By Keith Schaefer
Editor/Publisher of the Oil & Gas Investments Bulletin
Many investors would be surprised to hear that more oil leaves the Bakken by train than it does through pipelines.
The last time I checked, 47% of Bakken oil leaves via tank cars, vs. 44% going out through pipelines.
Railroad company BNSF (now in Warren Buffett's stable), which operates all the railroad capacity in North Dakota, has seen oil volumes increase nearly 7,000 percent, from 1.3 million barrels in 2008 to 88.9 million in 2012.
That's because pipelines can't keep up with the fast production growth of light oil in the Bakken. In fact, one proposed pipeline with 200,000 barrels a day capacity out of the Bakken was cancelled in late November?due to lack of interest from producers.
And neither can refineries keep up?which is where the money is in this discussion.
First, understand it costs MORE per barrel to ship oil via rail than via pipeline?it's about double, actually. Generally speaking, rail costs $8 to $14 to get to coastal refineries?whether it's to the Gulf Coast, California, Washington State or Philadelphia.
But the rail lines offer a compelling value for producers over pipelines?they don't need years of permitting and hearings to get the oil moving. And in the process, they are solving America's biggest pipeline issue, which for some reason almost nobody talks about. To me, this is the big benefit of the fast-growing rail business in oil.
America needs east-west pipeline oil flow. Refineries in California are barely profitable, and I've written before how east coast refineries are going bankrupt having to use the very expensive, imported, Brent-priced oil they use now.
Everyone talks about the Keystone pipeline, which will run north-south from Canada to the Gulf Coast. But that's not going to change any economics for anybody in the oilpatch, either producer or consumer.
It's just not a meaningful topic of discussion (other than to highlight the political divide in the country). All it does is help move the oil glut in the US from Cushing, Oklahoma to the Gulf Coast Refinery Complex. It may improve prices for some Canadian producers?but just a bit.
With no new refinery capacity to go with it, Keystone is one of the most overblown topics in the North American energy discussion.
The chances of a major east-west oil pipeline?of any new major pipeline?in the US is small.
And it's rail that is filling that gap, faster and more effectively than anyone thought possible just 18 months ago.
Of course, with the Eagle Ford and Eaglebine and Cline shales in Texas now developing full bore, the Gulf Coast refineries really don't want the Bakken oil, anyway.
So, who is the big winner out of all this information?
Think about it this way. If we say it costs just $8 a barrel to ship Bakken crude to coastal refineries?well, that's $8 a barrel that the refineries close to the Bakken don't have to pay. Crude oil is their input costs, and being able to buy cheaper crude?because they're close to the source?improves their profitability.
On the whole, refineries usually operate on thin margins; they are a volume business. But for the refineries near the Bakken, margins are soaring, while their coastal cousins flirt with bankruptcy or, at best, meager margins.
That's why today's best-positioned refineries are increasing their throughput... to make hay while the sun shines. That's creating a double-whammy of increasing profits for a select group of refining stocks?higher margins, higher volumes.
And the dividend increases coming out of this group in 2013 should be a beautiful thing for investors.
What's more, the increased rail traffic is cementing this newfound profitability into the system?I think it's now a structural part of the American energy sector. And it's giving these companies a competitive edge in attracting capital, and valuations [read: stock price].
There's one company in particular whose fortunes are improving at an incredible pace. Last quarter's dividend was almost 50% higher than The Street expected. And I expect their next quarter to be even better.
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