Buffett's Railroad Goes All In On Shale Oil

Posted by - Wednesday, January 9th, 2013

After incredibly strong oil shipments by rail in 2012, railroad companies are poised to capture as much of the traffic as possible while pipelines fail to meet demand.

In keeping with his reputation, Warren Buffett is already well positioned to capture some sizable profits.

Domestic crude oil output jumped nearly 1 million barrels per day to a near 20-year high. Much of the new production comes from places where there is little pipeline capacity, such as North Dakota.

While Lisa Jackson, former head of the Environmental Protection Agency resigned in protest of the Obama Administrations plans to green-light the Keystone XL pipeline, it will still take years to complete the project.

The pipeline will connect oil from Alberta and Northern states to the Gulf Coast. Meanwhile, refineries on the west coast, especially in California, will remain isolated from any benefit.

The situation has created an opening for rail companies that can quickly and cheaply convert their lines to load and ship the oil. Coal shipments declined just under 10% amongst the seven largest railroad companies last year and oil has offset the loss of business.

At the same time, Booming oil production from shale deposits pushed shipments of petroleum on U.S. railroads up more than 46% in 2012.

Matt Rose, CEO of Burlington Northern Santa Fe LLC stated, “Crude by rail is going to be really strong for us. It’s been a real benefit to us to replace some of that lost coal business.”

Burlington Northern, which was purchased by Warren Buffet for $26.5 billion in 2010, is now expecting a 40% increase in crude oil shipments this year alone. When combined with the 46% last year, the total increase in crude oil shipments will be slightly over 100% over the last two years.

The company, well-positioned in and around the Bakken oil fields area, is exploiting what many considered to be a fleeting opportunity as U.S. oil production grows the fastest since the first commercial well was drilled in 1859.

According to Krista York-Wooley, the railroad spokeswoman, Burlington Northern carries about 25% of the oil from the Bakken fields. She also noted that the company can carry higher volumes from North Dakota or Alberta going forward.

Another of Buffett's investments is poised to profit from the massive increase in crude oil rail shipments as well.

Buffett’s Union Tank Car Co. is working at full capacity to produce oil tanker cars and has been leasing all of their new cars instead of sellling them. Rail carloads of crude tripled last year to more than 200,000 as leasing rates in some cases have more than quadrupled to $2,500 a month.

“People who want to ship oil can’t get them,” Toby Kolstad, president of the consultant firm Rail Theory Forecasts LLC said.“They’re desperate to get anything to move crude oil.”

With Buffett's double play on Bakken oil shipments, he has bet a lot of money on betting on virtually guaranteed profits for years to come while the oil production and pipeline disparities persist.

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