How Extraordinary Growth in Bakken Oil Is Revitalizing Railroads

June 6th, 2013 by Abby Joseph
CNI: Canadian National Railway logo
CNI
Canadian National Railway

Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

Change in the railroad business is not something you expect, but it is happening with Bakken oil.

The Association of American Railroads (AAR) is the industry group for North American railroad stocks, and while all trade groups are to be taken with a grain of salt, you can garner insight on the U.S. economy by reading the AAR’s data.

Even if you aren’t interested in railroad stocks, business conditions for railroads are still very relevant. They remain the backbone of North America and the industrial economy.

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According to the AAR, U.S. Class I railroad stocks originated a record 97,135 carloads of crude oil in the first quarter of 2013. This represents a gain of 20% from 81,122 carloads in the fourth quarter of 2012 and a substantial increase of 166% from 36,544 carloads originated in the first quarter of 2012.

While the shipment of oil—Bakken oil, in particular—is the source of renewed growth for railroad stocks, the numbers also reveal a flatness that coincides with the rest of the U.S. economy.

The AAR reported that in the first 21 weeks of 2013, U.S. railroad stocks reported volume of 5.8 million total carloads, down 1.8% from the comparable period in 2012. Total U.S. traffic for the first 21 weeks of 2013 was 10.8 million carloads and intermodal units, up 0.8% comparatively.

For the same period, Canadian railroads reported volume of 1.6 million carloads, up 2.3% comparatively, and 1.1 million intermodal units, up 4.7%.

Volume on Mexican railroads came in at 315,377 carloads, up nine percent, with 192,060 intermodal units, down 0.3% from last year.

Railroad stocks have been on a tear lately and are only now taking a little bit of a break. Most railroad companies are right close to their stock market highs.

The AAR, as a trade group, is promoting rail transportation for oil, including Bakken oil, and is citing a number of statistics suggesting that transporting Bakken oil by rail is safer and offers greater reliability over pipelines.

According to the group, total railroad oil spills are less than one percent of total pipeline spills. The group estimates that pipelines spill three-times more oil than railroads.

Weaker shipments of coal, due to the increasing use of natural gas for power plants, has not dented the enthusiasm that institutional investors have to invest in railroad stocks so far. (See “Keeping It Rolling—U.S. Energy Boom Good News for Railroad Stocks.”)

Bill Gates likes railroad stocks. His private investment firm, Cascade Investment, LLC, is now the single largest shareholder in Canadian National Railway Company (NYSE/CNI; TSX/CNR), now owning about 10% of the company. With the addition of the Bill & Melinda Gates Foundation Trust, Gates owns 12% of Canadian National (CN).

Railroad stocks have proven over time to be excellent stock market investments, but they have experienced long periods of nonperformance.

Railroad stocks are very sensitive to general economic conditions and changing preferences among investors. If technology stocks are roaring, who wants to own real railroad stocks?

In my view, there definitely is room in a long-term equity market portfolio for one railroad company.

The railroad sector is an old economy industry that continues to pay.