Kinder Morgan’s Latest Investment to Benefit Railroads

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Kinder Morganhas announced plans  to build a crude-by-rail terminal in Houston, Texas, underlining a U.S. trend towards the use of rail to ship crude. 

The pipeline transporter and truck and rail operator Watco have formed a joint venture KW Express LLC which will own 85% of the terminal. 

The remaining 15% will be owned by Mercuria Energy Trading Company, a Texas energy trading firm. The terminal will deliver up to 210,000 barrels of crude oil per day for sale to nearby refineries. 

Kinder Morgan says the terminal would enable Mercuria Energy to bring crude oil to the Gulf Coast from western Texas, the oil hub at Cushing, Oklahoma, the Bakken Shale, and western Canada (where a potential investment by Kinder Morgan will give the company more access to oil in the area).

"This will be the first major crude by rail destination facility in the Houston area with the ability to deliver into the largest refining complex in the world," John Schlosser, Kinder Morgan Terminals' president, said.

Oil haulage through railroad -- an expensive proposition compared to pipeline shipping -- is a throwback at to the earliest days of the petroleum industry, when there were no pipelines to start with.

However, the concept is gaining popularity again, as unconventional hydrocarbon production picks up virtually across the nation, including areas that are poorly connected to the existing North American pipeline system. Prominent of these new production hotspots is North Dakota’s Bakken Shale formation.

Kinder Morgan’s initiative to resort to an age-old approach for oil transportation is a manifestation that the pipeline network has not been able to keep up with the rapid but geographically scattered growth on the unconventional side.

The company is a pipeline transporter, and what it is doing could somewhat weaken the pipeline operators' influence in the market. It is usually a zero sum game between pipeline operators and railroads, as one’s gain would be another’s loss.

Despite this conflict, Kinder Morgan’s decision seems to make sense, as trains can reach higher-paying markets more flexibly, allowing shippers to take advantage of more favorable market conditions.

For example, a barrel of light crude on the Gulf Coast could mean a price difference of $20 or more as compared to prices in the midcontinent. Oil refiners on the Gulf Coast have traditionally relied on costlier imports from Europe or West Africa.

This simply means that Kinder Morgan has forged a profitable collaboration with railroads in a booming oil transportation market. Without making much fuss, railroads have been benefiting from the second oil revolution.

According to information from the Association of American Railroads trade group, the amount of crude shipped by rail in the US has more than tripled over the past year, with 233,811 carloads of crude oil in 2012 compared to 65,751 carloads the year before.

Probably the best stock to play this theme is Canadian National Railway ) whose crude oil shipments jumped from 5,000 carloads in 2011 to 30,000 carloads in 2012.

The company projects it will be able to double this figure in 2013 by building a new terminal to serve Gulf Coast refiners. Canadian National Railway had a fantastic fourth quarter during which petroleum and chemicals contributed 17% to the company’s top line.

Canadian Pacific Railway ) is another player making most of the hydrocarbon boom. The company claims it is the only rail carrier providing single-line haul service between the Bakken and major crude oil markets in the Northeastern U.S.

Canadian Pacific Railway hauled 8.5 million barrels of Bakken oil in 2012, growing up many times from just 325,000 barrels in 2009 when it started operations in the region. In addition to hauling oil, the company, which has a formidable presence in Marcellus Shale region, is busy increasing sand shipments for fracking which is another lucrative line of business.

Overall, going long in these stocks could be a smart way to play the US unconventional hydrocarbon boom which is not likely to slow down over the next couple of years. Buying integrated oil players such as Kinder Morgan is a way to participate in the rally, but railroad stocks such as Canadian National and Canadian Pacific offer the benefits of the energy revolution without exposing investors to the uncertainties of oil drilling business.  


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