When you think about the companies that should benefit from the rising price of, and demand for oil, giant multinationals are the first that come to mind. But in his compelling piece for Barron’s, “Climb Aboard the Oil Train,” Jack Hough contends that railroads which are hauling the overflow that pipelines can’t handle are also poised to reap the gains, with Canadian Pacific (CP), Union Pacific (UNP), Kansas City Southern (NSC) and CSX (CSX) among the most likely winners.
First, Hough point out that U.S. domestic oil production is currently approaching record volumes. “Earlier this year, U.S. oil production topped seven million barrels per day for the first time since 1993,” Keough said. “Analysts expected it to hit 10 million by 2020. For comparison, Saudi Arabia, the world’s largest producer, puts out just over nine million barrels per day, albeit of purer crude.” Part of this increase is due to hydraulic fracturing (commonly called “fracking”) which literally can squeeze oil of shale.
Although transporting oil by rail is significantly more expensive than using pipelines, the glut of oil has made rail transportation economically viable , given that rail infrastructure is already in place “Pipelines take years to build and can run up against environmental squabbling. Train tracks are already laid, and no one complains about adding more cars and extra offloading facilities,” Keough states.
Keough, citing Credit Suisse analyst Allison Landry, cautions that not all railroads will benefit equally, with Canadian Pacific appearing to be a solid short-term bet on the trend. “Canadian Pacific is uniquely positioned in that it can originate oil shipments from both Bakken shale and Canada’s oil sands. The oil sands have three to four times the output potential of Bakken. And while rail’s share of Bakken oil is expected to peak in late 2014 as new pipelines come online, pipeline capacity for Canada won’t surge until 2015 at the earliest.”
Landry also likes the oil transportation prospects of Kansas Southern and Union Pacific, while BMO analyst Fadi Chamoun likes Union Pacific, along with CSX and Norfolk Southern.
