CSX Corporation (CSX) and Kinder Morgan Energy Partners (KMP) have partnered in a venture to transport ethanol into Tampa, Florida through a train-to-pipeline distribution system.
With support from Tampa Port Authority (TPA), both parties will transport ethanol from Midwest to central Florida markets through 100-car unit trains serving Kinder Morgan’s Tampa Terminal. The TPA will assist in building rail track and infrastructure to manage train deliveries and offloading yard at terminals.
We expect CSX to gain opportunities in emerging markets, mainly from the Eastern region that produces more corn. The company already serves the Albany terminal in New York, one of the largest ethanol distribution hubs. Hence, we believe new business wins in Tampa region will aid the company’s strategic expansion plans in the regional markets.
In addition, we believe the partnership remains accretive to CSX’s growth given the predominant position that the U.S. enjoys in global ethanol production with approximately 13.2 billion gallons recorded in 2010.
The U.S. remains the largest producer of ethanol, accounting for more than 50% of the total global requirement. Further, market sources project growth in ethanol production to continue driven by increased fuel needs. Ethanol is mainly derived from corn as feedstock and therefore, significant chances prevail for it to substitute fossil fuels. This is quite evident as 90% of the petroleum products derived in the U.S. are blended with ethanol.
However, the economic slowdown and steeper fuel prices have greatly hurt the demand/supply dynamics in fuel markets. We believe the success of the partnership remains largely governed by movements in the fuel market. Prospects of this business can only be assessed over the long term. Hence, we expect the near-term results to only include the cost side of the deal and establishment charges for network developments that are likely to weigh on CSX’s margin growth.
CSX Corp., one of the leading U.S. railroads, holds a Zacks #3 Rank (Hold). This is supported by our long-term Neutral recommendation.
CSX CORP (CSX): Free Stock Analysis Report
KINDER MORG ENG (KMP): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment