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Canadian National Railway (USA) (CNI), TransCanada Corporation (USA) (TRP): The Best Crude Rail Play

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Canadian National Railway (USA) (NYSE:CNI)

Four North American railroads are seeing explosive growth in shipments of crude due to a lack of pipeline capacity in the United States and Canada. But only one railroad, Canadian National Railway (USA) (NYSE:CNI), owns a rail to the massive Athabasca Oil Sands in Alberta, the largest known reservoir of crude bitumen in the world.

In 2007, CN acquired 201 miles of track from the Athabasca Northern Railway for $25 million and began $135 million in upgrades.

With TransCanada Corporation (USA) (NYSE:TRP)’s Keystone XL pipeline stuck in political turmoil in the United States, CN isbest poised to grow crude shipments by rail from the Athabasca Oil Sands in Alberta to refiners.

The Athabasca deposit is the largest known reservoir of crude bitumen in the world and the largest of three major oil sands deposits in Alberta, along with the nearby Peace River and Cold Lake deposits. The Alberta sands deposits contain about 169 billion barrels of oil, according to the Canadian Association of Petroleum Producers.

Due to its growing edge in the movement of crude, CN was recently upgraded to Neutral from Underweight by JP Morgan analyst Thomas Wadewitz, who raised CN’s price target from $96.00 to $110.00 per share, said

Due to its greater reach North into the oil sands and South to U.S. Gulf Coast refineries, CNI has one of the strongest crude by rail growth stories over the next several years.

CN, Canadian Pacific Railway (NYSE:CP), Burlington Northern Santa Fe, owned by Berkshire Hathaway Inc. (NYSE:BRK-B), and Union Pacific Corporation (NYSE:UNP) also are benefiting from growing demand for shipments of crude from the Bakken region.
Railroads haul in carloads of frac sand and drilling pipe used to build wells. They haul out crude oil to refineries and other end users thousands of miles away in the Gulf Coast.

U.S. rail traffic of crude and petroleum products grew 51.8% year-to-date through May 25, 2013 over the same time period in 2012, the Association of American Railroads (AAR) reported May 30.

Canadian railroads saw 26.9% growth in shipment of petroleum products year-to-date through May 25, AAR said.

Pipelines are cheaper for hauling crude, but often face political battles for construction. North Dakota has seen huge increases in crude production, but its existing pipeline lacks capacity to handle higher volumes.

At Berthold, N.D., you can see pipeline companies working side-by-side with railroads. A Berthold rail hub — an on-ramp to BNSF’s rail network — is owned by Canadian oil transporter Enbridge Inc (USA) (NYSE:ENB), a large pipeline company.

Enbridge built the rail facility at Berthold last year to help ease a bottleneck on its large nearby pipeline that carries oil eastward through North Dakota into Minnesota. A second phase at the site will connect pipeline nodes in the heart of the Bakken to the Berthold facility, eliminating the need for producers to truck oil 50 miles or more, according to a recent report by Phil Davies, senior writer for the Federal Reserve Bank of Minneapolis.

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