Meet Oil Refiners’ New Best Friend: Warren Buffett: Phillips 66 (PSX), Valero Energy Corporation (VLO)

Warren BuffettPhillips 66 (NYSE:PSX)‘s recent earnings release was another example of the fantastic run that oil refining and marketing companies have had these past several quarters. Looking past the numbers, though, there was one issue that the company sees as a potential weakness. For a solution, it looks to be turning to a new friend: Warren Buffett.

Hop on the oil train
Despite the large boom in U.S. oil production, a few parts of Phillips 66′s refining operations have what may be considered a feedstock problem. Much of Phillips 66′ byway facility in New Jersey has been cracking Brent crude, which is selling at a premium to almost every domestic crude supply. With WTI and Bakken crude spot prices at almost a $20 discount to Brent, these East Coast refiners could seriously improve their margins by moving to domestic feedstocks. The same could be said for West oast refineries as well, because Alaskan North Slope crudes are selling at prices very close to Brent.

One of the best feedstock candidates for these facilities is from the Bakken. Not only is the crude cheap in comparison with imports, but it’s also a high-quality crude and doesn’t have strong local refinery capacity. There is one small problem with Bakken feedtsocks, though: The infrastructure from the region to the East and West Coast is relatively weak.

Refiners, midstream, and E&P companies have settled on rail for emerging oil plays for the time being, because the speed to bring rail operations online using existing lines is much faster than building new pipeline networks. The two following images highlight how rail infrastructure is much more robust than pipeline networks in emerging oil regions such as North Dakota.

US Class I Rail Infrastructure (Source: US Department of Transportation.)

North American Interstate Oil Pipelines (Source: Canadian Association of Petroleum Producers.)

To take advantage of this, both Phillips 66 and Valero Energy Corporation (NYSE:VLO) announced in their recent conference calls that they plan to purchase 2,000 and 1,000 rail cars, respectively.  While much of Phillips 66′s rail efforts will focus on moving Bakken crude, Valero plans to use rail to also move oil sands away from Alberta.

So where does Warren Buffett fit into this picture? The largest holder and operator of rail lines in the North Dakota region is Burlington Northern Santa Fe, which is a wholly owned subsidiary of Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A). If any of these companies hopes to run rail cars in the region, they will need to use Burlington Northern’s rail lines to make it happen. According to Berkshire’s most recent quarterly earnings report, the largest revenue growth for the railroad company has come from increased petroleum shipments. As long as pipeline capacity remains weak in the region, Burlington Northern will see strong growth from petroleum transport.

Rail deliveries aren’t the perfect solution, though. Based on Tesoro Corporation (NYSE:TSO)‘s estimates, it takes about $8 to $9 dollars per barrel to move Bakken crude to its refineries on the West Coast. That’s almost double what it takes to transport a barrel of crude via pipeline. It also requires these companies to either construct or expand their rail terminal facilities. Since rail is the only economically viable option right now, though, both refiners and E&P companies will be more than willing to pay the higher price.

What a Fool believes
Despite the higher costs associated with moving crude via rail, it certainly makes economic sense while spot differentials remain so high and pipeline networks have yet to catch up with production volumes. For the time being, East and West coast refiners such as Phillips 66, Tesoro, and Valero will all use rail as much as possible. While this will be a small gain for these refiners, Burlington Northern could be an even bigger winner. An uptick in rail deliveries could be a strong revenue boost for the company.

This advantage might be rather short-lived, though. Enbridge Inc (USA) (NYSE:ENB) has plans to bring a 125,000 barrel-per-day pipeline online that will connect the Bakken with its existing network in the U.S. and Canada. Enbridge anticipates the pipeline to come online sometime in early 2013. Current production in the Bakken is about 500,000 barrels per day and is growing, so there is still a lot of takeaway capacity needed for the region. But it shouldn’t be surprising if we see other midstream pipeline projects coming up.

The article Meet Oil Refiners’ New Best Friend: Warren Buffett originally appeared on Fool.com and is written by Tyler Crowe.

Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him on Fool.com under TMFDirtyBird, Google +, or Twitter: @TylerCroweFool. The Motley Fool recommends and owns shares of Berkshire Hathaway.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!