“We have lowered our second-half 2016 and later revenue estimates for tank car and small covered hopper car (used for frac sand) manufacturers to reflect potential pricing pressure on new railcar orders,” says Crawford. “We note that the UBS Global Oil team revised its oil price and supply/demand forecasts in a separate report. UBS expects lower oil prices to prompt a material cut in 2015 U.S. E&P capex, which is forecast to impact oil production beginning in 2016. While the headline capex reduction may elicit concerns over potential railcar order cancellations, we believe the current backlog is largely secure, and deliveries will extend into 2016. Rather, we see risk to the current railcar pricing environment, with the impact flowing through to OEM results in 2016. We see limited risk to the current backlog.”
UBS’ lower oil price forecast is largely a function of increased U.S. production,” says Crawford. “Of note, UBS raised its 2020 U.S. tight oil production forecast by 13%. In light of our upward production revisions, coupled with imminent tank car design regulations (PHMSA is expected to announce a new standard in first-quarter 2015), we believe current tank car orders in backlog are likely to be delivered, and that we may see additional ordering next year if older tank cars are retired subsequent to the release of a new standard.
“We have lowered our 2016 and later estimates on potentially weaker pricing. Our revised estimates reflect pricing pressure and margin compression, rather than lower volume forecasts. We continue to forecast a peak in industry deliveries in early 2016, as we anticipated some moderation in energy-related demand from robust levels.”