Record and surging oil production volumes in places like the Bakken have been a boon to an unexpected group: railroad stocks.
That’s because many of today’s hottest shale regions — where fracking is making all of this production possible — sit outside of the thousands of miles of existing pipelines crisscrossing our country.
And rather than see their production go to waste, E&P firms like Continental Resources (CLR) have secured other means of transportation. Shipping crude oil via railcars — commonly referred to as crude-by-rail — has become the go-to means for getting energy out of the Bakken and other shale plays.
That is, until recently.
A series of high-profile derailments and crashes had regulators and pundits rethinking the rules on shipping crude via tank car. As such, shares of the leading railroad stocks that ship Bakken crude have fallen. However, crude-by-rail is simply too big of a trend to be chucked away.
And for investors, any cold-water thrown on the crude-by-rail movement can be seen as an opportunity to buy a handful of railroad stocks for the long-term.
3 Major Crude-By-Rail Accidents
Despite the record amounts of crude being shipped over our railways, there have been a few serious crude-by-rail incidents as of late. The most recent occurred two weeks ago, when two trains collided in North Dakota, causing a massive fire. Before that, there was a derailment in Alabama and before that was the deadliest accident so far.
In the beginning of July, a train carrying 73 tank cars of crude oil lost control, barreled downhill, derailed and exploded in downtown Lac-Megantic, Quebec. That explosion leveled the small town and killed 47 people.
All of these incidents has prompted officials to begin looking at the crude-by-rail movement in a serious manner.
The Pipeline and Hazardous Materials Safety Administration put out a new report saying that Bakken crude was more risky to transport due to its flammability vs. traditional heavy crude oil. Meanwhile, U.S. and Canadian regulators are considering imposing tougher rules on railcar construction. Many argue that Bakken crude oil is too rich in hydrogen sulfide and will cause faster corrosion of the current tank car fleet. Many of the DOT-111 tank cars in operation wouldn’t be able to handle the more corrosive oil over the longer haul.
All in all, these potential rules could increase the cost of moving Bakken crude to market. But it won’t kill the movement like some environmental pundits are predicting. It’s just too darn big.
How big? According to the Association of American Railroads, volumes of crude-by-rail shipments have surged 31% over the course of the year to reach around 150,000 barrels of oil per day. And as production continues to surge in the Bakken, industry experts predict that crude-by-rail capacity and volumes will leap to an astonishing 700,000 to 750,000 barrels of crude a day this year.