Friday, December 6, 2013
WASHINGTON - For all the debate over building the Keystone XL pipeline, the oil is moving without it.
Rail tanker cars, like these in Corpus Christi, Texas, are being used to ship crude oil, making huge profits for railroads, as the White House ponders the fate of the Keystone XL pipeline. Shipments jumped 256 percent in 2012.
Eddie Seal/Bloomberg News
Railroads such as Warren Buffett's Burlington Northern Santa Fe are the rolling alternative, keeping oil flowing from the Bakken Oilfield in North Dakota to refineries along the Texas Gulf Coast, as the White House deliberates the fate of TransCanada's petroleum artery.
They're boosting employment in the process: Rail transportation payrolls have climbed by 9.1 percent, a pace more than twice as fast as total job growth, since the end of 2009.
"It's having a ripple effect that's really creating jobs and wealth and investment opportunities," said Charles Clowdis, the managing director for transportation advisory services at IHS Global Insight in Lexington, Mass. "There's so much crude being produced that can't be piped. These guys are putting real dollars in the bank each week and railroads are making a darn good profit on hauling this in tank cars."
Crude oil shipments by rail jumped 256 percent in 2012 to a record 233,811 carloads, or 167 million barrels, the Association of American Railroads said Feb. 21. That's equivalent to more than 7 percent of U.S. production, up from 2.3 percent in 2011, according to AAR and Energy Department data compiled by Bloomberg.
The oil boom on rails is driving returns for Buffett and other investors who bet on railroads as President Obama considers whether to allow Calgary-based TransCanada's $5.3 billion Keystone pipeline linking Alberta and Nebraska.
Railroad stocks have outpaced the broader market in the past year. The Standard and Poor's Supercomposite Railroads Index, which consists of Union Pacific, CSX, Norfolk Southern, Kansas City Southern and Genesee & Wyoming, has advanced about 24 percent in the past year, compared with a 13 percent gain in the S&P 500 Index.
Earnings at railroads in the S&P 500 increased about three times as much as the broader gauge, according to data compiled by Bloomberg. Profits for companies in the rail index rose 16 percent in 2012 compared with 5.2 percent for the S&P 500.
"Rails provide the flexibility of being able to deliver the crude extracted from the shale to different locations," said Ben Hartford, a transportation analyst at Robert W. Baird & Co. in Milwaukee, Wis., who recommends buying Union Pacific and CSX shares. "People are focusing on the Keystone pipeline and its development but there's still receptivity to using rail."
One reason is that oil from the Bakken costs about $17 per barrel less than Brent crude, the international benchmark. The difference means companies will pay the extra $10 to have a barrel of cheaper domestic crude oil shipped via rail to their refinery, rather than take delivery of the international petroleum.
Among those with the most to gain are BNSF, the railroad Buffett's Berkshire Hathaway took over three years ago in a $26.5 billion deal, and Union Pacific, the largest U.S. railroad by sales. BNSF said in January it will boost crude shipments by 40 percent this year. John Ambler, a spokesman for BNSF, didn't return a phone call seeking comment Tuesday.
Fort Worth, Texas-based BNSF's 40 percent market share for hauling petroleum products in the U.S. and Canada in 2013 is the largest among the seven largest railroads, according to data compiled by Bloomberg Industries. Canadian National Railway is second with 21 percent, followed by Union Pacific at 15 percent and Canadian Pacific Railway at 12 percent, the data show. CSX, Norfolk Southern, and Kansas City Southern handle less than 4 percent.
Buffett said in his annual letter to shareholders March 1 that Berkshire will gain from more oil production. He highlighted demand for rolling stock made by Berkshire's Union Tank Car, which traces its roots to John D. Rockefeller's Standard Oil Trust. Staffing for manufacturing has more than doubled since the lows of 2009 and 2010, company spokesman Bruce Winslow said.
Buffett said to watch for the UTLX logo. "As a Berkshire shareholder, you own the cars with that insignia," he wrote to investors in his Omaha, Neb.-based company. "When you spot a UTLX car, puff out your chest a bit and enjoy the same satisfaction that John D. Rockefeller undoubtedly experienced as he viewed his fleet a century ago."
Union Pacific said Jan. 24 that increased petroleum shipments helped boost fourth-quarter net income by 7.5 percent to $1.04 billion. The Omaha-based company said in a presentation that petroleum shipments jumped 69 percent last year from 2011. Oil and gas account for 29 percent of volume.
Canadian National, the Montreal-based railroad that's the nation's largest, has said it may move twice as many carloads of crude oil this year than last.