Profiting from the Record Bakken Oil Haul
There’s more to the Bakken in North Dakota and Montana and the tar sands in Alberta than oil. Oil may be the primary opportunity for most investors, but there are a number of interesting secondary and tertiary investing platforms to consider. And when it comes to oil and petroleum products, one of the biggest growth areas has to be North American railroad stocks.
Despite the fact that a new pipeline in the booming Bakken fields in North Dakota was recently completed, more ways to transfer oil are needed to keep up with production. That’s because North American production is outpacing pipeline capacity.
On top of that, continued resistance to pipeline infrastructure expansion in North America is putting pressure on rail systems to pick up the slack. And two of North America’s biggest railway companies have only been more than willing to do so.
In fact, the amount of oil and petroleum products being shipped by rail has soared. In 2008, just 9,500 carloads of crude oil and 220,000 carloads of ethanol moved throughout the United States by rail; in 2012, the combined figure for crude oil and petroleum products was 600,000 cars. (Source: “Moving Crude Petroleum by Rail,” Association of American Railroads web site, December 2012.)
Roughly 70% of North Dakota’s oil and 70% of America’s ethanol is transported by rail. Why does so much Bakken oil rely on railroads? Whereas oil sand development can be in production for several decades, wells in the Bakken are in production for a much shorter time span—around 10 to 12 years—meaning that it’s not always economical to connect Bakken oil fields to existing pipeline infrastructure. It is, however, easier to ship oil by rail in some cases.
And the demand for rail is only going to get stronger. That’s because in the coming months, North Dakota will begin producing more than one million barrels of oil per day (bopd). Since last August (the most recent monthly data), production in North Dakota has increased by almost 30% to 911,496 bopd. Over the last two years, daily production has climbed 104%, and since August 2011, Bakken production has soared 176%. (Source: North Dakota Industrial Commission Department of Mineral Resources web site, August 2013.)
More recently, for the month of September, petroleum and petroleum products had one of the biggest carload increases, going up 10.4%, or 4,825 carloads. For the week ended October 5, 2013, U.S. railway companies transported 12,640 rail cars of oil and petroleum products for a 7.5% year-over-year increase. The year-to-date cumulative total of 537,406 rail car loads, with a weekly average of 13,435, is up 36% over the same period in 2012. (Source: “U.S. Rail Traffic Week 40, 2013 – Ended October 5, 2013,” Association of American Railroads web site, October 10, 2013.)
The long-term sustainable growth of North American railroad stocks hasn’t been lost on some of the richest men in America. Bill Gates owns 12% of the Canadian National Railway Company (NYSE/CNI, TSX/CNR). He owns 43 million shares, or roughly 10%, through his holding company, Cascade Investment LLC, and holds a further 8.6 million shares, or roughly two percent of the company, through the Bill and Melinda Gates Foundation. (Source: Deveau, S., “Bill Gates ups CN Rail stake to 12%,” Financial Post web site, December 12, 2012.)
Canadian National operates the largest rail network in Canada and the only transcontinental network in North America. In 2012, petroleum and chemicals accounted for 15% of total revenue. (Source: “CN reports Q4-2012 net income of C$610 million, or C$1.41 per diluted share,” Canadian National Railway Company web site, January 22; 2013.)
Through Berkshire Hathaway Inc. (NYSE/BRK-B), Warren Buffett acquired the Burlington Northern Santa Fe railroad in 2010.
Investors can’t pad their retirement portfolios with Burlington Northern anymore, but they might want to look at Union Pacific Corporation (NYSE/UNP). One of America’s leading transportation companies, Union Pacific Corporation expects to report a 13% increase in third-quarter net income on the heels of increased shipments of chemical and crude oil. (Source: Kashi, D., “Earnings Preview 2013 Q3: Union Pacific (UNP) Transporting More Cars, Crude Oil As Coal Shipments Fall, Helping To Boost Profit 13%,” International Business Times, October 16, 2013.)
Individual transportation stocks and transportation exchange-traded funds (ETFs) also represent a great opportunity for investors looking to take advantage of an improving market and oil and gas sector.