TransCanada Corporation (TRP), Canadian National Railway (USA) (CNI): How to Profit From Pipeline Gridlock

The top players

Canadian National Railway (USA) (NYSE:CNI) is the top play on this trend.

In 2012, Canadian National Railway (USA) (NYSE:CNI) shipped 100,000 b/d of crude oil accounting for 7%-8% of the company’s total revenues. Crude shipments are expected to triple with the company moving 300,000 b/d by the end of this year.

Canadian Pacific Railway Limited (USA) (NYSE:CP), Canada’s second largest rail carrier, is also benefiting from booming energy production.

The company expects to ship 70,000 carloads in 2013, up 30% from last year. By 2015, Canadian Pacific Railway Limited (USA) (NYSE:CP) expects crude shipments to more than double to 140,000 carloads.

The company doesn’t provide an exact precise revenue breakdown. However, industrial chemicals, which includes crude oil shipments, accounted for 23% of revenues last year up 3% from 2011.

So what’s the difference between these two companies?

Canadian National Railway (USA) (NYSE:CNI) is more leveraged to growth in the oil sands as its terminals are better positioned in northern Alberta.

In contrast, Canadian Pacific Railway Limited (USA) (NYSE:CP) is centered in the Midwest giving the company greater exposure to explosive growth in the Bakken region.

Risks

But rail carriers face several challenges to fully exploit this opportunity:

Terminals: In order to increase capacity new loading terminal need to be constructed. Smaller facilities, which can handle 2,000 to 20,000 barrels, can be built within a couple of months. However larger terminals, with the capacity to load 65,000-70,000 barrels, are the most economic but take over a year to build.

Rail cars: Capacity is also being limited by the availability of crude oil rail cars. There’s a two year waiting period from order to delivery. The backlog is close to 48,000 cars which could take several years to clear. In 2013, only 12,000 to 15,000 cars are expected to be delivered.

Spread: Shipping crude by rail is only economical if there’s a wide spread between the price of Canadian oil and traditional benchmarks. However, this gap narrowed significantly this spring.

Foolish bottom line

The crude by rail express has become one of the biggest developments in the oil patch. Until new pipeline initiatives can cut through political gridlock, it will be the railroads that benefit most from North American’s rapidly growing energy production.

The article How to Profit From Pipeline Gridlock originally appeared on Fool.com.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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