The boom in US shale gas and oil is now a fact of life for investors. But the best way to play that boom is not directly through oil and gas companies. Look at how many of them have suffered thanks to an excess of supply and the resulting plunging prices for both natural gas and natural gas liquids (NGLs).
The best way to play shale is from owning the beneficiaries of low gas prices – petrochemical companies – and the beneficiaries of transporting shale oil across North America – the railroad industry.
The fact is that increased oil production, from both Canada and North Dakota, have nearly overwhelmed the existing transportation system in that part of North America. Drilling techniques such as hydraulic fracturing have increased oil production in North Dakota sevenfold to more than 600,000 barrels a day, moving the state to second behind only Texas in U.S. oil production. The U.S. Energy Information Administration forecasts production there will surpass 1 one million barrels a day next year. Even in Canada, oil production is expected to top 4.1 million barrels of oil a day next year, up from just 3 million barrels a day in 2005.
The drilling in areas like North Dakota is occurring in a region with few refineries and a limited pipeline network. So that leaves one alternative to transporting the oil taken out of the ground in North Dakota – railroads. According to the Association of American Railroads, overall U.S. rail shipments of oil have almost quadrupled to 88,026 rail car loads in the first half of 2012 from only 22,714 in the first half of last year. In 2008, there were less than 10,000 carloads annually.
The key here for investors is that this is not a blip, but part of a long-term trend. Just take a look at what two of the country's major refining companies – Tesoro (NYSE: TSO) and Phillips 66 (NYSE: PSX) have done in recent months. Tesoro this month will complete a rail facility at its west coast refinery in Washington to receive Bakken crude from North Dakota from 800 rail cars it had ordered previously. In June, Phillips 66 ordered 2,000 rail cars at a cost of $200 million to transport shale oil from North Dakota fields to its refineries.
All of this is great news for the railroads and should bring smiles to the faces of shareholders in railroads including CSX (NYSE: CSX), Canadian Pacific (NYSE: CP) and BNSF, which is now owned by Warren Buffett's Berkhsire Hathaway (NYSE: BRK-B). Canadian Pacific, for example, recently told attendees at an investor conference that the company expected oil shipments it carries to rise from 13,000 carloads last year to leap to at least 70,000 carloads sometime in 2013.
Burlington Northern SantaFe (BNSF) is a particular beneficiary of the Bakken shale oil boom since it carries 44 percent of the region's oil exports. It has built terminals along its routes throughout the region which are capable of handling 1 million barrels of oil a day, well above the current 290,000 barrels a day it handles. The company expects that, even after planned pipelines are built, that it will still handle between 25 and 37 percent of the Bakken's oil exports.
Of course, it's not all gravy for the railroad companies. Take CSX, for instance. The shale boom has hit the coal industry hard and therefore coal shipments are down sharply. CSX coal shipments were down 28 percent in the first quarter of 2012, though earnings were up marginally. Coal has traditionally accounted for 20-25 percent of of traffic for big rail companies like CSX.
So the question remains whether transporting oil from the Bakken and elsewhere – after a large investment into tank cars which CSX CFO Frederik Eliasson calls a “risk” - will offset the decline in railroads' coal business. For now, the railroads think the answer is yes. They are planning to at least triple capacity to move oil in the months and years ahead. With cheaper domestic crude oil from the Bakken luring the refineries to use cheaper domestic oil instead of expensive imported crude oil, the railroads seem to be sitting in the perfect spot as the transporter of that oil.
This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/
Showing posts with label berkshire hathaway. Show all posts
Showing posts with label berkshire hathaway. Show all posts
Wednesday, October 3, 2012
Tuesday, May 8, 2012
US Railroads and the Coal Slump
The US railroad industry has always been the heart of the nation's industrial economy. If the country's major railroads – Union Pacific (NYSE: UNP), Norfolk Southern (NYSE: NSC), CSX (NYSE: CSX) and BNSF, owned by Berkshire Hathaway (NYSE: BRK.B) – were in robust health, it meant good things for the economy.
But does that still hold true today? It may not, thanks to the impact that increased government environmental regulations and decade-low natural gas prices are having on the domestic coal industry.
The US railroad industry traditionally has gotten roughly 20 percent of its volumes from transporting coal, mainly to power utilities, across the country. Overall coal traffic on the rails in the first quarter of 2012 dropped by 14 percent from the year ago period, with revenues derived from coal traffic falling by 5 percent to $832 million. The only thing keeping things from getting worse was a 19 percent rise in coal exports from the first quarter a year ago.
This is significant because of the impact it will have on earnings at the rail companies. Barclays Capital says that for every 1 percent change in the amount of coal they ship, earnings per share will swing 0.2 percent at Union Pacific and 0.5 percent at both Norfolk Southern and CSX. Partially offsetting the effect of coal though will be improvement in other segments.
Rail companies' revenues from transporting shipping containers and the like rose 19 percent to $389 million on a 9 percent gain in traffic. Other key segments including agricultural, automotive and construction rose 10 percent in the first quarter to $1.68 billion on a 3 percent traffic gain. This segment was actually enhanced by the sharply increasing movement of fracking sand, which is used in shale gas and oil drilling, across the country.
The drop in coal shipments by the rail industry to power utilities nationwide may be the beginning of a trend which looks set to continue as long as natural gas remains so cheap. If so, this could mean a rather permanent falloff in railroads' revenues.
The rail companies are well aware of that possibility. Senior executives at CSX were discussing this after revealing that the company's coal shipments in the first quarter to electric power stations were down 28 percent from a year ago. They stated that US railroad companies would have to sit down with power companies across the United States to discuss revising their contractual agreements for delivering coal.
There may be a secular change occurring in the electric industry, where coal is only used for power during peak demand and natural gas is used for the majority of power needs. If so, the railroads do not want to have pay the entire expense of maintaining excess capacity, to deliver coal, which is used only occasionally. The companies want the utilities to share the maintenance costs and thus the need for “discussions” between the two industries.
For investors in these two industries, the results of these upcoming discussions may very well affect the future profitability of both industries and in turn shareholder returns.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
But does that still hold true today? It may not, thanks to the impact that increased government environmental regulations and decade-low natural gas prices are having on the domestic coal industry.
The US railroad industry traditionally has gotten roughly 20 percent of its volumes from transporting coal, mainly to power utilities, across the country. Overall coal traffic on the rails in the first quarter of 2012 dropped by 14 percent from the year ago period, with revenues derived from coal traffic falling by 5 percent to $832 million. The only thing keeping things from getting worse was a 19 percent rise in coal exports from the first quarter a year ago.
This is significant because of the impact it will have on earnings at the rail companies. Barclays Capital says that for every 1 percent change in the amount of coal they ship, earnings per share will swing 0.2 percent at Union Pacific and 0.5 percent at both Norfolk Southern and CSX. Partially offsetting the effect of coal though will be improvement in other segments.
Rail companies' revenues from transporting shipping containers and the like rose 19 percent to $389 million on a 9 percent gain in traffic. Other key segments including agricultural, automotive and construction rose 10 percent in the first quarter to $1.68 billion on a 3 percent traffic gain. This segment was actually enhanced by the sharply increasing movement of fracking sand, which is used in shale gas and oil drilling, across the country.
The drop in coal shipments by the rail industry to power utilities nationwide may be the beginning of a trend which looks set to continue as long as natural gas remains so cheap. If so, this could mean a rather permanent falloff in railroads' revenues.
The rail companies are well aware of that possibility. Senior executives at CSX were discussing this after revealing that the company's coal shipments in the first quarter to electric power stations were down 28 percent from a year ago. They stated that US railroad companies would have to sit down with power companies across the United States to discuss revising their contractual agreements for delivering coal.
There may be a secular change occurring in the electric industry, where coal is only used for power during peak demand and natural gas is used for the majority of power needs. If so, the railroads do not want to have pay the entire expense of maintaining excess capacity, to deliver coal, which is used only occasionally. The companies want the utilities to share the maintenance costs and thus the need for “discussions” between the two industries.
For investors in these two industries, the results of these upcoming discussions may very well affect the future profitability of both industries and in turn shareholder returns.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
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