Derailment Puts These 3 Rail Car Stocks in Focus - Analyst Blog

The oil shale boom in North Dakota and Montana has resulted in a consistent increase in the volume of flammable liquids transported by rail over the past one decade. However, this rise in crude-by-rail shipments has entailed multiple railcars being forced to go off the tracks given inadequate safety standards.

According to a report appearing in the Associated Press, there have been at least 23 oil-train and 33 ethanol train accidents since 2006 in the U.S. and Canada alone. The accidents were mostly cases of fire or derailment, several of which resulted in large-scale oil spills.

Latest Derailment Forces Town Evacuation

The latest oil train derailment was reported in the state of North Dakota in the early hours of May 6. The derailment of the Berkshire Hathaway BRK.B owned BNSF train necessitated the evacuation of the residents of a small town (Heimdal) in the state. No injuries have been reported yet. According to media reports, six or seven of the 109 tank cars of the BNSF oil train derailed. The derailment resulted in a major fire and the area was engulfed in smoke. This necessitated immediate evacuation.

This is not the first case of oil train derailment in the U.S. this year. Thankfully, all the derailments have taken place in scarcely populated rural areas thereby minimizing the damage. A derailment in a densely populated urban area can result in massive damages and casualties.

Outdated Tank Cars More Accident-Prone

According to a statement issued by BNSF, tank cars involved in the May 6 derailment were unjacketed CPC-1232 models. Notably, these models are on their way out following the new rules announced by U.S. regulators last week to enhance the safety of transportation of crude oil by trains. CPC is the design standard for rail cars issued by the American Association of Railroads.

We note that the DOT-111 tank cars were originally being used for crude oil transportation. However, they were found to be inefficient, often resulting in explosions due to derailments.

Further, the reputation of the CPC-1232 model, in use over the last few years (mostly since 2011) by railroad carriers for transporting flammable liquids like ethanol and crude oil, has taken a beating following multiple crashes this year. This has naturally underlined the need for newer safety regulations.

New Rules

According to the new rules unveiled by Federal regulators last week to enhance safety, the oldest, least safe tank cars should be replaced within three years. The new tank cars will be equipped with thicker shells and higher safety shields, thereby providing better fire protection. Moreover, the new set of rules also calls for the CPC-1232 tank cars, built since 2011 with greater safety features, to be retrofitted or replaced by 2020.

In recent times, rail safety has now become a blazing concern. Last month, the National Transportation Safety Board (NSTB) - an independent U.S. federal government agency - had recommended the use of ceramic thermal blankets to promote safety standards amid multiple derailments of crude oil trains over the last couple of years.

The increasing number of accidents, which have often resulted in explosions and oil spills, has naturally raised questions about the safety of tank cars when transporting flammable materials.

Also, in Apr 2015, the transportation department issued emergency directives such as restricting the speed limit to 40 miles an hour in urban areas for trains transporting hazardous materials. According to the directive, railroad companies will also have to furnish detailed shipment-related information within 90 minutes of a derailment, if one occurs.

The issue of rail safety has also made the Canadian government take notice. Last month, the Canadian government issued an emergency directive, which is operative til Aug 17, which requires the trains not to operate at speeds more than 40 miles/hour in highly urbanized places as opposed to the previous regulation, which allowed such trains to travel at speeds of up to 80 kilometers/hour.

Canadian railroad operators like Canadian National CNI and Canadian Pacific CP have already complied with the directive and have brought down the speeds of their trains to a maximum of 35 miles/hour in urban areas.

Stocks in Focus

Interestingly, Berkshire Hathaway, the owner of the tank car which derailed in North Dakota, saw its first-quarter 2015 results bolstered by the solid performance of BNSF. Weak oil prices reduced BSNF's fuel costs significantly during the quarter.

The Zacks Rank #3 (Hold) company reported first-quarter 2015 operating earnings of $1.72 per share, beating the Zacks Consensus Estimate by 6.2%. Earnings, which benefited from higher revenues, were also up 20.2% on a year-over-year basis. Strong results notwithstanding, we believe the latest derailment is a setback for the company.

Lake Oswego, OR-based tank car maker Greenbrier Companies GBX has responded enthusiastically to the new rules for enhancing safety of transportation of crude oil by trains. The demand for new cars adhering to the latest safety standards should increase thus benefiting this Zacks Rank #1 (Strong Buy) supplier of transportation equipment and services to the railroad and related industries. The company said that it has already delivered multiple tank cars compliant with the new safety standards.

Dallas, TX-based tank car manufacturer Trinity Industries Inc. TRN is another company that is likely to benefit, following the stricter regulations for oil tank cars. The requirement for new, safer tank cars is expected to boost revenues for this Zacks Rank #3 company.

With the new rules in place to advance rail safety, we expect investors to closely watch how they are implemented and adhered to hereafter by the railroad operators. For now, keep your eyes on the performance of the above-mentioned tank car manufacturers to make the most out of the recent developments in the industry.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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