How Will Falling Oil Prices Impact Transportation & Logistics Companies?

Demand: On the demand side, the implications tend to vary more by mode of transportation and markets served than on the expense side. Clearly, those with exposure to domestic energy production are at risk, while those leveraged to consumer spending may benefit.

Operating Expenses: Just as lower oil leads to better prices at the pump for consumers, it also leads to lower fuel costs for transportation providers. Since the late ‘90s, though, most contractual rate agreements with shippers include a fuel surcharge, which fluctuates with changing prices. So, as the cost of diesel goes down, for example, a trucker’s revenue and expenses both decrease. In general, truckload carriers have the least compensatory fuel surcharge, as they still have to pay for the fuel burned outside of miles traveled to serve a shipper, while parcel, LTL, and rail recoup a percentage of revenue to cover fuel cost increases, which typically make them (at least) whole.

Investment Conclusions: In the near-term, we don’t expect there will be any exceedingly large impacts from fuel (negative margin impact to LTL carriers in 4Q14 is likely to be offset by a strong demand and pricing environment), and none which change our current investment thesis on any sector. Crude oil production at established operations should continue, protecting near-term rail volume, and it is likely only the further investment that remains at risk.

As a result of the heightened risk associated with future crude volume growth, rail stocks have been hit recently, as the price of oil has fallen.