New Pipelines in Limbo: Invest in Rail Cars or Railroads?

car

The gut in crude oil is filling up storage tanks across North America. Producers are hoping to sell their crude oil in the future at higher prices. The growth in storage capacity is partly due to increases in crude by rail shipments which requires more staging than by pipelines.

A storage boom in Alberta’s is underway as oil sands producers are pumping out record volumes of crude. Conoco Phillips, Husky Energy and Imperial Oil are set to start-up new projects from investments made years before oil prices hit the skids. Gibson Energy announced in April that it was adding another 900,000 barrels a day of tank storage capacity in Hardisty, Alberta. Keyera Energy and Kinder Morgan also announced that they will build as much as 4.8 million barrels of new oil storage in Edmonton under a 50 -50 joint venture with a potential to expand to 6.6 million barrels.

Current pipelines are running at near capacity and can’t handle all this new production which has played a role in the deep discounting of Alberta’s oil. Eventually, railroads (CP & CNR) will benefit from all this upcoming crude production.

As mentioned in my last post, railroads will have to update their tank car fleet to meet new government standards due to public safety concerns. Approximately 60,000 CPC 1242 tanker rail cars need to be retro fitted plus 100,000 Dot 111 have to be either replaced or retro fitted. A new braking system may be also needed in the near future. There are three-rail car manufactures listed on the U.S. stock exchanges who should benefit from the new regulations.

  • Greenbrier Companies (GBX)
  • American Railcar Industries (ARII)
  • Trinity Industries, (TRN)

Crude oil by rail shipments have skyrocketed from just over 20 million barrels in 2010 to more than 373 million barrels transported in 2014. The vast majority of crude oil by rail originates in the Midwest, primarily in the Bakken region of North Dakota. Even if the Keystone Pipeline was eventually built, it could only handle about 830,000 barrels per day. The Bakken region is projected to produce  2 million barrels of oil per day which would be transported by rail.

I am in no rush to buy railroads which have been falling in price lately. Investors are worried that slow economic growth may continue during the 2nd quarter of 2015. Low commodity prices  and the projected additional costs to meet new government rail car regulations will also effect the bottom line of railroad stocks. Remember the investment lesson of: Don’t Catch a Falling Knife & Dead Cat Bounce , you may want to wait for the railroads to form a bottom.

Before you buy, the price of crude oil needs to stabilize and hedge funds have to reduced their bets on the downside. You also have to believe that economists are right that economic growth will rebound in the second half of 2015 along with the price of crude oil. Under these conditions, both U.S. and Canadian railroads could be a buy.

 

car1

In the meantime, I recommend doing some research on rail car manufactures who will be busy with a lot of new orders from railroads. Keep in mind that railroads have time limits to meet new rail car standards ranging from 2 to 5 years.

Advertisements

2 thoughts on “New Pipelines in Limbo: Invest in Rail Cars or Railroads?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s