Trains, Barges and Pipelines

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One of my favorite movies is "Planes, Trains and Automobiles," which stars Steve Martin and the late John Candy. It tells the tale of two businessmen trying to get home to Chicago from NYC in time for Thanksgiving. Battling bad weather and other woes, they use three forms of transportation as the title implies. 

One of the methods, railways, is becoming a key player in energy too. Due to a lack of pipeline capacity in some geographic areas there has been an exponential increase in the amount of oil shipped by railroads since 2006. That should continue to increase in the future. One estimate calls for "several tens of billion" to be invested in railroad infrastructure in 2013. 

BNSF Railway, owned by Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), reported a 70:1 increase in oil shipments on its rail lines from the Northern Plains over the last four years.

Berkshire completed its acquisition of BNSF (a combination of the former Burlington Northern and Santa Fe systems) in 2009 by buying the remaining 77% of the shares it didn't already own. It appears that the world's most successful investor, Berkshire chairman Warren Buffett, made a wise move there.

Recently, the company made headlines by buying back some of its own stock, something Mr. Buffett doesn't normally do unless he feels that the valuation is cheap enough relative to certain financial conditions. The class A stock recently was priced at $133,900 per share, near its all-time high. It probably will reach that again. 

Related businesses, such as Trinity Industries (NYSE: TRN), one of the world's largest manufacturers of rail cars, reported an increase in the number of deliveries it made this year and is poised for continued growth next year. In addition, it produces inland barges, which are also being used to transport oil down the Mississippi River, primarily from the Bakken Shale region of North Dakota. Valero Energy (NYSE: VLO), the largest independent refiner in the world, converts that crude to gasoline and other products in Memphis, TN. 

Things have improved at Trinity after a down year in 2009. Earnings per share have more than doubled over the past year and should continue to grow next year. With a P/E of 11 (below its 5-year average and its peers) some might consider the stock to be a relative bargain right now. There are two caveats, however. The company has an elevated long term debt level and negative free cash flow. That might be expected in a business that requires large sums of capital investment.

Valero's stock has far outperformed the market over the last few years in spite of slowing earnings growth and a relatively high P/E, historically speaking. However, analysts do project a change in the growth story going forward. The company has been generating positive free cash flow and has a relatively low debt level. All in all, the stock may still have some life in it. 

Pipelines are still the most economical method of moving both oil and natural gas. For example, it costs $5 to $10 more per barrel of oil to be transported via rail. However, opposition from local government, civic and environmental groups have made it somewhat difficult to build new pipeline systems. Hence the surge in rail and barge transportation and the importance of existing infrastructure. 

Regarding existing transportation, Spectra Energy Corp (NYSE: SE) paid $1.7 billion to buy the Express-Platte pipeline, which moves up to 280,000 barrels of oil a day from Canada to the Midwest. The Houston-based company is primarily a player in the midstream natural gas industry. The company has experienced slowing earnings growth, as many businesses in the energy industry have, but it should pick up again. The stock is reasonably priced, and the P/E is about on par with the rest of its peers and the overall market. A negative is a relatively high debt level. 

It appears that besides the traditional methods of getting oil from the wells to the marketplace, one of the oldest forms of transportation is starting to make some headway. Railroads could play an important role for many years to come. Investors may want to pay attention. 

 


Mathman6577 has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and Spectra Energy. Motley Fool newsletter services recommend Berkshire Hathaway and Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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