Apr 30, 2015
Executives
Sterling Adlakha – Investor Relations Joe Pyne – Chairman David Grzebinski – President, Chief Executive Officer Andrew Smith – Chief Financial Officer and Executive Vice President
Analysts
Gregory Lewis – Credit Suisse Jack Atkins – Stephens John Barnes – RBC Capital Markets Kelly Dougherty – Macquarie Ken Hoexter – Merrill Lynch Kevin Sterling – BB and T Capital Markets John Chappell – Evercore ISI David Beard – Iberia
Operator
Welcome to the Kirby Corporation 2015 First Quarter Earnings Conference Call. My name is Ellen and I will 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
Thank you Ellen and thanks everyone 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 www.kirbycorp.com in the Investor Relations section under non-GAAP financial data.
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.
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
Thank you, Sterling and good morning. Yesterday afternoon we announced first quarter earnings of $1.09 per share.
This compares with $1.09 per share reported for the 2014 first quarter and near the middle of our $1.05 to $1.15 per share guidance range. During the 2015 first quarter in our marine transportation inland tank barge fleet, utilization remained in the 90% to 95% range as the market continues to experience good customer demand.
However, pricing weakness made it difficult to get better pricing on contact renewals and encouraged the tone of uncertainty, which we’re currently seeing. In the coastal market, utilization also remains in the 90% to 95% range.
Mid to high single-digit coastal contract pricing increases were indicative of a tight market. Our challenged this quarter isn’t pricing or utilization, but more in plant equipment outages for maintenance.
In our Diesel Engine Service segment, revenue increased over last year, but operating income was down. The marine diesel engine service segment experienced some weakness as you would expect in the Gulf of Mexico oil service market.
With respect to our land-based diesel engine service business, we’re working in a very challenging market environment. Our distribution business which includes orders for parts, transmissions, engines was relatively strong in the quarter and contributed to the year-over-year revenue growth we experienced.
In addition, we continue to work through backlog orders for new pressure pumping equipment. However, severance expenses and lower margins are impacting our profitability.
I’ll now turn the call over to David.
David Grzebinski
Thank you, Joe and good morning. In our marine transportation segment, as Joe indicated during the first quarter, our inland marine barge demand was stable with equipment utilization in the 90% to 95% range.
Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, were at 80% with spot at 20%. Of the term contracts, 56% are time charter and 44% are contracts of afreightment.
Pricing on the inland marine transportation term contracts that renewed during the first quarter were flat to very slightly down. Spot contract rates were generally in line with contract pricing.
Over the course of the quarter, we did see several instances where spot contract pricing, primarily through brokers, dipped below contract levels. I’ll discuss inland marine pricing in more detail when I provide our outlook towards the end of the call.
In our coastal marine transportation sector, equipment utilization remained in the 90% to 95% range, as Joe indicated. And during the first quarter 85% of the coastal revenues were under term contracts.
Demand for coast-wide transportation of refined products, black oil and petrochemicals remained consistent with the fourth quarter. With respect to coastal marine transportation pricing term contracts that renewed during the first quarter increased in the mid to high single digit range, as Joe indicated.
In our diesel engine services segment, our marine diesel and power generation markets experienced stable demand in most regions of country, but there was some weakness in the Gulf of Mexico oil service market. In the land-based Diesel Engine Service market while orders for new parts and equipment were pretty good in the first quarter, we have seen that demand weaken significantly in recent weeks.
During the first quarter we continued to work through backlog of 2014 orders for new pressure pumping equipment. However, customers continued to delay delivery of orders during the quarter and much of that backlog is now pushed into 2016.
Several projects which experienced delays and production issues last year completed in the first quarter and as such negatively impacted margins. As a result of this and the weak outlook for the market, we have taken aggressive measures to cut costs.
Since the beginning of the year we have reduced the staffing level in the manufacturing area by about 40%. Additionally, we are structuring the business to be able to ramp up and down more efficiently.
Having said, that the delays to our backlog combined with a lack of inbound orders and a reduced near-term outlook for the distribution portion of the business have further reduced our expectations for contribution from this business. I will comment more later in the call during my comments on the outlook.
Before turning the call over to Andy, let me make a brief comment about our share buyback program. During 2015 first quarter we repurchased 1.25 million shares for $98 million or at a price - average price of $78.27.
Since our last call with you, we repurchased 178,000 shares at an average price of $75.88. Currently our unused repurchase authorization is 3.5 million shares.
I will now turn the call over to Andy to provide some detailed financial information and then I will come back to finish a discussion on the outlook.
Andrew Smith
Thank you, David, and good morning. In the 2015 first quarter, marine transportation segment revenue declined 4% and operating income declined 1% as compared with the 2014 first quarter.
The inland sector contributed approximately 70% of marine transportation revenue with the coastal sector contributing 30%. Our inland sector generated an operating margin in the mid 20% range and coastal sector generated an operating margin in the high teens.
Overall, the Marine transportation segment’s operating margin was 22.9% compared with 22.4% for the 2014 first quarter. A decline in marine transportation segment revenue in the first quarter as compared to the prior year was primarily due to a 34% decline in the average cost of marine diesel fuel, which is largely passed through to our customers albeit with some lagging effect.
Following normal seasonal patterns, we typically experience difficult weather in the first quarter. Late in the 2015 first quarter, weather challenges were particularly acute with high winds and fog on the Gulf Coast and icing on the Illinois and upper Ohio rivers.
Despite these challenges, inland marine delay days, while slightly above our five year average, were down 18% compared to the 2014 first quarter. A quarter where we experienced more severe icing and high water conditions in the Midwest as well as high winds and fog on the Gulf Coast.
Also, the first quarter results did reflect the anticipated year-over-year negative impact of $0.04 per share for higher pension expense, reflecting actuarial changes to mortality table and a lower discount rate. We noted in our January call, our 2015 results will be negatively impacted by an estimated year-over-year increase of $0.15 per share from pension expense and $0.24 per share from increased depreciation and amortization, the result of capital additions and capital upgrades in 2014 and expected capital additions in 2015.
David will discuss our second quarter and full year guidance in a minute, but let me comment on fuel. Our second quarter guidance reflects an estimated $0.03 to $0.05 per share temporary sequential impact from the decline in fuel price as compared to 1Q 2015.
Some of our contracts allow us to directly bill customers for the cost of fuel. In others, we have escalators, which are designed to pass through the cost of fuel.
Those escalators are most effective when fuel price changes are gradual. Diesel fuel prices have swung from a very high point to a very low point in a very short period of time and have recently increased some off of the lows.
In this environment, our escalators are not perfect in passing through recent increases. We have seen this situation a few times in our history.
And as prices stabilize, we should see the negative impact ultimately reverse. During the 2015 first quarter, we took delivery of 21 new tank barges with a total capacity of 310,000 barrels.
We also purchased from a competitor six pressure barges, which added approximately 100,000 barrels of capacity. We retired six inland tank barges, removing approximately 100,000 barrels of capacity.
The net result was an addition of 21 inland tank barges to our fleet, constituting a net increase of approximately 310,000 barrels. Of the 21 inland tank barges delivered, 16 were 10,000-barrel barges and 5 were 30,000-barrel barges.
For the remaining nine months of 2015, we expect to take delivery of 14 additional 10,000-barrel inland tank barges and 4 additional 30,000-barrel inland tank barges. Including retirements, we expect to add net capacity of approximately 490,000 barrels over the course of the year, leading to year-end capacity of approximately 18.3 million barrels versus 17.8 million barrels at the end of 2014.
As I mentioned earlier, in March we purchased 16,000 barrel inland LPG pressure barges for $41.3 million from a carrier who has decided to exit the pressurized cargo transportation business. In the coastal marine transportation sector construction of the four coastal articulated tank barge and tugboat units is proceeding as planned with the first unit a 185,000 barrel 10,000-horsepower ATB expected to be delivered and in service in the 2015 fourth quarter.
Our second new offshore vessel also a 185,000 barrel ATB is currently ahead of schedule and looks likely to deliver at the very end of this year or early next year. We continue to expect delivery of the third and fourth vessels, both 185,000 barrel ATBs in late 2016 and mid 2017 respectively.
I also want to reiterate something that we have previously mentioned regarding coastal fleet operating expenses. Deferred drydock expenses, our drydock costs that are capitalized and amortized over the time between drydockings generally a 30 to 60-month period.
This expense ramps up as equipment obtained via acquisition goes into drydock until the entire acquired fleet goes through a full regulatory shipyard cycle over Kirby ownership. As such our deferred drydock amortization in 2015 is expected to result in approximately $5 million of additional expense compared to 2014.
Moving onto our Diesel Engine Services business. Revenue for the 2015 first quarter increased 9%, while operating income decreased 31% compared with the 2014 first quarter.
The segment’s operating margin was 5.3% compared with 8.3% for the 2014 first quarter. The marine and power generation operations contributed approximately 30% of the Diesel Engine Services revenue in the first quarter with an operating margin in the low to mid teens.
Our land-based operations contribute approximately 70% of the Diesel Engine Services segment’s revenue in the first quarter with an operating margin in the low single-digit. This operation incurred a pre-tax severance charge during the first quarter that totaled $1.2 million.
As David mentioned, we let go of approximately 40% of the manufacturing workforce during the quarter to better reflect our anticipated production schedule in this difficult market environment. In March, Kirby completed the sale of a loss producing land-based Diesel Engine Services product line to a strategic buyer for approximately $9.5 million.
The sale resulted in a small pre-tax gain that roughly offset the severance expense I just mentioned. Product line was expected to have a slight negative, but not material impact on operating income in 2015.
On the corporate side of things, our cash flow remains strong during the quarter, which helped to fund our marine equipment construction plan. The acquisition of the six pressure barges and $98 million of treasury stock purchased during the quarter.
The stock purchase were a combination of the completion of the $100 million stock repurchase program we started in the 2014 fourth quarter and open market repurchases. With respect to any further repurchases, we will continue to evaluate all available potential uses of capital and as you know, at times and for various reasons, we are precluded from being in the market.
Any future decision to repurchase stock will be based on a number of factors including such limitations to stock price and our long-term earnings and cash flow forecasts as well as the alternative opportunities available to deploy capital including acquisitions. We have revised our 2015 capital spending guidance to a range of $315 million to $325 million including approximately $75 million for the construction of 39 inland tank barges and three inland towboats expected to be delivered in 2015 and approximately 95 million in progress payment on the construction of the new ATB.
The balance of $145 million to $150 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities as well Diesel Engine Services facilities. The $15 million increase in the range was primarily due timing of payments for construction of the ATBs and offshore shipyards which were accelerated in the 2015 from 2016 to accommodate customers’ needs.
Total debt as of December 31st - total debt as of March 31st was $819 million, a $102 million increase from our total debt of $717 million on December 31st, 2014. The increased debt was primarily due to the acquisition of the six pressure barges and treasury stock purchases during the quarter.
As of today, our debt stands at $809 million and our debt-to-cap ratio at March 31st 2015 was 26.9% compared with 24% as of December 31st, 2014. I’ll now turn the call back over to David.
David Grzebinski
All right. Thank you, Andy.
In our press release, we sent out last night, we announced our 2015 second quarter guidance of $0.95 to $1.10 per share and this compares with $1.31 per share earned in the 2014 second quarter. For the full year, 2015 we lowered and widened our guidance to $4.10 to $4.40 per share as a result of the uncertainty we’re seeing in the land-based Diesel Engine Services business and the inland marine transportation markets.
Let me discuss the marine outlook first. In the inland marine transportation market pricing over the remainder of 2015 will likely be impacted by our customers’ expectations of how much oil is produced and will need to be shipped by barge domestically and consequently whether the industry is in an over or under supplied position.
Before I discuss our guidance in a little more detail, I want to provide some general observations regarding the inland marine barge market and our company’s performance. After four straight years of improved earnings, the market has forced a pause in our record financial performance.
Last year we saw record inland transportation rates, record earnings and record revenue. Because of some uncertainty in crude oil volumes and a large number of 30,000 barrel barges built during the last several years, industry wide utilization in the 30,000 barrel barge market is being impacted and rates are under some pressure.
Some barges moving Bakken and Canadian crude have been released and the industry is redeploying them, but the utilization concern is pressuring price. Utica volumes are absorbing some of the supply.
So much of the market’s pricing choppiness is anticipating a change in market dynamics rather than accurately pricing in the supply and demand levels that we see today. We think that the market will strengthen once crude oil prices stabilize and any excess barge capacity is absorbed by barge demand from increased refined products and chemical volumes.
This is not a collapse in the market, but more of a pause which has put the brakes on new construction in the inland tank barge market which is a very positive reaction and it gives the market some breathing room. Our second quarter guidance assumes normal weather patterns for our marine transportation markets with utilization remaining in the 90% to 95% range for both our inland and coastal equipment.
However, utilization in our inland fleet could trend towards the lower end of that range for both the quarter and as the year progresses. The coastal market remains healthy and our outlook is for mid single-digit price increases.
However, during the second quarter, our coastal fleet will be negatively impacted by heavily - heavy planned shipyard cycle contribution. This is also true for the full year as we have moved several 2016 planned shipyards into this year to accommodate customers and to better match the timing of their volume need.
In our inland markets, our guidance assumes we will experience some price weakness as 2015 progresses. Currently, spot prices are generally in line with contract rate levels, but have dropped below contract levels on occasion.
So far in the second quarter, we have seen come term contracts renewed down low single-digits. Consequently, we remain cautious with our 2015 pricing expectations for the inland.
Our low end of the range encompasses more deterioration than we are currently seeing and expect, but due to uncertainty, we broadened our range. Let me move to the outlook for our Diesel Engine Services group.
In our land-based sector, given the significant decline in the price of crude oil and resulting oil field capital spending reductions. Customer-driven requests to delay orders have pushed much of our remaining backlog for new pressure pumping units into 2016.
Additionally, the outlook for sales of parts, engines and transmissions has deteriorated beyond our earlier expectations. We now expect the land-based diesel engine services business to generate a small quarterly operating loss through the remainder of 2015.
In our marine diesel and power generation markets, we continue to expect this business to earn an operating margin in the low double-digit percent range to the remainder of the year, and although we do expect some revenue and profit impact due to the weakness in the Gulf of Mexico oil services market. For the company as a whole, the difference between the low-end and high-end of our guidance range is related to the variability in the land-based diesel engine services market, as well as how utilization and pricing trend in the inland market – in the inland marine market.
The low end of the guidance range could be characterized by what we view as a weaker than expected outcome in each of our diesel engine and marine transportation markets. The low end of our guidance range for both the second quarter and the full year does not seem likely but it is possible if our markets were to significantly deteriorate.
Well, our 202015 earnings guidance is lower than 2014, we expect our cash flow to remain strong, combined with lower CapEx, could provide additional free cash flow for potential acquisition opportunities and share repurchases. In summary, 2015 has presented us with a number of market-based challenges.
However, our balance sheet is strong, our debt-to-cap ratio is right at 27%. And as I mentioned, we expect our cash flow to remain strong in 2015.
As such we are very well-positioned should any market weakness or disruption open up, good investment opportunities including acquisitions and share repurchases. Operator, that concludes our prepared remarks.
We are now ready to take questions.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] The first question is from Gregory Lewis with Credit Suisse.
Gregory Lewis
Yes. Thank you and good morning.
David Grzebinski
Hey, good morning Greg.
Gregory Lewis
David, you touched on this a little bit about clearly there is some crude 30,000 barrel barges rolling off contract, you know, upriver have been coming down to Houston. Do we have any sense for how many, I guess, idle crude barges are sitting around Houston?
And have we started to see some of this equipment being into the working fleet already?
David Grzebinski
Yeah, the sort answer is, yeah. Most of it is being absorbed.
It is the - the pause where it gets redeployed that is putting pricing pressure and it’s also the outlook that they - we believe that the crude market - crude production will decline. But let me address it with some numbers.
There were about 500, maybe 600 barges in crude, maybe 550 on average. And that declined about 100 to 150.
We think it’s about 375 to 425 in the crude market. Now, so there has been a redeployment of crude barges.
Some of that - the Bakken as I mentioned in my prepared comments, the Bakken and Canadian have declined, but some of the barges have been redeployed up into the Utica and bringing that downriver. But the market is absorbing it.
But - what’s overhanging the market in terms of pricing is given a $50 crude price in the rig count coming down from 1,800 to 900; the market is expecting a decline in crude production volumes. So, that’s kind of the overhang that’s pushing down price.
Gregory Lewis
Okay, great. And then also wanted to touch on the [indiscernible] and you hence was the six pressure barges for LPG that were acquired.
Is this something that - is this - do we think this is an opportunity where we could see some growth? Or is this market kind of - is there any opportunities to grow this business organically as we look out over the next one to two years?
And how big is this market right now?
David Grzebinski
Yeah. Well, we - this is an opportunity.
I mean this is where you get a little market noise and a competitor decides to exit and we took advantage of that opportunity. That’s one of the things we’ve always done is when a customer - excuse me, a competitor is ready to move our balance sheet is ready to move.
So, we were able to pick up these barges that were essentially new and couple of years old because it’s a good long-term market for us and we like the pressure barge market and with that growing customer demand. So it is a great opportunity and one we hope we see more of as time goes on.
Gregory Lewis
Okay. Hey, thank you guys for the time.
Operator
The next question is from Jack Atkins with Stephens.
Jack Atkins
Good morning, guys. Thanks for taking my question.
David Grzebinski
Hey, Jack.
Jack Atkins
So I guess, just to kind of start out, the reduction at the midpoint of the guidance I think its about $0.35 for midpoint to midpoint. Just sort of curious when we kind of break it down between changes to the outlook in the marine business versus changes in the outlook to the diesel and services business and then how much of the pull forward of the shipyards and the impact of oil played – the decline in diesel prices play into that, too?
Just trying to put some brackets around all that?
Andrew Smith
Yes, Jack, this is Andy. I would say that, its about a 50/50 split between diesel engine services and marine.
And diesel engine services, the vast majority that’s in marine based.
Jack Atkins
Sure.
Andrew Smith
Marine again, shipyards being pulled forward. It has an effect on our coastline businesses and then some of what we are anticipating in terms of rate pressure affects the remainder of the business later in the year.
Jack Atkins
Okay. And then just to follow up on that Andy if I could for a moment.
I mean, it sounds like you are pulling the shipyards forward. Could you quantify the impact that has on earnings for this year?
And then secondly you talked about higher amortization expense associated with maintenance at coastal. Is that something which you would expect to repeat in 2016 or just really just an abnormally high number for 2015, I guess?
David Grzebinski
No, I mean, that’s a number this has been growing over the years as we acquired assets and we have been doing the shipyards to these regulatory drydocking. And it has grown a bunch over the last couple of years, first of all.
But it should start to moderate somewhat and start to level off. On the shipyards, you know, we have probably pulled, you know, I would say $4 million or so forward from 2016 into 2015.
Jack Atkins
Okay. That is very helpful.
Thanks again for the time.
David Grzebinski
Yeah.
Operator
The forecast in question is from John Barnes with RBC Capital Markets.
John Barnes
Hey, good morning, guys. A couple of things.
You know, in terms of United and this business going forward, I mean you have owned this thing for what, about four years now and I guess you have been through a couple of down cycles in this business already, tends to bring with it more volatility than what we are kind of used to in the marine business and even the other diesel engine business. Can you just talk a little bit strategically about the outlook for this going forward given than it does bring this varying degree of volatility?
Is it something you are comfortable continuing to own? Or what is kind of your strategic view of this business going forward?
David Grzebinski
Yeah. Sure, John.
We clearly don’t like the market environment we are in right now. And when we bought United we knew it would be susceptible to oilfield cycles, and as you know our strategy then and now was to mitigate some of that volatility by focusing on the more stable repair and parts and service business.
But what we have seen here in this market particularly is a dramatic decline. You get the rig count drop 1,800 to 900.
We’ve had oil - crude oil price drop in half essentially and frankly, some of our customers are in some financial stress right now. So, it is really an acute down cycle, certainly more than we would hope for or have expected.
But, we’re committed long-term to get our service offerings where they need to be to mitigate some of the volatility. But also as I commented in our prepared remarks, we’re looking and streamlining the organization so we can ramp-up and down more effectively going forward.
John Barnes
Okay. All right.
And I guess net on the - your commentary around the shipyards and maybe less orders of liquid barges, I guess there has been some discussion that one of the shipyards converted a liquid line over to a dry line. Two things; one, can you give us a sense for how many barges do you think - liquid barges do you think the shipyards could produce this year given maybe some of those modifications?
And then if this continues for say this year and next year, as you approach kind of that up-tick in liquid volumes at some of this petrochemical build out, I mean do you believe that the industry is actually under-investing in equipment at this point if we see less orders given kind of the transitory nature of the market right now?
David Grzebinski
Yeah. Maybe.
The interesting thing is one thing that the crude volatility has done in this anticipated volume decline in crude is it, it stopped the order book build for liquid barges, it really hasn’t changed since October of last year. And those are contracts, so people can’t cancel them effectively.
But the new build order book as of October of last year is about 180 barges. And that really hasn’t changed.
So, nobody is building barges, which is very good and as you know, we typically have a retirement of 100 to 150, some years 175 barges. So, we should be – its a good environment and we do know that petrochemical volumes are coming online.
We’re actually starting to see it now. The big plant builds are 2017 and 2018, but we’re already getting volumes in petchems that are helping to absorb any excess capacity, particularly ethanol is one area that has come on stream here recently.
So, I think it’s great if we’re short of few barges at end of the year or next year as things develop. We believe that pricing will stabilize and go up again as new demand for refined products moves and petrochemical moves come on stream so.
John Barnes
Very good. Thanks for your time, guys.
David Grzebinski
Thank you, John.
Operator
The next question is from Kelly Dougherty with Macquarie.
Kelly Dougherty
Good morning. And thanks for taking the question.
I just wanted to kind of, maybe take a higher level view and just think how long do you think it takes the private companies valuation expectations to ratchet down. Just wondering if your peers still have the valuation expectation even with increasing uncertain inland pricing outlook and how long maybe it needs to stay like this before those levels come in, and then I just imagine when they do you guys are ready move pretty quickly, is that fair?
David Grzebinski
That’s very fair. That is why we keep our balance sheet the way we do, so we can move quickly when the opportunities do.
Kelly, that is a good question. The pricing expectations certainly in - when the market is choppy get more reasonable.
Typically you need longer periods of pain before they get really realistic about price expectations, but certainly they are headed in the right direction right now. And as you know we are ready to move, and we are always looking.
And one good thing about Kirby is the industry knows that we are the logical buyer in most cases. So we are always optimistic on acquisitions, but as you know, it is hard to predict.
Kelly Dougherty
Okay. Thanks.
I appreciate that. And then just maybe another timing question.
Can you give us a sense for how long it might take the market to absorb this excess capacity? I know there is a bit of a self-correcting mechanism in that something like 20% or older than 30 years and 13% are older than 35.
How long does it take people to start to cease those older barges out once the pricing starts to turn down? So just think maybe when we can start to see an improvement from a pricing perspective?
David Grzebinski
Yeah, it is hard to predict. But we would expect crude volumes to decline here as the year progresses and that will put some pressure on utilization which is why we’re adjusting our guidance.
But, as that pressure comes, if you’ve got old barges, they go to the back of the line, so to speak, from a customer perspective and they are harder to deploy. And – so maybe we’ll see some more retirements, but in terms of how long it takes for that excess capacity if it comes on to be absorbed, its hard to predict because we’re seeing, as I mentioned just a few minutes ago, that refined product volumes are growing and petchem volumes are growing.
So, it could be towards the end of the year, but that’s a real hard thing to predict.
Kelly Dougherty
Great. I appreciate the color.
Thanks, guys.
David Grzebinski
Thanks, Kelly.
Operator
The next question from Ken Hoexter with Merrill Lynch.
Ken Hoexter
Great. Good morning.
David you talked about getting rid of 40% of the staff at the manufacturing side. And you talked about maybe being able to ramp-up or down a bit quicker.
Can you tell us what you’re doing aside from just getting rid of the staff that enables you to ramp back up quicker? Or what are you doing here within the business.
And within that answer, I guess maybe following on John’s question before, what are the synergies you still see on the united portion or the manufacturing portion of that with rest of business? Or is that something that is not core to Kirby?
David Grzebinski
Yeah, let me take that in phases here. We’re in terms of ramping up and down quicker.
What we’re doing is working on our supply chain and working with outsourcing some pieces so that you can lay them off and bring them on a little differently. But that takes some management.
But on the internal side what we are doing is focusing on the core mechanic group so that they can take on lower skilled assemblers and bring them up to speed quickly and then when we have to lay off lower skilled assemblers. So it is really developing that core mechanic strength.
And frankly that is one of the areas where we can have some synergies is in the marine diesel engine mechanic space, our legacy thing - space we’ve got very strong mechanics and so there is some cross knowledge that can happen between our mechanic space and we can try and lever that. I don’t know if that answered your question.
Ken Hoexter
That answers definitely part of it. And then can you talk the synergies within the core business?
David Grzebinski
Within the core...
Ken Hoexter
I guess do you still see the see manufacturing as core part of Kirby given the large swings and the impacts it has had on the business?
David Grzebinski
Yeah. I understand your question now.
Yeah, but we would prefer to be much more focused on remanufacturing because that’s a higher skilled level should have higher margins. The manufacturing is certainly more volatile.
So our focus will be build that remanufacturing business. Take some manufacturing opportunities but never sacrifice the remanufacturing and service opportunities for the manufacturing opportunities.
Ken Hoexter
Okay. And if I can do, I guess, a follow-up on a different subject.
It would be in the - going back to kind of a couple questions here on, on capacity. And I guess I want to fill out Kelly’s last question on the scrapping side.
Do you still see, I guess, the industry - I know you said the order book hasn’t changed much. But given that the fleet is newer, I guess, over the - since we went through the phase of eliminating all of the late [indiscernible] vessels and now you have got a really new fleet, are you seeing scrapping still at those levels?
Or is it dramatically - you mentioned the 100 to 150, is it really slowing now because the fleet is newer? I am trying to figure out what is going on with that size of the fleet now given the pricing pressure you are seeing in the market?
David Grzebinski
No, the scrappage rates actually for the last four years have been down, more closer to that 100. There were back in the 2009, 2010 timeframe the scrappage rate was closer to 200.
So the scrappage rate has actually come down a little bit. So we are not forecasting it to increase a whole lot.
But when there is pressure in the market and you come into a shipyard with an old barge and you say wow, it is going to cost me $0.5 million to extend the life of this barge for another five years and you just say well, that just doesn’t make sense. So it really comes down to an economic decision and that puts some pressure on it.
Now, there are still 600 or so older barges in the system that could come out over time. You are right that the building in the last four years has skewed the average age down a little bit.
But there’s still quite a few older barges out there.
Ken Hoexter
All right. Appreciate the insight.
Thank you, Dave.
David Grzebinski
Yeah. Thanks you, Ken.
Operator
The next question is from Kevin Sterling with BB and T Capital Markets.
Kevin Sterling
Thank you. Good morning, gentlemen.
David Grzebinski
Good morning Kevin.
Kevin Sterling
David with the weakness on the inland side you’re seeing, do you think that could spill into coastal or at this point is coastal rather insulated?
David Grzebinski
Yeah, I - costal is still pretty good. We - as I said that the crude - the crude that has been pressured on the inland side has been more Canadian and some of the Bakken.
But the Bakken is still cheap to go to the coast for the refiners on both the east coast and west coast. And then importantly, the Eagle Ford is still very cheap and our coast-wise equipment is really taking Eagle Ford cross Gulf to the refineries in the Gulf Coast.
And our belief is with the Eagle Ford being competitive even at these levels; we will still see that doing pretty well.
Kevin Sterling
I got you, makes sense. I guess Eagle Ford is competitive just given its location to Corpus Christi and the Houston ship channel is that right?
David Grzebinski
Yeah. Well, not only that, but if you look at the breakeven curves from an E&P standpoint, from an exploration standpoint, that’s some of the cheapest crude out there, also the Utica which is, of course, inland focused.
But Utica is more about getting liquids while they are getting gas. But you are right.
The Eagle Ford is some of the lowest cost to produce crude out there. And you have got a new phenomenon coming out which is refracking of wells which is very cost effective.
And you are starting to hear more about that. I don’t know that the volumes are significant yet, but it is another cost mitigating effort that the industry is undertaking.
Kevin Sterling
I got you. It makes sense.
For the second question, David, you talked about the pumping backlog being pushed into 2016. Can that be canceled?
I am sure you have penalties in place for canceling an order. But have you seen any orders cancel or if we continue to have this volatility in crude, what are your expectations regarding maybe potential cancellations in 2016?
Are your customers talking about that with you?
Andrew Smith
Kevin, this is Andy. You know - and we said this before, but our terms and conditions are pretty much market within the industry.
And while customers do have the option to cancel, they generally are on the hook for any items which have been ordered and delivered and any work that has been done. We prefer to work with the customer and we delayed some of that equipment rather than push them towards making a decision on it right away.
Again, we are in this for the long-term. We want to make sure we work with our customers and take a long-term view of it.
So while there is some risk to it, we think that most of the stuff that is going to be canceled, probably has been already and the stuff that deferred is going to ultimately cliff.
Kevin Sterling
I got you. Okay.
Andy, thank you and gentlemen, thanks so much for your time this morning.
David Grzebinski
Thanks, Kevin.
Operator
The next question is from John Chappell with Evercore ISI.
Jonathan Chappell
Thank you. Good morning, guys.
David Grzebinski
Good morning, John.
Jonathan Chappell
Joe or David, just trying to get a better sense for the potential duration. You talked about the pricing in the inland barge business kind of every way possible, I think.
But I guess, one other way to maybe ask about it and I understand there is still a lot of uncertainty here. But as the contracts - the term contracts start to renew, you talk about maybe how staggered the contracts are, been basically isolated from a lot of the kind of the mid 2014 contracts and kind of pressure environment and can you see kind of more acceleration as those contracts start to renew back half of this year or early 2016?
Joe Pyne
John, this is Joe. Just a couple of observations.
This is very different than 2008, 2009 where you had a collapse in the market, collapse in volume and a rapid de-escalation in prices. And in that environment you will remember that the 2010 year which was the year that the business started recovering was actually a lower year than 2009.
And the reason that was is that the way we structure our contracts they renew over the year and as pricing pressure increased in 2009 as they rolled over into 2010, you saw the impact in 2010. This is different.
Utilization has not collapsed. What you have is a really almost an attitude that - of concern where operators you know looking at equipment being returned from crude oil service and trying to redeploy that equipment and also believing that these crude oil prices the volumes are going to be down in the latter part of the year are putting pressure on prices.
And that’s going to happen. Its moderate pressure, it’s not the kind of pressure we saw in 2009.
I think that once the market sees that the equipment can be redeployed as the additional volumes that David talked about, refine product volumes, people are driving a lot more. They are - they are buying bigger cars, bigger trucks, that was a - a more significant part of our business 10 years ago than it has been more recently.
Seeing those volumes come back is going absorb capacity and then you have the $100 billion that’s being invested in the chemical business. So, I don’t think there’s anything dire at all.
There is nothing wrong with the business. You just have a pause in pricing that - and some slight pressure on pricing that has occurred, but from historically high levels.
And when this thing turns, it could turn pretty quickly. And you could be back on an up cycle a lot quicker than you think.
But we just need to kind of work through this malaise that’s out there and get the market balanced. I think you will – we talked about scrapping.
I think you will see some scrapping. They’re not – we’re not building 30s, we’re building some 10s, but we need the 10s for the chemical business.
So I don’t think there’s anything wrong, it’s just the – an uncertainty in this business makes operators want to kind of lock away their equipment and shippers take advantage of that.
David Grzebinski
For my follow-up, if I can just dig a little deeper there, too. How sensitive are the discussions around, I guess, the prevailing narrative of the week?
It seems like oil prices have bounced pretty significantly off the bottom, it doesn’t seem they have. And I guess that’s part of the volatility and then I guess it feeds into uncertainty as well.
But it would appear to me that maybe there’s a bit more optimism for those customers as opposed to the complete dire state of shock that they were in when the price of the barrel had troughed few months ago. So has there been any change, whatsoever, in the conversations or discussions as we bounced pretty hard off the bottom right now, or is it still kind of wait and see for the second half of the year?
Joe Pyne
I don’t think that there is a sense yet that the pricing – that oil pricing is sustainable. And you hear views all over the place.
I’m sure your firm has a view. The one thing, though, that is important to remember is that these fields produce at different economics.
And you have, Eagle Ford and Utica, for example, that are lower economics some of the other fields. I think there is a consensus that says that for volumes to be maintained at current levels or increased levels that you need higher prices.
And that is a price that stretches across all fields. So some fields will produce at these prices just fine.
And fortunately, we have been very careful picking the customers we want to work for, and actually, you know, servicing the fields that have economic sense. We have been - you remember, when we started talking about crude oil we said we were going to be careful and very specific with respect to who we were going to put this equipment for because we ourselves were concerned about the long-term prospects, the volumes growing forever.
Having said that, I think that that what I am hearing is that business is stable with some slight growth when oil is somewhere between $65 and $75.
David Grzebinski
You are certainly starring to get back in the range with WTI at $58 and Brent up at $65. But you do have the rig count decline, so you are going to have to see that stabilize and start to move back up a little before you will see or get comfortable with production volumes and I think that’s part of the dynamic that is in here.
Jonathan Chappell
Okay. I understand.
Thanks, Joe. Thanks, David.
Operator
The next question from Michael Webber with Wells Fargo.
Unidentified Analyst
Hi, this is Donald [indiscernible] stepping in for Mike Webber. Thanks for the call, guys.
Can you quantify the general easing in rates and demand in the inland barge segment and I guess to a lesser extent the coastal barge segment given its insulated nature in longer term contracts? And then overall with production declines beginning demand itself in 2015, how would this impact your expectation for rates as you try to secure charters for the ATBs in second half 2015?
David Grzebinski
Yeah. Let me break that into two pieces.
On the inland side, pricing - where as I mixed we’ve seen some term contracts in the second quarter price down low single-digits. So, we’ve built some of that in to the remainder of the year and maybe up to the mid single-digits.
But we’ll see. I think the low end of our range, we think is pretty draconian and we’re not really seeing that right now.
But we’re being cautious and we’ve widened our guidance because of that caution. I think on the coast-wise sector, it is a different dynamic and its - supply takes a long time to come on.
It takes two years to build some of these coast-wise pieces of equipment and they are - we’re pretty busy there and again, we haven’t seen volumes of crude fall off on the coast-wise business. I guess it’s always a possibility, but we’re not seeing it, we don’t anticipate it.
So, right now, our view of coast-wise pricing is mid single-digits for the year.
Unidentified Analyst
All right. Thank you.
David Grzebinski
Does that help - does that answer it, Don?
Unidentified Analyst
Yeah, that’s great. And could you just give us some color around the share repurchases.
I mean You said had 3.5 million shares available as of the 29th. Should we expect similar volumes in Q2 compared to Q1 or how do you view that moving forward?
David Grzebinski
We don’t telegraph what we are going to do repurchasing wise. It’s a – you know, it’s one of many things we look at when we have various uses of capital including acquisitions and sometimes you get precluded from being in the market because you are looking at something for example.
So it’s just best for us not to comment on our acquisition or our share repurchase plans.
Unidentified Analyst
All right. Appreciate the color, guys.
Take care.
Operator
The next question is from David Beard with Iberia.
David Beard
Good morning, gentlemen.
David Grzebinski
Good morning.
David Beard
Just a clarification and maybe a little bit of a drilldown. First you mentioned the about half of the weakness is related to the Marine segment.
Is that just isolated to the black oil product or is that spread to petrochemical?
David Grzebinski
Well, pricing is – yeah, it’s being caused by the crude oil portion of it. But, as those barges are redeployed and some of them were clean barges so they could be redeployed into other trade lanes, it puts pressure kind of, across-the-board even though it is isolated to the crude side.
David Beard
And that’s what I was going at. It really would have to be a clean tanker that could switch otherwise the heated ones can’t.
Can you quantify at all how big you know, of the 550 barges. How many were clean and how many have switched into the petrochem trade?
David Grzebinski
I can’t quantify off the top of my head. But let me think about it for a second.
Let us get back to you, David, on that. Probably half of that 500 were clean - were clean barges and that is just a rough estimate.
David Beard
All right. We can follow up on that.
And then just to drill down on your black oil fleet. Is most of that weakness, or is there any way to quantify the weakness between what’s happening in black oil and petrochem?
And my follow-up to that is going to be - are those barges still profitable? And really what I am doing is taking your pre-tax $15 million and trying to see if you spread this amongst the barges, are they still profitable or marginally profitable or what happens to derive that number?
David Grzebinski
We are still very profitable. You got to remember we are at record rates and rates are been going up for four years.
So this is just a slight pull back. So we are still very profitable at the rates we are getting.
I mean, you could see our margins are still mid-20s for the marine business and even with that weakness margins are still going to be okay.
David Beard
And even - for some of the crude oil barge is still profitable, but it seems like a bit less than before, quite a bit less in that segment?
David Grzebinski
Right.
David Beard
All right. That’s helpful.
Thanks, guys. Appreciate it.
Operator
The next question is from John Barnes with RBC Capital Markets.
John Barnes
Hey, just two quick follow-ups. Andy, on your comments about the deliveries versus the cancellations at United, how long can those - can the backlog be deferred?
How much farther out can it be pushed?
Andrew Smith
I mean that’s really a customer relationship type discussion, John. So, I mean we can just sort of decide that on the customer-to-customer basis.
And we’ve got a customer, a good long-term customer. We’ll let they will defer them out.
If it’s someone that we think is not going be a long-term customer than we’ll probably play our hand a little harder.
John Barnes
Okay. All right.
And then David, your comment that there were still about 375 barges I guess in crude oil service and your commentary around maybe production continuing to trend down the balance of this year, do you ever feel for how many more of those you would expect to come out of crude and need to be absorbed into another service?
David Grzebinski
It’s hard to say, but crude oil production won’t disappear, right. I mean it - maybe it’s another 100 barges, but that’s really hard to say.
John, let me just get - reiterate a little bit what Joe said but add some color here. There’s nothing fundamentally wrong with the business.
Pricing has been at historical highs. We do expect these crude oil volumes to decline.
But offsetting that is crude is coming off the bottom. It will come back.
Building has paused, and that’s good. We do have a $100 billion of petchem plants coming on.
We’re already seeing some things like methanol come on, refined product volumes are growing and miles driven are going up. You can look at the EIA data.
So, again, nothing is fundamentally wrong here. This is just a pause and pricing will stabilize and go up again.
And if its 100 barges more that have to come out, we’ll absorb that easily.
John Barnes
All right. That’s good color.
Thank you.
Operator
The next question is from Kelly Dougherty with Macquarie.
Kelly Dougherty
Hi, thanks for the follow-up. Just wanted to see if we could delve a little bit into the nuances of customer conversations and how you might be thinking about volume.
I know about - four big customers make up about half of your inland business, so just wondering how pricing conversations are going maybe with that core group versus some of your other customers. And then if there is new concerns about some key customers moving some volume away from Kirby if your competitors suddenly have barges available and they tend to be generally at lower prices than what you usually charge?
David Grzebinski
Well, there’s not a big difference between smaller customers and bigger customers. And to be honest we fight every day and make sure our service is at highest level we can every day.
And there is always somebody nipping at you. So, I don’t think the dynamic in this environment is any different than it has always been between big customers and large customers.
David Grzebinski
And Kelly let me just make an additional observation. We have - and this is a historical observation.
We don’t have really issues with volume. Customers want to do business with o Kirby for a host of very good reasons; flexibility, safety, financial strength, relationships.
So I am not - I am not concerned about, you know, losing business to other companies. You may are to adjust prices a little bit, but we - typically as we free up capacity, we take business from others.
It is not the other way around. So that is not a concern.
Kelly Dougherty
Okay, great. So it seems like it is just more really kind of the setting the price expectations appropriately from utilization and volume perspective, you guys are pretty comfortable given everything going on in the backdrop.
David Grzebinski
Yeah, that’s right.
Kelly Dougherty
Okay. Thank you.
David Grzebinski
Operator, I think that’s all the time we have.
Operator
Okay. I will turn it back to Sterling for closing remarks.
Sterling Adlakha
We appreciate your interest in Kirby Corporation and 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
Thank you. Ladies and gentlemen, this concludes today’s conference.
Thank you for participating. You may now disconnect.