To Market, To Market, To Fetch a Fat Spread: Canadian Pacific Railway Limited (USA) (CP), Trinity Industries, Inc. (TRN)

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Unconventional oil shales have provided critical revenue for the large US independents at a time when weak gas pricing might otherwise be disastrous. Getting that oil to market however, is a challenge. Bakken production is log jammed because of a lack of pipeline infrastructure. Similar issues have hamstrung western Canadian syncrude producers. Rail shipping has been critical to getting this off-the-beaten-trail production to market and its contribution is still expanding.

Berkshire-Hathaway gives its shareholders a peek into virtually every corner of the economy. The relatively recent addition of Burlington Northern Santa Fe extends that look even further. With the slowdown in coal shipments to China, there was some concern that rail revenue might be impacted. In his annual letter, Buffett disclosed that BNSF’s moving a lot of oil that’s more than picking up the slack.

Canadian Pacific Railway Limited (USA) (NYSE:CP)The railroad unit handled 500 MBbld (thousand barrels per day) of rail shipped crude. That’s about 10% of production in the lower 48, according to Buffett. The railway expects that number to reach 700 MBbld by the end of the year on its way to 1,000 MBbld in a year and a half.

Canadian Pacific Railway Limited (USA) (NYSE:CP) is just beginning build-out of its Bakken crude loading depots, and expects to be operating 70,000 oil tankers annually, up from 13,000 in 2011. Altogether, approximately a third of current Bakken production is shipped by rail.

With environmental impact studies still red-lighting the controversial Keystone XL pipeline, Canadian syncrude producers are looking to copy the rail success in the Bakken. Canadian Pacific Railway Limited (USA) (NYSE:CP) is now gearing up its facilities in Alberta to carry oil sands syncrude. The combined weight of Bakken and Canadian demand has created a production backlog for railcar tankers.

Berkshire-Hathaway’s Union Tank Car unit is backlogged through 2014. Another manufacturer, Greenbrier Companies Inc (NYSE:GBX), is reportedly now booking its 2015 orders. Carl Icahn recently disclosed a 9.9% stake in Greenbrier, so the heavyweights are taking notice and making their bets. Trinity Industries, Inc. (NYSE:TRN) is a third way to play the high railcar demand, for those keeping score.

In contrast to the Bakken, only a small portion of Alberta oil sands production is now shipped by rail. That could increase significantly if Keystone XL is held back longer. In fact, the successful utilization of rail for Bakken oil shipment has been highlighted by US officials that question the need for the controversial pipeline.

Rail shipping is becoming cool again. EOG Resources Inc (NYSE:EOG) first started using it to move its Bakken crude in 2009. The project was so successful that EOG expanded its rail shipping capacity to 70 MBbld. It’s currently rail shipping the bulk of its Bakken production to its St. James, LA rail terminal.

That means that EOG nets Louisiana Light Sweet prices on its Bakken crude, rather than West Texas Intermediate prices that prevail at Cushing, OK or Enbridge’s terminal at Clearbrook, MN. Since LLS prices off Brent due to its easy access to east coast refiners, the spread can top $20 a barrel. For many producers, shipping costs eat up that spread, since rail shipments are estimated at $16-$18 per barrel, about 3 times the cost of pipeline transport.

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