Kirby - Q3 2015
October 29, 2015
Transcript
Andy Smith (EVP and CFO)
Welcome to the Kirby Corporation 2015 Q3 earnings conference call. My name is Eric and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Sterling Adlakha. Sterling, you may begin.
Sterling Adlakha (Head of Investor Relations)
Thank you, Eric and thanks everyone who's on the call for joining us this morning. 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 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.
Andy Smith (EVP and CFO)
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman)
Thank you, Sterling and good morning. Yesterday afternoon, we announced third-quarter earnings of $1.04 per share, near the middle of our $0.95-$1.10 per share guidance range. That compares with $1.34 per share reported for the 2014 Q3. During the 2015 Q3, our marine transportation tank barge fleet continued to experience high equipment utilization levels, despite an industry-wide decline in the transportation of crude oil. In the inland marine market, utilization remained at the 90%-95% level. We experienced strong customer demand, particularly for the transportation of petrochemicals and refined products. Crude oil barges continued to be cleaned out of crude oil bottoms, but we believe this trend is beginning to bottom out.
Andy Smith (EVP and CFO)
However, the availability of these barges in the marketplace continued to have some negative effect on contract renewal pricing. On the coastal side of our business, utilization also remained in the 90%-95% range and contract renewal prices continued to increase. As expected, we had a significant number of vessels in the shipyard during the quarter, which impacted both revenue and earnings. On a year-over-year basis, our diesel engine service segment remained under pressure. In our land-based division, we continue to work through a very challenging environment. In the marine and power generation business, that's our legacy business, it continues to perform well, except for that part that services the Gulf of Mexico oil service market. Before turning the call over, let me take a moment to recognize our newest board member, Anne-Marie Ainsworth.
Anne-Marie brings a wealth of experience and knowledge about national and global supply chain logistics, safety management and extensive leadership experience in the midstream and downstream energy business. Kirby management team looks forward to working with Anne-Marie as we leverage her knowledge to continue to grow and create shareholder value. I'll now turn the call over to David.
David Grzebinski (President and CEO)
All right, thank you, Joe and good morning. I'll hit some key points in the quarter, turn it over to Andy for some detail and then come back for an outlook. In the marine transportation segment, our inland marine barge demand remains in the 90%-95% range. Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed about 80% of revenue for the 2015 Q3, with 55% attributed to time charters and 45%, contracts of affreightment. Pricing on the inland marine transportation term contracts that renewed during the Q3 was down in the low to mid-single digits. Our spot contract rates remained at or above term rates.
Andy Smith (EVP and CFO)
However, the spot market is dynamic, so we see, on occasion, our competition offering equipment below our term rates. Unique to Kirby, most of our spot opportunities are with existing term customers. In our coastal marine transportation sector, demand for the coast-wide transportation of refined products, black oil and petrochemicals remained consistent with the H1 of the year. However, we have seen some increase in our spot exposure, which we attribute to increased uncertainty in the market by our customers, driven by uncertainty around crude oil supplies. During the Q3, approximately 80% of coastal revenues were under term contracts. Kirby's coastal equipment utilization remained in the 90%-95% range. With respect to coastal marine transportation pricing, term contracts that renewed during the quarter increased in the low- to mid-single-digit % range.
In our diesel engine services segment, our marine diesel and power generation markets experienced stable demand in most regions of the country, except for the Gulf of Mexico oil service business, where services for supply vessels and offshore rigs decline. Our land-based diesel engine services market remains challenging. Demand for service parts and distribution has remained relatively consistent with levels experienced in the 2015 Q2, but there remains little demand for new manufacturing of pressure pumping equipment. We will continue to aggressively address costs in this business. During the 2015 Q3, we continued to execute on our share repurchase authorization, buying approximately 892,000 shares for $63 million, or an average share price of $70.97.
Subsequent to the end of the quarter, through this past Tuesday, we repurchased approximately an additional 292,000 shares at an average price of $64.62. October's purchases brought total repurchases for the year to over 2.9 million shares or approximately 5% of shares outstanding. Currently, our unused repurchase authorization is 1.8 million shares. I'll now turn the call over to Andy to provide some detailed financial information and again, I'll come back and discuss the outlook.
Thank you, david and good morning. In the 2015 Q3, marine transportation segment revenue declined 7% and operating income declined 16% as compared with the 2014 Q3. The decline in revenue in the Q3 as compared to the prior year, was primarily due to a 38% decline in the average cost of marine diesel fuel, as well as some impact from inland contracts renewed at lower rates throughout the year. The marine transportation segment's operating margin was 22.4%, compared with 25% for the 2014 Q3. The inland sector contributed approximately 70% of marine transportation revenue, with the coastal sector contributing 30%.
Inland marine weather was seasonally normal, but operating conditions were challenging due to high water early in the quarter and scheduled lock closures along the Gulf Intracoastal Waterway, which contributed to a 40% year-over-year increase in delay days and a decline in ton miles. Despite these challenges and the pricing pressures that Joe and David mentioned, the inland sector generated an operating margin in the mid- to high-20% range for the quarter. The Q3 results for inland marine also reflected the anticipated year-over-year negative impact of $0.03 per share for higher pension expense, reflecting actuarial changes to mortality tables and a lower discount rate. In the coastal sector, we experienced heavy shipyard activity in the Q3, as anticipated and mentioned on our July conference call.
With a 38% decline in fuel prices and a number of vessels in the shipyard, revenue in the coastal sector declined both year-over-year and sequentially. Pricing on contracts renewing during the quarter continued to improve, as David mentioned. Additionally, we shortened the depreciable lives on some of some assets in our coastal fleet, which were coming up for shipyards in 2016 and the estimated cost of extending their lives did not make sense. This resulted in a combined $3.5 million increase in depreciation expense and dry dock amortization for the quarter. This change, plus higher maintenance expense during the quarter, in addition to ongoing impacts from higher wages, depreciation and deferred dry dock amortization, led to a year-over-year decline in the coastal sector operating margin, which was in the low double digits.
Without the additional depreciation and deferred dry dock amortization expense mentioned above, the margin would have been in the mid-teens. During the 2015 first nine months, we took delivery of 35 new tank barges and when combined with the six pressure barges purchased in the Q1, increased capacity by approximately 560,000 barrels. The number of barges we retired, including return charter barges, totaled 25, removing approximately 370,000 barrels of capacity. We also transferred one coastal 30,000-barrel tank barge that was working inland back into the coastal fleet. The net result was an addition of 15 tank barges to our inland tank barge fleet and approximately 160,000 barrels of additional capacity.
In the 2015 Q4, we expect to take delivery of 3 30,000-barrel inland tank barges with a total capacity of approximately 90,000 barrels. Combining these additions with our current plan of 7 retirements in the Q4, will result in an approximate capacity at year-end of 17.9 million barrels, a reduction of 70,000 barrels from our current capacity. In the coastal marine transportation sector, construction of our 4 coastal articulated tank barge and tugboat units continues to progress with the first unit, a 185,000-barrel, 10,000-horsepower ATB, expected to be delivered and in service later this year. Our second new offshore vessel, also a 185,000-barrel ATB, is likely to deliver in mid-2016.
We continue to expect delivery of the third and fourth vessels, both 155,000-barrel ATBs, in late 2016 and mid-2017, respectively. In our press release last night, we also announced shipyard contracts to build two 4,900-horsepower coastal tugboats and a new 35,000-barrel offshore chemical tank barge. The new offshore chemical barge will enter service under a long-term contract with an existing customer upon delivery, which is expected in early 2017. Moving on to our diesel engine services segment. Revenue for the 2015 Q3 declined 51% and operating income decreased 72% compared with the 2014 Q3.
The segment's operating margin was 4.9%, compared with 8.6% for the 2014 Q3. The marine and power generation operations contributed approximately 40% of the diesel engine services revenue in the Q3, with an operating margin in the low to mid double digits. The operating margin was impacted by approximately $700,000 of severance expense incurred in the Q3, as we continue to address costs across our whole organization as appropriate. Our land-based operations contributed approximately 60% of the diesel engine services segment's revenue in the Q3, with break-even operating income. During the 2015 Q3, Kirby signed an asset purchase agreement to sell United Engines compression.
The transaction is expected to close in the 2015 Q4 and based on the structure of the agreement and current levels of working capital, the sales price is expected to be approximately equal to the book value of the net assets sold. On the corporate side of things, our cash flow remained strong during the quarter, which helped fund our marine construction plans and $63 million of treasury stock purchases during the quarter. Subsequent to the quarter, we purchased an additional 292,000 shares for $18.9 million. Any future decision to repurchase stock will be based on a number of factors, including the stock price, our long-term earnings and cash flow forecasts, as well as alternative opportunities available to deploy capital, including acquisitions.
We have raised our 2015 capital spending guidance slightly to a range of $320 million-$330 million, including approximately $70 million for the construction of 38 inland tank barges and 3 inland towboats, expected to be delivered in 2015 and approximately $100 million in progress payments on the construction of the new coastal equipment. The balance of $150 million-$160 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities.
Total debt as of September 30 stood at $810 million, a $2 million increase from June 30 of this year and a $93 million increase from our total debt of $717 million at December 31, 2014. The increased debt since year-end 2014 was primarily due to the acquisition of the fixed pressure barges in the 2015 Q1 and treasury stock purchases during the first nine months of the year. As of today, our debt stands at $819 million. Our debt-to-cap ratio at September 30, 2015, was 26.4%, compared with 24% as of December 31, 2014. I'll now turn the call back over to David.
David Grzebinski (President and CEO)
Thank you Andy. In our press release last night, we announced our 2015 Q4 guidance of $0.93-$1.03 per share and for the 2015 full year, guidance of $4.10-$4.20 per share. With respect to the inland transportation market, our Q4 guidance reflects an assumption that there could be continued modest pricing pressure in our inland marine transportation market. We are assuming normal seasonal weather patterns for the remainder of the quarter and utilization that remains in the 90%-95% range. In the coastal market, the difficulty in permitting terminals on the West Coast to get crude to water, coupled with the length and magnitude of the decline in crude prices, has injected some uncertainty in the coastal marketplace.
Andy Smith (EVP and CFO)
This has resulted in some reluctance among certain customers to extend term contracts. This uncertainty will likely lead to an increase in the number of coastal vessels operating in the spot market. While a further impact from lower crude prices is possible, the coastal refining complex across the country continues to show strong demand for crude by water. Further, demand for refined products, the sector's biggest product trade, continues to be strong and should continue as we go into the heating oil season along the East Coast. Also, Kirby has the largest fleet of asphalt equipment and given the low price of crude oil, combined with additional infrastructure spending, we are seeing signs of an increase in asphalt demand. So for the Q4, we believe our utilization will continue to be in the 90%-95% range.
For our diesel engine services segment in our land-based sector, we expect the market to remain extremely challenged for the remainder of the year. Additionally, capital spending levels of many of our customers have been even further constrained from earlier this year and the low end of our guidance contemplates a more material operating loss in the land-based portion of this business in the Q4. In our marine diesel and power generation markets, we continue to expect this business to perform similar to the second and Q3s, although we expect revenue and profit to be down slightly due to weakness in the Gulf of Mexico oil services, oilfield services market. We also expect that earnings from these markets in the Q4 will be sequentially weaker due to normal seasonality.
Before we turn the call over to questions, let me also briefly address the outlook for Kirby beyond this year. We are currently in the process of preparing our budget and we'll provide 2016 guidance during our Q4 earnings call in January. As a lot can change in the next few months and so it's still too early to provide earnings guidance for next year. That said, 2016 will be challenging. We believe utilization for inland equipment should remain in the 90%-95% range, but pricing will likely continue to reflect the uncertainty in the market, principally driven by lower crude oil volumes. With lower domestic production of crude oil, particularly in the Eagle Ford and Utica Shale basins, we are seeing a continued decline in inland barges carrying crude oil.
However, we currently estimate that the industry has somewhere between 250-300 barges actively moving crude oil today. This is a significant decline from an estimated 550 barges at the peak of crude oil barge activity. Consequently, we expect the pressure on inland pricing to begin to subside in the short to medium term, as the number of crude barges in service continues to decline to a less significant number and new refined products, black oil and chemical volumes continue to grow. On the coastal side, we believe utilization should remain above 90%, but the coastal term to spot ratio to decline. This is as shippers become a little more comfortable that their volumes can be handled with the existing fleet. Consequently, pricing on contract renewals may increase at a slower rate.
The potential slowing in coastal pricing and the change in spot term mix would make maintaining older equipment more difficult for the industry and should result in the retirement of older vessels in the industry fleet. We do expect a number of other positives to develop next year. We intend to have new customer contracted coastal 185-barrel ATBs in operation, one by the end of this year and the other mid-2016. Both of these barges will provide incremental earnings to our coastal business. Additionally, as the oilfield service industry continues to defer maintenance on the industry-wide pressure pumping fleet, a backlog of needed repairs and/or replacements will continue to build. As such, we could potentially see some improvement in our land-based diesel engine business in 2016.
Despite this period of uncertainty, our cash flow has remained and should continue to be quite strong. We continue to invest in maintaining our inland and coastal equipment and we'll continue to look for attractive opportunities to invest capital, whether in our own facilities, through potential acquisitions, or through share repurchases. Operator, that concludes our prepared remarks. We are now ready to take questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Please note that questions will be reserved to one initial question and one follow-up question per person. Once again, if you have a question, please press star, then one on your touch-tone phone. Our first question comes from John Barnes from RBC Capital Markets. John, please go ahead.
Jon Barnes (Analyst)
Hey, thank you. Good morning, guys. Thanks for taking my question. First, Dave, around your comments concerning and maybe this goes to Joe as well. Joe, you made the comment at the very beginning that you felt like you were beginning to see the bottom in terms of the number of vessels converting from crude service and, Dave, I understand where you're coming from in terms of just the sheer number of vessels has declined, but it still seems like 250-300 is a pretty fair number. Number one, why do you think we're seeing the bottom there. Why wouldn't the remainder of those convert.
Andy Smith (EVP and CFO)
And number two, if they do does that, does that make your, your guidance around pricing too and and could it be, could it be worse than what you're looking for.
David Grzebinski (President and CEO)
John, they may well come out of crude service, The industry is absorbing them and we're still very utilized across the industry. It's just becoming a smaller and smaller number, so that overhang will dissipate confidence in the market and the utilization will continue to increase, which should make this bottom and pricing start to turn. Now, the timing is the question, but clearly, it's the number of barges in crude service has gotten smaller and smaller and clearly, the industry is absorbing it because our utilization across the board is pretty strong still.
Joe Pyne (Chairman)
David, let me just just add that, John, you followed us for a number of years and know that we were always a little careful with respect to the proliferation of crude oil because it it's a movement that is fungible and it's high volume and it fits very well in pipelines. Having said that, there are areas that barging, in fact, does play a role. Either pipelines aren't there or the type of crude oil or condensate is not as fungible as it is in other places. There's always gonna there, there's gonna be a need for
Andy Smith (EVP and CFO)
For inland and coastal barging of crude oil. But it it's gonna be capped. It's not gonna be this optimistic scenario, which we never believed, that produced almost 600 barges in the trade.
Jon Barnes (Analyst)
All right, that makes sense. Then, just your outlook on the coastal side and I get where you're coming from in terms of maybe the change in mix between spot and contract. But, number one, your comment about maybe it becomes a little bit more difficult to leave older equipment out there. Can you remind us your estimate as to what % of the fleet would be classified as old enough to potentially be up for retirement now.
Andy Smith (EVP and CFO)
Then, number two, is there any risk to the ATB contracts you have in place now given this change in customer behavior, or does it put any additional pressure on the ability to get contracts for the other two ATBs, where you don't have an agreement in place now. Thanks.
David Grzebinski (President and CEO)
Now, John, let me answer that in two parts here. Right now, we believe the industry fleet has about 47, maybe 45-47, ATBs or barges, wire barges, that are older than 30 years and, that's pretty old. That's on a base of 260, approximately and now I'm talking barges less than 200,000 barrels. That's a pretty big number in terms of percentage, about 20% just less than 20% of the fleet that should retire and that's actually helped pricing and should help pricing over time as that equipment comes out.
Andy Smith (EVP and CFO)
The crude offshore is interesting because it there's still a lot of movements out there and there would be more if you could, for example, on the West Coast, get some of these terminals that our customers would like to get built to move crude to the coast and then move it to their refineries. So it's it's relatively positive from that perspective and the refineries continue to run very, very heavily and with respect to our ATB contracts, we do have the two 185s. They are contracted for multi-year and they'll be coming out, as I said, in late 2015 and mid-2016.
The two 155s are not contracted, but we are in active discussions with customers and that's proceeding forward. Clearly, the customer base does like newer equipment and if you've got to choose between older equipment and newer equipment, they gravitate towards the newer equipment for obvious reasons. So that kind of circles back to the first point, is that these 47 older barges, or 45-47 older barges, will get displaced ultimately.
Operator (participant)
Our next question comes from John Chappell from Evercore ISI. John, please go ahead.
John Chappell (Analyst)
Thank you. Good morning, guys.
David Grzebinski (President and CEO)
Good morning, John.
John Chappell (Analyst)
David, thanks for the first glimpse at 2016 to the extent that you could. That's very important. Along those lines, then one difference I noticed between last quarter and this quarter was last quarter, you'd mentioned that spot pricing in the inland barge business was above term. This quarter, it seems like they're almost at parity. So from your experience, when you get that almost parity now between spot and time charter or term, what does that kind of foreshadow going forward as far as, like, the magnitude or duration of any softness in pricing. Does the spot need to get significantly below term to have that catch up. Or once you get to parity, does that kind of indicate you're getting close to a bottoming in term renewals.
David Grzebinski (President and CEO)
It's probably closer to the latter. but it's been bouncing around. We've seen term, excuse me, spot prices above our term contract rates, but we have seen some of our competitors dip down and take spot moves below our term contract rate. That's all a function of absorbing kind of these returned crude oil tows and it is maybe too soon to call a bottom here at some point, things start to look a little more positive.
John Chappell (Analyst)
And the same type of themes now seem to be developing on the coastal side as well. You started to talk about crude and uncertainty, things that we've been talking about for the last 12 months in inland. Is there any way to kind of gauge what percentage of the fleet, of the coastal fleet, is in crude and then could potentially move over to get cleaned up and move over to the refined product business and maybe just compare those two businesses October 2014 with inland, with October 2015 coastal and what that may indicate as far as pricing there.
David Grzebinski (President and CEO)
The on the coastal side we estimate about 5-6.6% of the coastal fleet is moving crude now, so it's a relatively low number. We have seen refined products moves pick up, as refinery utilization as ramped up and they've done expansions. You can see it in vehicle miles driven and kind of the light vehicle sales numbers. The lower crude prices reflected in lower gasoline prices is driving that demand. As some of the crude moves coastwise have tapered off, the refined products have picked up again, our estimates that the coastwise fleet, again, this is our, below 200,000 barrels.
Andy Smith (EVP and CFO)
We think it's around 6% of the fleet, so it's not that meaningful. It still can have an impact. I'd circle back to a comment I made earlier, though if on the West Coast, for example, if you could get some of these terminals in place, there would be more crude moves out there. So the refineries like the crude and want it, so it's a little different dynamic than on the inland side, where pipelines have taken some of the crude moves away.
Operator (participant)
Our next question comes from Jack Atkins from Stephens. Jack, please go ahead.
Jack Atkins (Analyst)
Good morning, guys. Thanks, thanks for the time.
David Grzebinski (President and CEO)
Morning, Jack.
Jack Atkins (Analyst)
David, I really appreciate your commentary around the 2016 outlook initially. but when we think about the various puts and takes in your business and you guys clearly know what those are heading into next year, the additional coastal barges coming in and all that sort of stuff. When we think about directionality and I understand you don't wanna give guidance for 2016, I'm not asking for that. But do you think that earnings next year are—will be up versus 2015. Just trying to understand are we looking at up year or a down year next year.
David Grzebinski (President and CEO)
Jack, we're just not ready to declare that there are too many moving pieces around and we're just not prepared to opine on that yet.
Jack Atkins (Analyst)
I understand, David and then when we think about your core chemical business, that's held up very well, along with the refining market over the course of the last 12 months. But we continue to hear negative data points around the industrial economy and the economy in general. Can you maybe talk about what's driving the strength in that chemical market and I guess, as you look out into the H2 of 2016 do you feel like you'll start seeing those incremental volumes come on from all this CapEx we're seeing invested in the space.
David Grzebinski (President and CEO)
What's really driving the petrochemical business is the low, low-cost feedstock position. Ethane is still advantaged. We've had propane actually come in and out of advantage for the chemical group. So that feedstock advantage is, it really puts the U.S. chemical business in a globally competitive position and we've seen our chemical customers work on incremental capacity increases. There are as over $100 billion in projects along the Gulf Coast that are well under way. We have a list of all the ones that have started construction. I would say a good portion, good 70% of them are permitted and under construction.
Andy Smith (EVP and CFO)
So those chemical plants will come along in the next maybe 2-4 years, various stages. So that, that's what it's about. It's really about that incremental capacity coming on from our chemical customers because they are feedstock advantaged here in the United States.
Operator (participant)
Our next question comes from Doug Mavrinac from Jefferies. Doug, please go ahead.
Doug Mavrinac (Analyst)
Thank you, operator. Good morning, guys. I just had a couple of questions also on the market. First, David, as it pertains to the idea that the inland market for barges moving oil may be bottoming, can you relate to us or remind us kind of how many barges were operating in the crude oil market, say, four or five years ago, before this big surge in U.S. production even occurred. because the U.S. production story hasn't rolled over that dramatically, but it seems like a lot of barges have been taken out. So I'm just trying to get a sense for how many barges were operating in the oil market before the boom even occurred and how do we compare to that right now.
David Grzebinski (President and CEO)
No, 5 years, 6 years ago, there were probably very, very few barges, if any. It may have been closer to 0. There was some heavy Canadian crude moves, off and on and that, as you heard Joe's comment earlier, that was one of the reasons we kind of shied away from it, because we viewed crude, crude is best moved in the pipeline. As all these shale plays came up they couldn't get it into pipelines. The pipelines didn't exist, so there was a big ramp up and then consequently pipelines did come on the Parkway Pipeline and the Flanagan South Pipeline and that's taken the volume down.
Andy Smith (EVP and CFO)
Now we've got production declines as well. But there are places like the Utica, where it's gonna be very difficult to get pipelines out of the Utica down to the Gulf Coast. So those there actually may be kind of a floor here where there will continue to be the need for barges... on the inland side to move crude and condensate, just because logistically, you can't get pipelines everywhere.
Doug Mavrinac (Analyst)
Right. See, that's kind of what I'm thinking, is that you do have a, a base level of production that exists today, that you may not go back to where you were, but, but you're gonna be higher than you were, so therefore, you need an increased level over what you had back then. That's helpful and then, just my follow-up, as it pertains to kind of the current market, obviously, you guys are very busy, both inland, coastal utilization levels, north of 90% and so clearly, sentiment is weighing on the pricing, especially on the inland.
Andy Smith (EVP and CFO)
At what point does the sentiment start to look at 2017 and start saying, "look this is what's coming on the petchem side and all of the uncertainty, all the concerns, all of my ability to kind of press pricing to the downside has kind of run its course and now maybe sentiment starts to change." So from your experience, about how far in advance of the actual volumes hitting, do you start seeing that shift in sentiment, especially given that the underlying fundamentals, utilization levels are still very, very strong.
David Grzebinski (President and CEO)
I mean, you've hit, you've hit it on the key point here, is the shippers and the competitors have to have confidence that it's kind of stabilized and demand is gonna continue to be such that things will be tight it's kind of that forward view I don't know if there's any good rule of thumb as to timing once the confidence starts to emerge that, or the concern on the shipper side that, hey, maybe there won't be some spot availability, a better term up, is when prices do start to move and it's in terms of a key timeframe, boy, that's hard to predict.
Andy Smith (EVP and CFO)
you can see it happening if these return crude barges keep getting thinner and thinner and there are fewer and fewer of them and not all of them go out, but demand for the other products that we move and our competitors move, at some point, there will be a concern that the equipment's not gonna be available and people will start to want to term up and that's when you get that confidence, that's when you're gonna start seeing the prices sorry, I can't predict that. I wish I could. That would make our lives a little easier, but it's starting to feel better in that regard. I don't know. Joe, is there anything you'd like to add to that.
Joe Pyne (Chairman)
That's right. It's a bit of an anomaly to have utilization rates above 90% and not have pricing power and the reason that you don't is a lack of confidence within the industry that those utilization levels are gonna be sustainable that the Kirby utilization levels are probably above at least some of the operators out there, so they have more availability.
Andy Smith (EVP and CFO)
That once the confidence levels shift to the point that when I have a spot piece of equipment, I can book it and I don't have to worry about it being idle for a period of time, then you'll get the sentiment to move prices back to higher levels I sense that as the shift out of crude oil in the inland sector begins to taper off, we're sensing it is beginning to taper off.
You're gonna you're gonna begin to get more confidence in the market and more confidence that pricing is gonna be stabilize and you're gonna see some pressure to increase rates. That hasn't happened yet that we're kind of bumping along the bottom and when that happens then everybody will feel better.
Operator (participant)
Our next question comes from Kevin Sterling from BB&T Capital Markets. Kevin, please go ahead.
William Horner (Analyst)
Good morning, guys. It's actually William Horner on for Kevin.
David Grzebinski (President and CEO)
Hi, William.
William Horner (Analyst)
Hey, David, thanks for taking my questions. I wanna kind of stick on the coastal comments for a second here and with the, the shift in, in spot capacity. Obviously, it's been a little more insulated as a result of the capacity constraints. So trying to get a handle on, when did you start seeing some of these ATBs looking for a home. Was it relatively steady shift through Q3, or have we seen an acceleration, in capacity in, in recent weeks.
David Grzebinski (President and CEO)
It's been fairly steady here through the quarter and i guess the shippers are just getting a little more confident that there's gonna be some availability. But it's still a pretty tight market there. I mean, you saw we had price increases in the quarter.
William Horner (Analyst)
Sticking with the uncertainty in the market, you highlighted in your, in your, in your comments, the West Coast and and terminal permitting issues, with regards to that longer-term confidence. But were there any markets in particular where you saw some of these capacity shifts, in the near term. Was it in the Gulf or the Northeast, or.
David Grzebinski (President and CEO)
Mostly the Gulf, william there are some moves that, well, some barges that were kind of taken out of crude service, some coastwise barges taken out of crude service, given some of the production declines and then some newer MR equipment being available and absorbing some of that. But, again less than or around 6% of the—our, what we consider our market, the 200,000 and below is in crude. So it's not quite the overhang that you saw in the inland side.
Operator (participant)
Our next question comes from Kelly Dougherty from Macquarie. Kelly, please go ahead.
Kelly Dougherty (Analyst)
Hi, guys. Thanks for the questions. Just sticking on coastal, can you talk to us about some of the similarities and differences between coastal and inland. I guess what I'm trying to get at, is there anything different structurally or customer-wise from a capacity perspective, anything like that, that would give us comfort that what we saw in the inland market isn't going to manifest itself in coastal as well and then follow up to that what percentage of your coastal business is up for renewal in 2016 that you might think could switch over into spot versus term.
David Grzebinski (President and CEO)
Kelly, I mean, it is different than the inland. First of all, the equipment is just not as fungible, right. In the inland crude trade, it was almost all 30,000-barrel barges, all fairly similar, reasonably cheap to clean them out. In the coastwise business the 260 barges in less than 200,000 barrels, they range anywhere from 30,000 barrels up to 200,000 and so it's a mixture. They're not as fungible. Certainly, the clean out cost, just given the size, is much more significant. So it's that fungibility makes a difference and the other thing is there's just fewer competitors, right.
Andy Smith (EVP and CFO)
You've seen in our IR material, we have 40-plus competitors on the inland side and some of them jumped into crude and then when you look at the coastwide side, it's 15 competitors. So it's a little more concentrated market. That helps. There's a little more discipline and you haven't seen kind of the irrational behavior that you saw on the inland building side, there. It's a little more disciplined and frankly, it's because the equipment's a lot more expensive and the quantities are bigger and it, it's just a tougher business.
Kelly Dougherty (Analyst)
No, that, that's helpful and then, am I correct in thinking that there were no or very few multi-year contract renewals this year and is it fair to assume that the majority of them renew in 2016. I'm talking on the inland side now and Shouldn't that be beneficial from a pricing perspective. Because I imagine there's kind of non-pricing benefits that you guys bring to the table, for some of these larger customers.
Andy Smith (EVP and CFO)
Kelly, this is Andy we had a typically normal year for us. Obviously, all of our spot contract has pricing exposure. But of our 80% of our term contracts, about half of that renews every year and of the remaining half, about a third of that renews every third year and that's typical. That's about what we'll see next year.
Operator (participant)
Our next question comes from Steve Sherowski from Goldman Sachs. Steve, please go ahead.
Steve Sherowski (Analyst)
Hi, good morning. You said earlier that, of the 250 to 300 inland barges that are currently in crude service, they're primarily servicing either a Utica or Eagle Ford crude. Is that true and if it is, can you just break out the percentage of, what's in Eagle Ford versus Utica.
David Grzebinski (President and CEO)
Look, Eagle Ford is, it also includes Permian. It's really the Gulf Coast move, right. Where you load, perhaps in Corpus Christi and then take it up to Houston or Port Arthur on the Intracoastal Waterway. So that—it's not just Eagle Ford. Some of the Permian comes by pipeline to Corpus Christi and then the Utica, of course, Utica and Marcellus is a condensate that's up in the West Virginia and Ohio areas that comes down the river I don't know the rough split. Maybe 50/50, I don't have a good number on that.
Steve Sherowski (Analyst)
No, that's fair enough and, do you have any updates on just your views on crude oil exports and how that could impact, I guess, both coastal or inland businesses.
David Grzebinski (President and CEO)
I'm sorry, can you repeat the question. I missed it.
Steve Sherowski (Analyst)
Just the potential for crude oil exports. Do you have an updated view, just given the fact that it's been in the press with increasing frequency recently. You have the exports to Mexico or at least swaps to Mexico now allowed. Any updated views on just how this could potentially impact your inland or coastal businesses if the ban is ever lifted.
David Grzebinski (President and CEO)
First let me comment on whether the ban gets lifted it did pass the House. Senate hasn't really done anything with it yet the administration, the current administration, has been pretty clear that they'd veto it. Before you get crude exports, it'd probably take a change in the administration. That said, we don't know if it's gonna be positive or negative. There are factors that could be positive and factors that could be negative on crude oil exports. Let me just run through a couple of them real quick. If you had crude oil exports, there's a case that the WTI Brent spread would collapse and you'd trade at parity.
Andy Smith (EVP and CFO)
That may cause some of the moves to the East Coast to change. They would probably import more Brent. We're seeing some of that now. But we still get coastal moves with imported Brent on the East Coast because it's usually comes into tanker and then it's lightered by barges. But it it could move some things around on the Gulf Coast, one of the potentials is, you would export the light crude and import heavy crude to the Gulf Coast refinery. You'll recall that the Gulf Coast refineries are set up to crack the heavier crude. That could be a negative in that, you're not moving as much light WTI around on the Gulf Coast.
But then again, it could be a positive because the heavier feedstock slate would have more byproducts, which would likely result in some additional moves and then I guess the final factor would be, hey, just that more volume on the system across the system, there would just be more liquids on the system, because it even if it went for export, it may come into a terminal. We may get a chance to touch it before it goes for export just more liquids on the water would be a potential. It's a mixed bag. We're not sure if it'd be a net positive or a net negative on crude exports, but we'll see. We'll see.
I don't think in the near term we have to that it'll happen. But if it does, we're not exactly sure that it'll be positive or negative.
Steve Sherowski (Analyst)
All right. Thank you.
David Grzebinski (President and CEO)
Thanks, Steve.
Operator (participant)
Our next question comes from John Mims from FBR Capital Markets. John, please go ahead.
John Mims (Analyst)
All right, thank you. Good morning, everybody.
David Grzebinski (President and CEO)
Good morning, John.
John Mims (Analyst)
Good morning. So David, let me ask you on the inland side, do you have sense and i appreciate your utilization is looking to stay in the 90s and I understand there may be some crude conversions that slide into non-crude service. But outside of that, do you have an industry utilization number. But I'm thinking about is there a shadow barge fleet that's tied up right now, that when things start to improve, you could have that kind of leak out and push the pricing recovery out farther than people may expect.
David Grzebinski (President and CEO)
We don't have good numbers there we just kind of know a little bit about what's out there, but we don't have good insight to all of our competitors' fleets. As Joe said, their utilization may be a little bit lower than ours, but I don't know how material it is. We just don't have perfect information there, John. Our guess is it's industry's slightly maybe slightly lower than Kirby's.
John Mims (Analyst)
During the last big downturn, it was, it dropped down to around 80, or did it break below 80.
David Grzebinski (President and CEO)
It was around 80. There may have been a period where it dropped below it was around 80.
Joe Pyne (Chairman)
It was slightly, slightly lower than 80, David, the lowest it got was 78% for a very short period of time in early 2009.
John Mims (Analyst)
All right. Thank you. That's helpful and then let me ask you on the M&A front. So the beginning of the month, American Commercial Lines announced that they bought AEP and then there's some liquid, it's mainly dry barges there, but still a big acquisition, Platinum Equity kind of, sort of doubling down on the industry. So a few questions there. One, your thoughts on industry valuations, if things are coming more in line as to where you would be more active, if there's been any material change there. Two, with these two, I mean, these are two big barge lines combining, is there any anticipated change in the competitive environment from what you see.
Andy Smith (EVP and CFO)
And then three, do you have any updated thoughts on the potential to diversify into the dry side, especially if you know we've got a few years of potentially prices kind of flat to maybe down on the liquid side. Does diversifying into that dry side to compete more with ACL and others make more sense here.
David Grzebinski (President and CEO)
Let me take them one at a time. In terms of acquisition pricing, there's stil there's always a bid-offer spread, right. But look, business has gotten tougher, right. I mean, it's not as much fun as when everything's going up. So conversations have been a little more frequent, a little more constructive. We still may need a little more pain. But the conversations have gotten more constructive. John, it's really hard to predict acquisitions. We don't want to forecast any for sure. Now, in terms of a change with ACL buying AEP, it was a great deal for them.
Andy Smith (EVP and CFO)
AEP really only had 40 liquid, 10,000-barrel barges that were all leased in. They were building another 40, They'll have a total of 80 and again, they weren't even owned by AEP. But the biggest part of AEP fleet, of course, was the dry cargo fleet, which you know. So that took ACL's position in the dry cargo fleet up quite a bit, right. I mean, they essentially doubled their dry cargo fleet. It's it's a nice acquisition for ACL as to whether we'd be interested in dry cargo typically we have shied away from dry cargo. We find it a little more volatile, a little less ratable than the liquid side.
and we wouldn't pursue a dry cargo, never say never, but I don't think we'd pursue a dry cargo acquisition in and of itself. But if, if we were to buy a competitor's liquid fleet and they had some dry cargo barges we, we may well keep the dry cargo fleet and and run it. But inherently, we don't like the volatility of the dry cargo fleet. it's it gets moved around a little more, with grain grain harvests and and, other things. whereas the liquid volumes tend to move more in line with and and the, the customer's profitability may go up and down, our liquid customers' profitability may go up and down with commodity prices, but the volumes are, are fairly steady.
That's a long-winded answer, John. Hope that answers it, your three questions.
Operator (participant)
Our next question comes from Ken Hoexter from Merrill Lynch. Ken, please go ahead.
Ken Hoexter (Analyst)
Great, good morning. Joe, Andy and Sterling. Last quarter, you talked about reducing assets in the land-based diesel services segment. Can you update on the progress there and then similarly, on the marine side, margins are taking a bit of a hit year-over-year. Is there more to do internally there, or is that all price-related.
David Grzebinski (President and CEO)
Look, Land-based diesel. You heard Andy's comments that we sold the compression business earlier this year. We sold the bucks, kind of, a small product line out of there so we're focusing on the core in at United, the core distribution, spare parts and service business, as well as that core manufacturing business. There may be some other things we could do there, but right now we're really focused on taking out costs in that core business and getting it prepared for the inevitable rebound in some demand. In terms of margins in the marine business, the margin decline really is price. Price just kind of rolls through the bottom line.
Andy Smith (EVP and CFO)
We have taken out some costs, reduced a little bit of headcount, really through attrition more than anything else. But we're constantly looking at costs, there. But as pricing does kind of flow right through to the bottom line.
Ken Hoexter (Analyst)
Great. Thanks. Dave, on the pricing on the dry side, not the coastwise barges, but the other ones that you run for services on a offshore basis, is there pricing pressure on that. Because when we combine the coastwise trade, it looked like pricing is down and you said modest increases. So I just want to understand, because I know there's a mix of vessels that you don't talk about much. Are we seeing kind of pricing down on that, or what is the utilization now of those six assets.
David Grzebinski (President and CEO)
No, those are our sugar and we've got basically two coastwise barges, sometimes three barges moving sugar and a couple barges moving coal. Those are in long-term contracts, both of them, so there's not a lot of price volatility there. You do have utilization volatility, particularly some. The sugar trade is on a kind of a contract of affreightment. When weather impacts that fleet, it impacts us and so weather can pull that around. I'm not sure what you're looking at in terms of pricing.
Andy Smith (EVP and CFO)
Ken, this is Andy. If you're looking at the revenue coming or getting into the revenue coming out of our coastal business, remember that we had much lower fuel pricing this quarter, as well as a heavy shipyard cycle and that the operating income line, another effect that you need to take into account is roughly a $3.5 million incremental depreciation and amortization effect for the shortening of the depreciable lives for some assets that were getting, quite frankly, long in the tooth and we're gonna have a very heavy shipyard cycle or expensive shipyards coming up that we shortened and essentially have written down. That's affected margins in the quarter, if that's what you're looking at. I don't think that it's pricing.
Operator (participant)
Our next question comes from David Beard from Coker Palmer. David, please go ahead.
David Beard (Analyst)
Hi, good morning, gentlemen.
David Grzebinski (President and CEO)
Good morning, David.
David Beard (Analyst)
David, when you talked about pricing still being under pressure for next year, should we still think about a sort of a 2%-3% price decline. Is that kind of what you're feeling is gonna roll into next year.
David Grzebinski (President and CEO)
Again, it's hard to forecast. We just don't know. A lot depends on this kind of the sentiment changing as the industry deals with fewer and fewer barges in crude. So it we're not. I don't wanna give you a forecast on where rates are going it just. There is some uncertainty there and we don't know. We're just calling it out and refinery utilization and other things next year can change some things and for the positive, right. If these refineries continue to do green, not greenfield, but brownfield-type expansions and then the chemical guys continue to do their expansions, that demand should have an impact.
Andy Smith (EVP and CFO)
Now, the timing of all that with respect to the crude barge absorption is what makes it difficult to predict where pricing could be next year.
David Beard (Analyst)
Right. right and then just switching to the fleet of crude oil barges, the 250 to 300. I know you'd mentioned most of them in the last call had moved out of that trade and there was a certain base level that couldn't move because of volumes and also couldn't move because of the types of equipment. Can you give us your thoughts there and how many of those 250 to 300 still could move out of the trade.
Andy Smith (EVP and CFO)
We don't know. I really don't know. I would say some of the Utica stuff probably doesn't go away. Now, there's always a caveat, right. I mean, at low enough oil price people will shut in production or as the decline curves take place, they just won't drill anything new or produce anything new. So it's hard to say, but we've looked at some data that says even in the mid-$40s, some of these fields have pretty good IRRs 15% after-tax type of IRRs. Some of them will definitely continue to produce. It's just hard to say how much is the floor there, but there is a floor.
Operator (participant)
Our next question comes from Kelly Dougherty from Macquarie. Kelly, please go ahead.
Kelly Dougherty (Analyst)
Thanks for taking the follow-up.
David Grzebinski (President and CEO)
Hi, Kelly.
Kelly Dougherty (Analyst)
I just wanted to follow up on the M&A discussion and how much leverage do you guys have the ability to take on and would you be willing to take on some leverage for buybacks if you didn't find any attractively priced acquisitions in the near term. Thanks.
Andy Smith (EVP and CFO)
Kelly, You've heard us say before, we look at all of these things in a very similar way. We run a DCF and based on the different choices for capital allocation available to us in the short term, that's kind of how we make our decisions we're at 26% debt to cap, so we've got plenty of ability to lever up in the past, this company's been going way back to the Hollywood acquisition, even over 50% debt to cap and in the recent after the sort of big cycle in 2010, 2011, was over 40%. So plenty of capacity available.
David Grzebinski (President and CEO)
Kelly, we believe we could stay probably investment grade if we went up to 50%, but we had kind of a debt repayment plan that we outlined to the rating agency. We'd be pretty comfortable there and you make a good point. it's Kirby, we've always and I'll ask Joe to chime in here, too, we've always looked at our capital allocation and you kind of look at it. It makes sense what to do sometimes you build equipment, sometimes you buy acquisitions when you can get them done at reasonable prices and other times, you buy back your stock and yet other times, you pay down debt.
Andy Smith (EVP and CFO)
Over the years, it becomes pretty obvious what the appropriate thing to do. That said, this kind of environment in our history and I'm gonna ask Joe to comment on that. This is when we typically see some opportunities. Joe, do you want to add anything to that.
Joe Pyne (Chairman)
That's right, David. If you look back to how we built Kirby, it was during periods of uncertainty. We've just come through a very good period in this business and when you do that, you have operators the sense that it's gonna go on forever, when in fact, it it's not. This business still is cyclical. We try to take some of that cyclicality out with respect to the markets that we pursue and how we structure our contracts. But it takes a deflating the balloon a little bit to get people back on kind of a realistic page and it...
Andy Smith (EVP and CFO)
Nobody likes earnings that are going the wrong way, perhaps except for me, because I see it as a great opportunity to continue to consolidate this business to make Kirby stronger. Consolidation in the business is positive. If we mentioned the ACL, AEP acquisition that's gonna be long-term positive for the business. You'll have in the future with the larger companies with more at stake, a much more rational market. We already have a more rational market than we had 30, 35, 40 years ago when I entered the business. So I look at this period with some excitement.
That we're gonna actually have some good discussions with operators that you know recognize that the wind doesn't always blow in one direction.
Kelly Dougherty (Analyst)
Thanks, guys. I appreciate that color.
David Grzebinski (President and CEO)
Thanks, Kelly.
Operator (participant)
We have no further questions at this time.
Sterling Adlakha (Head of Investor Relations)
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 and have a nice day.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.