GATX Corporation (GMT)’s Fourth Quarter 2014 Earnings Conference Call Transcript

If you look at our order book very few cars are designated for petroleum service and none of those customers have expressed an interest in cancelling in order at this time either. And we really haven’t seen any weakness in the existing fleet, obviously a 99% utilization or in pricing either, other than what we have discussed over the last year or so about the 30,000 gallon tank cars and the pressure on those, but that was due to the overhang of the impending tank car regulation.

So, having said that despite what you might hear from others in the industry, I think it’s a little premature they there will be no effect of this sector on the real market if these low crude prices persist for a long period. Actually, we think many customers are still in the assessment phase regarding the effect on their business, you know this precipitous drop has only been here for two months or three months. So in our view that car types that could potentially be the most impacted our first and foremost the small cube-covered hopper market, obviously one of the commodities with that product carriers is shark fan this is the car that’s most directly related to the drilling of new wells. It already has been a volatile car type over the last few years. This march-up in demand and lease rate due to has been interrupted a few times by some temporary overwhelming.

In particular, small cubes designated for frac sand appear to be a big part of the manufacturing of freight car backlog, and we believe that backlog to be under pressure for cancellation if this new drilling is curtailed. As far as our fleet, as I said and while we do have 3100 cars in for frac sand service it’s obviously a very small part of our fleet they are deployed with high credit customers again for very long term. In addition, our small cubes are deployed in a variety of other commodities are we are seeing increased demand for cars and its other service. So for me it would be a good example. And current rate for small cubes actually remained very strong.

The second type is probably most obvious type of car that would be a factor of 30,000 gallon tank cars that carry crude, ethanol and other refined products. Actually, I mentioned this car type after small cubes because on a low crude price environment it’s unclear how much pressure this existing fleet of 30,000 gallon cars would experience. Even though the economics are drilling new wells could be tough which would definitely affect shark fan cars. Lower crude prices to continue to derive healthy demand for crude and refined products in North America, that demand could continue to be filled by existing North Americas wells and that would still create demand for these cars. So, time will tell is these production and transformation patterns will change but once again its arguably a bigger issue for the manufacturers and their order backlog for new cars and it is for the existing fleet out there.