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Buffett Railroad Sees Crude Cargo Climbing 40%


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Burlington Northern Santa Fe LLC, the railroad owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), will boost crude-oil shipments by 40 percent this year, helping blunt a decline in coal cargo, Chief Executive Officer Matt Rose said.


BNSF will spend “a couple hundred million dollars” on capital improvements to haul more petroleum to refineries from the Bakken shale formation in the northwestern U.S., Rose said in a telephone interview. Crude oil shipments will grow to 700,000 barrels daily by the end of this year, he said.


Crude from the Bakken, which is putting the U.S. on course to become the world’s biggest oil producer by 2020, is helping the second-biggest U.S. railroad buck an industrywide slump in commodity cargoes. Fort Worth, Texas-based BNSF’s raw material volumes were little changed in 2012 as competitors posted declines, based on Association of American Railroads data.

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US shale boom times look to be over for railcar makers









Manufacturers of tank railcars have been among the biggest beneficiaries of the US shale energy boom, with share prices and order backlogs soaring as fast as oil pouring from new deposits in North Dakota.


Deliveries are booked well into 2015. But growth of the industry’s backlog has slowed recently, sparking speculation that supply is catching up to demand from companies eager to ship crude on routes not well served by pipelines.






With new pipeline capacity set to come online in the next few years and new regulations under discussion, whether the industry can sustain the explosive growth of the past few years remains uncertain.


“It’s hard to tell because the dynamics change all the time,” says Art Hatfield, analyst at Raymond James. “But based on some of the data we look at it would appear that orders are going to slow dramatically.”


The promise of tank cars has attracted some of the biggest names in investing to two of the four main manufacturers: Union Tank Car is owned by Warren Buffett’s Berkshire Hathaway while American Railcar Industries is controlled by Carl Icahn.


Both companies, along with Trinity Industries and Greenbrier Companies, have enjoyed soaring fortunes in recent years, with shares in the three public companies up more than 250 per cent in the past five years, compared with a doubling of the S&P 500.


Trinity’s sales jumped 74 per cent from 2010 to 2012, to $3.8bn, while net earnings nearly quadrupled to $255m over the period. American Railcar earnings jumped from a $27m loss in 2010 to a $64m net profit in 2012, on sales that soared nearly 160 per cent, to $712m, over the period.


The boom has also drawn Canadian company National Steel Car, which will join the tank car business this year.


The industry backlog stretched to nearly 59,000 cars as of September – around 80 per cent of the overall railcar industry backlog – according to the Railway Supply Institute, an industry trade group. In 2012, production of tank cars more than doubled compared with the previous year.






Much of the rise in rail transport of crude can be attributed to North Dakota, where production rose more than tenfold in the last 10 years, to around 900,000 barrels per day. Around two-thirds of that is shipped by rail.


The lengthy environmental permitting process for pipeline has meant that rails have filled the gap, taking the oil to refineries in the gulf region, Texas, Oklahoma and the coasts.


In 2008, US class I rails moved 9,500 carloads of crude, according to data from the Association of American Railroads. That figure jumped to 66,000 in 2011, 234,000 in 2012 and was on track for around 400,000 for 2013.


But there are signs that the surge in growth is slowing. In the second quarter of 2013, railways handled more than 108,000 carloads of crude, but that figure fell to roughly 93,000 in the third quarter, the first sequential fall since 2009.


In a December report the AAR attributed this drop to the narrowing of the spread between West Texas Intermediate and Brent crude – the lower WTI price is a major driver of the economics of rail, which is more expensive than pipeline.


The AAR also noted that pipeline expansions had hit rail shipments of crude. Those are only set to ramp up in the coming years, as pipeline operators seek to meet the needs of producers pumping out, according to US Energy Information Administration estimates, a near record 9.5m barrels a day by 2016.


“There’s eventually going to be an oversupply as these cars are delivered and as these pipelines come online,” Brian Kenney, chief executive at tank car leasing company GATX, said on a conference call in October.


As rail has grown in prominence, it has drawn scrutiny from regulators – particularly in the wake of the Quebec oil train crash that killed 47 people in July. The US Department of Transportation is considering new rules that could require that more than 60,000 tank cars, or around a quarter those currently in use, be retrofitted.


While that could be a boon for tank carmakers, who could stand to benefit from the estimated $1bn cost of the industry-wide retrofit, they may not “have the ability to produce all the retrofit kits” considering the backlog, says Nick Heymann, analyst at William Blair.


“The industry is at a bottleneck to build any more – they don’t want to spend a lot of money to boost capacity and have it be a bust,” says Mr Heymann.


William Glenn, chief commercial officer at Oregon-based Greenbrier, says the industry is prepared to weather any upswing, having adapted long ago to the cyclicality of an industry whose products have 50-year shelf lives.


“I don’t think the market has reached equilibrium yet,” he says, noting that manufacturers can also shift their focus to the other industries set to benefit from shale, including chemicals and fertilisers.


“As an industry we’re pretty good at putting our foot on the brakes and then putting our foot on the accelerator when we need to respond to increased demand.”


To that end, the company has doubled its capacity for cars that carry sand, which is pumped into the ground during hydraulic fracturing to break open the shale and extract the oil and gas.


“The new fracking techniques they’ve developed are using even more sand,” says Mr Glenn. “So we’re seeing a new round of interest in sand cars.”

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