Greenbrier, one of my holdings, is poised to benefit from a recovery in oil prices. Greenbrier manufactures, leases and repairs rail cars.
Greenbrier was a beneficiary of the fracking boom and was negatively impacted by the bust in the last two years. Much of the oil that is being drilled throughout the US must to be transported via rail. Greenbrier’s stock peaked at $75 a share in mid 2014 around the same time that oil prices peaked above $100 and then began its decline to $50.
Meanwhile, amid the decline in oil prices, Greenbrier has been humming along and generating profits while the stock has been disconnected from the actual performance of the company and slid to the current $41.85 price level. Take a look at the operating income for the last few fiscal years:
2016: $408 million
2015: $386 million
2014: $239 million
They have also been paying down debt. Long term debt has been reduced from $445 million to $303 million.
Saudi Arabia & Oil Prices
With that said, it appears that oil prices are bottoming. Saudi Arabia engineered the decline in oil prices to kill their competition. Their mission is now accomplished and they want to see oil prices go back up. They are now organizing OPEC to cut production and raise oil prices again.
I suspect Saudi engineered higher oil prices will simply mean that US production will increase in response, which will benefit the train industry and companies like Greenbrier. The only way that it wouldn’t benefit would be if the US invests in oil pipelines. It appears unlikely that any pipelines will be built. In addition to the environmentalists, there is a strong resistance from NIMBY citizens. Any struggle to get these pipelines built will probably be akin to the Bush administration’s efforts to drill in ANWR, efforts that were abandoned because they were deemed to be too much of a political pain.
Personally, I don’t see how transporting all of this oil via train and truck is any better for the environment than putting it in a pipeline, but I don’t think it is good investing to think in terms of what should happen. Even if the new administration fights the political pressure and gets a pipeline built, it will be years before it actually happens. In the meantime, we will need a way to transport all of this oil and rail will benefit.
Margin of Safety
Greenbrier presents an excellent margin of safety at the current price. Even without higher oil prices, Greenbrier has been performing well while the stock price has fallen amid speculation that ignores the fundamentals of the business. My guess is that betting against rail while oil goes down has been fashionable on Wall Street, thereby creating attractive prices. It is a great value even if my prediction about oil prices doesn’t come true. I feel the same way about Valero, another stock I own as a play for an oil resurgence.
That’s the idea behind the margin of safety — even if I am wrong, the stock was purchased at a wide enough margin of safety that I should still do ok. I can bet on higher oil prices in a safe way, as opposed to buying a leveraged ETF or oil futures.
PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures.