New Oil Train Safety Fears Could Derail Railroad Stocks

Railroad stocks were holding up well so far in the aftermath of a massive derailment and explosion of a CSX Corporation (NYSE:CSX) train in West Virginia, but growing howls of protest over the risks of transporting volatile shale oil by rail is certain to weigh on the sector.

New Oil Train Safety Fears Could Derail Railroad StocksOn Monday, a 109-car CSX train hauling 3 million gallons of shale oil from the Bakken fields in North Dakota to an oil transfer facility in Yorktown, Virginia, derailed in West Virginia, causing at least 20 tank cars to ignite or explode.

Although there were no injuries, the accident prompted the evacuation of two towns and suspension of local water supplies.

Freight railroads are facing stiff regulatory headwinds in response to this most recent accident. The railroad industry has managed to head off tougher regulations for oil trains in the past by investing heavily to replace older, so-called DOT-111 tanker cars with safer, more puncture-proof CPC 1232 tank cars.

Although the investigation into the crash is ongoing, officials confirmed that the rail cars that ruptured and exploded on Monday were the new 1232 tank cars. The failure of the railroad industry’s solution is bound to trigger stronger — and more expensive — regulations for the sector.

Talk about bad timing: this was supposed to be a great week for freight railroads such as CSX, Norfolk Southern Corp. (NYSE:NSC) and Union Pacific Corporation (NYSE:UNP), which are growing revenue on surging shale oil transport. Although both houses of Congress approved the long-delayed Keystone XL Pipeline last week, President Barack Obama has vowed to veto the legislation — delivering a big boost for railroads that are offsetting the decline in coal volume with shale oil transport.

Instead, the accident could help Keystone XL supporters such as Sen. Joe Manchin (D-W.Va.) drum up support from his Senate colleagues to override Obama’s promised veto. At last count, Keystone XL supporters in the Senate were three or four votes short of the 67 needed to override the veto.

While that’s a tough nut to crack, the oil train safety concerns — particularly given the vulnerability of the new stronger rail cars — could drum up support for an alternative to moving oil by rail. Manchin, the state’s once and perhaps future governor, visited the still-burning site of the derailment on Tuesday.

The Bottom Line

The CSX derailment is a huge deal for railroad stocks for two reasons. First, it illustrates that the rail industry’s $7 billion investment in the upgraded 1232 rail cars is not adequate to ensure the safety of communities near crude oil transport routes. Tougher regulations will be needed to improve safety — and costly changes could ruin the economics for shale oil transport by rail.

Second, it’s difficult for Keystone XL opponents to look through the 300-foot fireball rising over the accident site and argue that shale oil transport by rail is safer than constructing the oil pipeline.

There is little chance that Obama will reverse course and sign the Keystone XL pipeline bill, if for no other reason than it would be viewed as weakness by the Republican-controlled Congress. But keep an eye out for signs that the accident is fueling support for the Keystone XL bill, as pipeline supporters keep trying to gain enough votes to override a presidential veto.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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