Regular Motley Fool readers are probably aware that America is in the midst of an energy renaissance. For most of recent history, oil and gas was delivered from the coast and shipped inland. But this has been completely reversed in the past five years due to double digit production growth in the Bakken, Eagle Ford, and Alberta Oil Sands. This shift has created a bull market for mid-stream companies that refine or move energy products which will play out in three distinct stages.
Refineries have been the biggest benefactor of this energy boom. U.S. oil refiners are buying domestic crude cheap and exporting finished product internationally for a big premium. Over the past year, the spread between raw inputs, particularly West Texas Intermediate, and finished outputs has widened resulting in fat profits for refineries.
Valero Energy Corporation (NYSE:VLO) is the best positioned to exploit this trend. Last quarter, the company announced that it had completely replaced its foreign crude with cheaper domestic supplies and has taken advantage of higher international prices by exporting 15% of capacity to premium markets like Western Europe and Latin America.
Valero is up 90% over the past year, but has lots of catalysts that can propel the stock higher over the next six to twelve months. Margins should continue to expand with more crude production coming on-line and few new projects to relieve supply bottlenecks. In addition, Valero is also spinning off its low margin Corner Store convenience chain.
The biggest problem in the energy sector is production growth overloading existing transportation capacity. New pipelines have been slow to get approved and constructed.
As a result, rail transport has developed into an important stop-gap until additional capacity can be built. The advantage of rails is that they face fewer political obstacles and can respond quickly to market conditions. In 2011, crude shipments by rail increased 46% to 540,500 carloads and railroads are expected to continue to play a growing role in energy transportation.
The best railroad levered to this trend is Canadian National Railway (USA) (NYSE:CNI). Last year, CN increased its crude shipments from 5,000 to 30,000 carloads with the company aiming to double this figure in 2013. CN is also enhancing its crude transport infrastructure by building a new terminal to serve Gulf Coast refiners. During the fourth quarter, petroleum and chemicals accounted for 17% of CN’s revenue and will continue to be an important growth driver over the next two to three years.
While rails enjoy a boom over the next 8-12 quarters, it will be traditional pipelines that eventually win out as they’re a significantly cheaper transport method per barrel.
My favorite pipeline play is Enbridge Inc (USA) (NYSE:ENB), as it has one of the best growth profiles in the industry. The company has a long list of projects with the most notable including:
Seaway Reversal: Last year, Enbridge reversed the flow of its Seaway pipeline to transport crude oil south from Cushing, OK to Freeport, TX for export. The company is working to double capacity to 850,000 barrels per day and is expected to be complete it expansion by the first quarter of 2014.