Pipelines have long been the best, cheapest and safest way to
move oil or other products from point A to point B.
Unfortunately, pipelines are fixed and the points on the map
where oil is produced are changing.
A rising number of U.S. shale oil production areas and an
increasing flow of oil sands crude from Canada are rapidly
altering the supply picture between U.S. refineries and
production regions. The change has fueled excitement over
railroads, which increasingly are picking up the slack that
pipelines -- choked with supply, blocked by environmentalists or
just in the wrong place -- can't meet.
Kansas City Southern (
),Canadian Pacific Railway (
), Warren Buffett's Burlington Northern Santa Fe and others have
quietly gained steam over the past year, moving Bakken Shale oil
from North Dakota, Eagle Ford oil from south Texas and Canadian
tar sands oil to refineries on U.S. coasts.
"Forget about Keystone. There's just a lot more production
than there is capacity to take it away," said Tom Kloza, chief
oil analyst for the Oil Price Information Service, referring to
the controversial and stalled Keystone pipeline project designed
to link oil sands in Alberta with refiners along the Gulf of
Railroads are, in addition, benefiting from Detroit's
car-building boom: delivering parts, plastic and steel to
manufacturing plants, and hauling away finished autos.
In the East,CSX (
) andNorfolk Southern (
) have taken the lead in upgrading bridges and tunnels in order
to snatch more intermodal container business away from trucking
fleets. Increasingly, every toothbrush, jug of detergent and bag
of dog food on store shelves is moving by rail.
All of that hasn't quite made up for slumping coal shipments,
hurt by high stockpiles, cheap and abundant domestic natural gas
and stricter emissions standards for power generation plants.
Both CSX and Norfolk Southern cited weak coal movements for
fourth-quarter earnings declines. But analysts see earnings up
across most of the 10-stock group this year, including estimates
for a 77% gain forGenessee & Wyoming (
) and a 40% gain for Canadian Pacific Railway.
The group ranked No. 44 out of the 197 industries IBD tracks
and has kept a top 50 ranking this year. Collectively, the
group's stocks rose 21% year-to-date through the end of March. It
then pulled back, following a Canadian Pacific Railway train
derailment in Minnesota in late March that spilled about 18,000
gallons of oil, followed by anExxon Mobil (XOM) pipeline spill
two days later.
Shares of Canadian Pacific, with a Composite Rating of 86 from
IBD, are up 22% so far for the year. The top-ranked operator in
the group, Kansas City Southern, has a Composite Rating of 93.
It's up 29% so far this year.Union Pacific (UNP), with a
Composite Rating of 91, is up 12% this year.
Black Gold Vs. King Coal
About 200,000 miles of pipelines carry 90% of the nation's
crude and petroleum products, according to government and
industry figures. But record production increases -- total
domestic oil output increased by 780,000 barrels per day last
year -- have outstripped those pipelines' capacity to move
Railroad tanker cars have kept storage farms from bursting
their seams and prices viable so that oil producers have not,
like shale gas producers, been forced to shut in production.
The amount of oil and related products shipped by rail climbed
48% last year to almost 541,000 carloads. This year, through the
end of March, volume was up 57.2% vs. the same period a year ago,
according to the Association of American Railroads.
Oil's carload count is still dwarfed by coal. Railroads filled
more than 6 million coal cars last year, the AAR data report. But
that was down more than 10% from 2011. An unseasonably warm
winter in parts of the country and the ongoing glut of natural
gas has dulled demand for coal even further.
Coal shipments fell off another 7.9% in the first quarter of
this year. Much of the remaining traffic is being moved to ports
for export. Rail shipments of autos and car parts was up 16.9%
last year, the AAR data show.
The increase in oil-by-rail isn't just a short-term bridge to
hold refiners over until more pipeline capacity comes on line,
"There will always be, under the current framework, a business
for the railroads to participate in around North American energy
development," said Matt Troy, a freight analyst with Susquehanna
Moving oil by rail is more expensive. Kloza said it could be
60% more costly than a pipeline, though estimates vary
So pipelines will remain the backbone of the transportation
network, and pressure will continue for more of them. And while
environmentalists worry about potential spills from an expanded
Keystone or other pipelines, Canadian Pacific's March spill shows
that transport method is also fraught with hazards.
But there are compelling economics involved with moving oil by
train, according to Eric Slifka, CEO ofGlobal Partners (GLP), a
midstream petroleum logistics and marketing company.
While more expensive, rail shipping is faster. Oil can quickly
be pushed to higher-margin markets. And it's more flexible when
production spikes in one region and fields slow elsewhere.
There are also lower permitting burdens, and less upfront
cost, including the need to prime a new pipeline with oil to keep
pressure high, thereby locking up inventory.
Last month, Global announced a deal with refinerTesoro (TSO)
for that company to build and operate a 7-mile pipeline to get
oil to Global's storage tanks and rail heads in Columbus,
From there, a Canadian Pacific line moved the oil to Albany,
N.Y., where Global transfers it to barges to move to refineries
in New Jersey and elsewhere in the East.
A nearby Global terminal in Beulah links oil to West Coast
refineries along a BNSF line.
"Railroads are cost-efficient and offer a level of optionality
that pipelines just cannot match," Slifka told analysts in a
conference call in March.
For the past two years, Susquehanna's Troy said the story was
"West is best." Western coal moved from Wyoming's Powder River
Basin is typically cleaner than what's used in the East. That
allowed temporary coal rebounds anytime gas prices rose. That and
other factors had him bullish on Union Pacific and Kansas City
But the prospects have shifted, he said.
"CSX and Norfolk Southern are about to see a very powerful
combination of coal fundamentals bottoming, intermodal growth
accelerating at a very nice incremental margin, and the and
oil-by-rail trend beginning to take hold materially over the next
18 months," he said.
He thinks railroads also stand to win over a larger piece of
the intermodal shipping containers business. They've raised
bridges and other obstacles to allow for double-stacking of those
shipping containers, making rail a more cost-effective route for
ever shorter runs.
And if pipelines start being built en masse, that's a nice
business for railroads as well.
"They get to haul all that material and equipment in and out,"