Berkshire's MidAmerican Energy is heavily invested in alternative
fuels. Will BNSF follow suit with LNG? Source: BNSF.
subsidiary BNSF Railway announced that it would begin
testing liquefied natural gas-powered locomotives toward the end
of 2013. BNSF CEO Matt Rose had this to say:
The use of liquefied natural gas as an alternative fuel is a
potential transformational change for our railroad and for our
industry ... While there are daunting technical and regulatory
challenges still to be faced, this pilot project is an
important first step that will allow BNSF to evaluate the
technical and economic viability of the use of liquefied
natural gas in through-freight service, potentially reducing
fuel costs and greenhouse gas emissions, thereby providing
environmental and energy security benefits to our nation.
Consider, on top of that, that Berkshire has more than $6
billion invested in companies heavily involved in natural gas
production and distribution, and it's not a stretch to see
Warren Buffett having reached the conclusion that domestic
production of oil and natural gas will continue to be strong, and
that natural gas will keep gaining traction as a transportation
fuel. How big is this to Berkshire?
There are two ways LNG can benefit the company: cost savings
and profit opportunity.
Fuel expense significant for several Berkshire
LNG locomotive. Source: CN Railways.
Fuel expense was second only to compensation and benefits for
BNSF in 2013, and at $4.5 billion is equal to a whopping 20.5% of
BNSF's total revenues. While switching its diesel locomotive
fleet to LNG isn't a simple matter, the long-term potential to
reduce cost is significant. Natural gas is significantly less
costly than diesel -- potentially 40% cheaper for a mass consumer
like a railroad -- and the ability to shave literally billions of
dollars off its operating expense makes it clear why BNSF is
taking a hard look at LNG.
BNSF isn't the only Berkshire company with substantial fuel
expense. Subsidiary McLane Company employs 20,000 people and
operates one of the largest vehicle fleets in North America, with
more than 2,300 heavy trucks. With $45.9 billion in 2013
revenues, McLane is the largest of Berkshire's wholly owned
subsidiaries by total sales. As noted in Berkshire's annual
report, "McLane's grocery and foodservice businesses are marked
by high sales volume and very low profit margins," so operational
efficiency is a central tenet for McLane. Its efforts to date
have included reducing the speed its trucks travel, as well as
better loading methods in order to reduce the number of trips its
McLane's fleet of 2,300 trucks is one of the largest in the
United States. Source: Wikipedia.
Based on some industry averages, McLane's annual diesel
consumption is probably between 30 million and 60 million
gallons, with annual fuel expense somewhere between $100 million
and $225 million. That's a wide range, but Berkshire and McLane
don't disclose these numbers. The figures are also dwarfed by the
amount of fuel BNSF buys, but they're substantial next to
McLane's before-tax profits of $483 million in 2013. A 20%
reduction in fuel expense -- not unreasonable with a switch to
natural gas -- could make a big difference in its profits.
Despite the cost savings, adoption has remained slow so
While it looks like NG and diesel prices are similar, each
wholesale unit of natural gas above is equal to eight gallons of
U.S. Retail Diesel Price
BNSF faces a number of serious challenges to adopting natural
gas, including refueling infrastructure, the expense of replacing
or converting locomotives, and regulatory approvals. The latter
could be the biggest delay, as regulatory bodies can be slow to
adopt changes. Nonetheless, natural gas for locomotives carries a
number of benefits above and beyond the cost savings for the
industry. As an almost entirely domestic resource, there is a lot
of political goodwill, and every gallon of natural gas that
replaces diesel will help reduce imports and put Americans to
BNSF operates around 7,000 locomotives. These are long-lived
assets (often 30-plus years in service), and over the past
decade, BNSF has re-manufactured or replaced almost 6,000. In
short, it will take years for BNSF to convert or replace a
substantial portion of its fleet with LNG locomotives.
Nonetheless, the opportunity is enormous, and the return --
such long-lived assets -- could be significant.
McLane has committed to updating its fleet of Class 8 tractors
as well, with a stated goal of replacing 48% of its fleet in
2014. However, the company hasn't made a commitment to natural
gas, counting instead on more efficient diesel engines to help it
reduce its fuel costs and consumption.
Investing in natural gas
The Berkshire stock portfolio has almost $7 billion invested in
companies throughout the natural gas value chain, ranging from
, the largest producer of natural gas in the U.S. through its
ownership of XTO Energy, to oil and gas field services giant
National Oilwell Varco
, along with a small stake in
. Each of these companies plays a significant role in natural gas
production and distribution, while GE also plays a critical role
as one of the largest locomotive manufacturers in the world.
Each of these investments will be buoyed by the increased use
of natural gas domestically and internationally as a
transportation fuel, but it goes far beyond that. General
Electric is also a key supplier of natural gas power-generation
turbines, as well as liquefaction systems that facilitate the
storage and transportation of natural gas globally.
Final thoughts: Bigger than just natural gas
The Berkshire portfolio and subsidiary family both are filled
with companies that have a stake in seeing natural gas for
transportation gain traction, but this is a long story, and it's
still the early chapters. As Buffett once said, "Someone is
sitting in the shade today because someone else planted a tree a
long time ago." It's going to take a number of years before the
Berkshire subsidiaries start seeing the bottom-line improvements
that natural gas can deliver.
Durable advantage is something that Buffett has often talked
about, and it's something that all of the companies Berkshire
invests in -- or owns outright -- tend to have. If natural gas
vehicles add to McLane or BNSF's competitive position, fully
expect to see further adoption.
More of Buffett's Wisdom from The Motley
Warren Buffett Tells You How to Turn $40 Into
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originally appeared on Fool.com.
owns shares of Berkshire Hathaway. The Motley Fool recommends
Berkshire Hathaway and National Oilwell Varco and owns shares of
Berkshire Hathaway, General Electric, and National Oilwell Varco.
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