thought process that happens. Kirby's going through that as well. We look at our old tonnage, and we're essentially retiring some of it. I think many in the industry are doing it. And then there are some other aspects to putting on ballast water treatment systems.
They take up space on a vessel. So, if you've got a smaller barge, call it an 80,000-barrel ATB barge, you know, the real estate to put that ballast water treatment system on the barge is difficult. You may lose some cargo space because you have to do it, and that starts to work into the calculus as well. So when you add it all up, it makes it difficult to extend the lives of barges that are older. And we would expect that that helps trigger retirements.
Douglas Mavrinac (Managing Director)
Okay, gotcha. Thank you. Very helpful. And then, my follow-up, David, is on the M&A front. You know, during or right after the S&S acquisition, during the call that you guys hosted, post that announcement, I believe you mentioned that, you know, you would be surprised if you didn't pursue another two or three acquisition targets by year-end on the marine transportation side. And obviously, shortly thereafter, you announced that one acquisition of those 13 assets. So my question is, you know, for the pending, maybe one or two that we should expect by year-end, you know, should they look like that one that you announced in June, i.e., kind of a one-off, or do you think that there are bigger fish to fry?
Does an undisciplined competitor, you know, kind of make its way onto the list? So, you know, what type of, kind of, you know, what should our expectations be, I guess, in terms of, you know, additional acquisitions in the marine transportation side?
David Grzebinski (President and CEO)
You know, it—you've heard us say it. It's hard to predict acquisitions. You know, it's all about the bid-offer spread, and they've got to come together, right?
Douglas Mavrinac (Managing Director)
Mm-hmm.
David Grzebinski (President and CEO)
Yeah, the process of the bid-offer spread coming together keeps working, and they are coming together. It's just difficult to predict it. But I can tell you, Doug, we're looking at multiple opportunities, and they range the gamut from, you know, just small equipment pieces like we just did, to the larger acquisitions. Predicting those is difficult, as I'm sure you appreciate. We remain disciplined.
Douglas Mavrinac (Managing Director)
Mm-hmm.
David Grzebinski (President and CEO)
As you know, we, we've always looked at things on a return on capital and make sure we can earn our return through a cycle. So we're, we're staying disciplined, but and we think the opportunities out there, the opportunity set is, is growing, not shrinking, and, we're pretty excited about the possibilities. But predicting them and, and getting them done is, is, is just hard to do.
Douglas Mavrinac (Managing Director)
Yeah.
David Grzebinski (President and CEO)
We're working hard on them, but, you know, as we said earlier, it's nobody wants to sell at the bottom, so you've kind of got to work that angle. But, you know, we're actively working on both asset sales and whole companies. So it's
Douglas Mavrinac (Managing Director)
Yeah.
David Grzebinski (President and CEO)
We'll see.
Douglas Mavrinac (Managing Director)
So, so just one kind of follow-up or, or maybe a little bit more specific data. Would you still be surprised if you didn't do another one or two by year-end?
David Grzebinski (President and CEO)
Yeah, it's hard to say.
Douglas Mavrinac (Managing Director)
Yeah, I got you. Okay.
David Grzebinski (President and CEO)
Yeah.
Douglas Mavrinac (Managing Director)
All right, great. That's very helpful. Thank you, David.
Operator (participant)
Our next question comes from David Beard with Coker & Palmer. Please go ahead.
David Beard (Institutional Equity Division Analyst)
Hey, good morning, gentlemen.
David Grzebinski (President and CEO)
Hey, David.
David Beard (Institutional Equity Division Analyst)
Two questions. First, a micro question: Should we assume the barge acquisition is in your guidance and S&S is not? Or how should we look at acquisitions relative to guidance?
David Grzebinski (President and CEO)
Yes. The last small acquisition we did is in our guidance, but the S&S is not.
David Beard (Institutional Equity Division Analyst)
Okay. And then relative to the inland barge industry, you know, we would have... or what level of utilization do you think you could get some pricing? Historically, it's been in the low 90s, and if there is one competitor, where do you think their utilization is?
David Grzebinski (President and CEO)
No. Yeah, you know, historically, and we probably ought to get Joe's wisdom and experience involved in this discussion. But historically, when you've been above 85% and the customers and the industry think it's going to stay there, we get pricing. So it's both a utilization and a mindset. And, you know, our utilization has stayed in the range where we would typically have gotten, in the past, price increases. You know, I think in the last five years, when we had crude by barge, people got used to utilization in the 90s, you know, between 90 and 95. And I think maybe it forgotten history a little bit.
But, you know, a couple undisciplined competitors can impact the market, and they are. But again, I don't believe this is sustainable. We know many, many is probably too much of a statement, but we know several customer competitors that are likely in financial stress right now, and so this situation is not sustainable. I don't know. Joe, do you want to add any color to that or any more insight? No, maybe we lost, we had a technical problem again.
Operator (participant)
Mr. Pyne is still on the line. He may just not be at his phone.
David Grzebinski (President and CEO)
Okay. All right. I mean, David, you get the idea. It's... This is again, typically, we should be able to push prices here, but it doesn't take too many people to spoil that ability. We do believe the particular undisciplined competitor is in the same range as we are in terms of utilization, but they have just a little different mindset.
David Beard (Institutional Equity Division Analyst)
Interesting. No, that's very helpful. Appreciate the call, David. Thank you.
David Grzebinski (President and CEO)
Thanks, David.
Operator (participant)
Our next question comes from William Baldwin with Baldwin Anthony Securities. Please go ahead.
Willian B. Baldwin (Partner)
Yeah, thank you. Good morning.
David Grzebinski (President and CEO)
Hey, Bill.
Willian B. Baldwin (Partner)
Dave, regarding the coastal market, can you make any commentary as to what kind of influence, if any, you think the tankers, like Kinder Morgan, has been taking delivery of and so forth? Has that had any direct influence over the rate picture in your coastal business?
David Grzebinski (President and CEO)
A little, Bill. We lost one deal because of a MR tanker, but we were able to redeploy that equipment. One of our 185s got displaced by a MR tanker. You know, 185s is kind of our largest piece.
Willian B. Baldwin (Partner)
Right.
David Grzebinski (President and CEO)
You know, the MR tankers is what? 330,000 barrels. So, they, they came down into our market and, and displaced one of our units, but we were able to, grab another contract with another customer with that unit. So it, it has had some impact, but it's, it I would say it's, it's only on the margin. Most of the MR Tankers can't. Well, the MR Tankers can't get to most of the docks that we get to. You, you need barges, smaller, smaller, footprints to get to, to, to, many of our, our customers' docks and terminals.
Willian B. Baldwin (Partner)
On the ballast water system, David, you mentioned that some of these smaller barges have a difficult time, you know, be problematic economically, whether they could do that or not. Will these ballast water systems, will they be from a regulatory standpoint, will these smaller barges, the 80,000 and lower, be required to have those, just like the larger barges will be?
David Grzebinski (President and CEO)
Yes. If you have a ballast water treatment system, you have to or if you have a ballast water system on your barge, you need to put a treatment system on it. Now, on the smaller barges, what they may do is go to permanent ballast, but permanent ballast adds weight to the barge permanently, and that reduces the amount of product that you can carry. So there's always a trade-off. So you can put the system on, but that costs capital and real estate on the barge. So it's an engineering economic balance. And you know, on a bigger barge, a 150 or a 100,000 barrel, you've got the real estate, you can do it, and you probably don't lose any product-carrying capability.
But as you get down into the smaller barges, it gets tougher, and it's a balance of do you have the real estate, or do you go to permanent ballast and give up a little cargo-carrying capacity?
Willian B. Baldwin (Partner)
So is that gonna be a source of incremental business for your marine diesel people to install these ballast water systems?
David Grzebinski (President and CEO)
It is. We, we represent one of the key ballast water systems in our diesel business, and, we have kind of a U.S.-wide franchise there. And, we've received a few orders. And you might imagine that as, as we, as Kirby, when we install one, we're using the system that our guys represent. So yes, that, that will be incremental revenue for our diesel engine business.
Willian B. Baldwin (Partner)
Thank you.
David Grzebinski (President and CEO)
Hey, thanks, Bill.
Operator (participant)
Our next call comes from Phoebe Clark with Redwood Capital Management. Please go ahead. Mrs. Clark? Mrs. Clark, perhaps your line is on mute.
David Grzebinski (President and CEO)
Okay, okay. Doesn't sound like she's there.
Operator (participant)
All right. Well, then, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Carey for any closing remarks.
Brian Carey (Head of Investor Relations)
Thanks, everyone, for your interest in Kirby today, and participating in the call. If you have any questions, please feel free to give me a call directly, 713-435-1413. Have a great day.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.