Buy These Rail Players on a Dip

by Aaron Levitt | July 9, 2013 10:46 am

Buy These Rail Players on a Dip

Investors should never let a good crisis go to waste.

In this case, we’re taking about the recent train derailment and deadly explosion in Quebec[1]. The train had been carrying crude oil produced in Bakken to refineries when it derailed and exploded. More than 50 people are still missing, and the fallout has not only upended the small town of Lac-Megantic — where the disaster took place — but the crude-by-rail movement itself.

Now some environmentalists, policymakers and other pundits are throwing water on the crude-by-rail[2] trend in light of the disaster. Shares of the leading shippers of Bakken crude have fallen in response. That’s leading to some interesting values for investors looking to enter the sector. After all, the trend is far too big to be taken out by a single — albeit deadly — incident.

13 Deaths

At last update, at least 13 people have been pronounced dead[3], while another 50 are missing, after a train carrying 73 tank cars of North Dakota-based crude barreled downhill, derailed and exploded in downtown Lac-Megantic, Quebec. The train — which was operated by privately held Montreal Maine & Atlantic Railway — was carrying the shale oil from the Bakken towards refineries in New Brunswick.

Local media outlets had reported that as many as 30 buildings have been destroyed, with Canadian Prime Minister Steven Harper saying the town looked like “a war zone.” Overall, the scale of the explosion and citizen evacuation would rank the accident as one of the most dramatic North American rail incidents in recent years.

However, the Lac-Megantic disaster is only the latest in a series of crude-by-rail related incidences. A few weeks prior, there was a 357-barrel spill in Minnesota involving another train on its way to Chicago. Capping off June, a train carrying petroleum products derailed in Calgary, when a flood-damaged bridge sagged and caused the train to lose its footing. That accident was the fifth derailment of a train in nearly three months involving crude oil shipments.

It almost seems like the accidents are becoming more frequent and more dangerous. That suspicion has already brought environmentalists out in force to protest fracking and shipping crude oil via rail in response to the accident in Quebec.

On Thursday, activist group Tar Sands Blockade released a statement calling the spill “massive” and expressed concerns about shipping tar sands crude by rail. At the same time, the Sierra Club was busy gathering support for its efforts. Glen Brand, director of the group’s Maine chapter, said the Quebec derailment is reason enough to call for an immediate moratorium on the rail transport of oil through the state.

Some analysts have begun to wonder about crude-by-rail’s future given the recent number of accidents and rabble-rousing by environmental groups. However, I’m not sure I’d bet against the movement just yet.

Thousands of Carloads

With the Bakken and other shale regions landlocked and lacking pipelines, producers have increasingly turned to railroads as a way to ship their production across the country to refineries and export facilities. According to the Association of American Railroads, shipments of crude-by-rail have gone from just 9,500 carloads in 2008 to a whopping 233,811 last year. A typical tanker car holds about 740 barrels of crude oil.

The refiners seem bullish on the idea of these “pipelines on wheels” because it allows them to buy crude oil feedstock quickly and shift around opportunities as price differentials between producing regions can mean juicier crack spreads.

Already, producers and refiners have spent billions on new terminal facilities[4] that can load 95- to 118-car trains — which can transport between 60,000 to 68,000 barrels per trip — to bypass the Cushing, Okla., storage depot. Likewise, countless dollars have been spent acquiring new tank cars and locomotives in order to facilitate this growth.

All things considered, that means the trend isn’t going away anytime soon — as long as the two industries’ lobbyists have their way. In fact, analysts now estimate that crude-by-rail volumes will grow to as much as 73 million barrels this year and nearly 110 million barrels by 2014.

That potential for growth makes railroads like Canadian National (CNI[5]), Canadian Pacific (CP[6]) and Union Pacific (UNP[7]) long-term buys. Any Lac-Megantic disaster-related weakness could provide the opportunity to purchase shares at lower prices.

The trio of railroads have all gained from rising oil shipments. CP hauled 53,500 carloads of crude last year — nearly 50,000 more than it moved 2009. Meanwhile, Canadian National expects to double last year’s 30,000 crude oil carloads this year, and Union Pacific has already tripled the amount of crude it moved last year.

These rising oil shipments have boosted profits and share prices. I expect that trend to continue into the future as production in the Bakken is still rising sharply.

For investors, the events at Lac-Megantic are tragic, but not enough to derail the crude-by-rail movement. I would add or start a position in either of the three railroads on any weakness related to the accident. Over the long haul, you’ll be glad you did.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. recent train derailment and deadly explosion in Quebec: http://investorplace.com/2013/07/weekend-oil-train-crash-may-bolster-keystone-pipeline-case/
  2. crude-by-rail: http://investorplace.com/2012/07/all-aboard-the-bakken-shale-railroad-plays/
  3. 13 people have been pronounced dead: http://abcnews.go.com/International/quebec-train-crash-toll-13-dead-50-missing/story?id=19606485
  4. new terminal facilities: http://investorplace.com/2013/06/make-a-move-on-construction-firm-mastec/
  5. CNI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNI
  6. CP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CP
  7. UNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNP

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