Oxstones Investment Club™By Jim Jelter, Market Watch,
Warren Buffett’s latest acquisition and a spectacular train wreck in North Dakota point to what could be a big play in 2014: Pipelines.
Here’s how they’re connected.
Buffett’s Berkshire Hathaway BRK.A +0.47% BRK.B +0.04% owns the BNSF railroad. It was a BNSF train of tanker cars that burst into giant fireballs Monday when it went off the rails near Casselton, North Dakota, just west of Fargo. The train was carrying crude (about 30,000 gallons per car) from North Dakota’s Bakken oil field, one of the nation’s fastest-growing oil regions.
Oil production in North Dakota is a relatively new phenomenon made possible by fracking its vast oil-bearing shale formations. Because it’s new, there are few pipelines serving the region, which means about 90% of the state’s crude is being sent to refiners by rail.
Anyone worried about the safety of carrying so much crude in railroads have had their fears confirmed twice this year. The first major accident, on July 6, involved a runaway train that crashed and incinerated downtown Lac-Megantic in Quebec, killing 47 people. The second incident was the BNSF wreck on Monday, which fortunately killed no one, but prompted an evacuation of nearby residents. Both trains were carrying oil from North Dakota’s Bakken field.
Coincidently, just a few hours after the BNSF derailment, Buffett’s Berkshire Hathaway said it had struck a deal with refiner Phillips 66 PSX +0.27% to buy Phillips Specialty Products Inc. (PSPI), a unit which, according to the announcement, “leads the science of drag reduction and specializes in developing polymers to maximize the flow potential of pipelines.”
Buffett’s BNSF doesn’t lose money hauling crude, but pipelines are a far more efficient and safer way to move crude to market. And every train wreck makes it a little easier to get the permits necessary to build the pipelines already proposed, especially to West Coast refineries that historically have had little access to crude from east of the Rockies.
At the same time, Berkshire’s PSPI acquisition neatly fits Buffett’s move into a broad spectrum of energy companies over the past few years, including the 27-million-share stake he took in Phillips 66 earlier this year, and which he’s now using (19 million shares) to fund his all-stock deal to buy PSPI.
The next logical step for Buffett’s empire building in the energy sector would appear to be investing in pipelines and, at the other end, the refineries that stand to benefit most from them.
Investors seem to see the logic in it as well. Half way through the final session of 2013, independent petroleum refiners were the top-three gainers in the S&P 500: Phillips 66 PSX +0.27% is up 2.9%, Valero Energy Corp. VLO +0.20% is up 3.4% and Marathon Petroleum Corp. MPC is up 3.5%, all ratcheting up expectations for what the new year could bring.
Tags: bnsf, energy infrastructure, energy pipelines, independent refiners, Marathon Petro, MPC, oil pipelines, oil refineries, Phillips 66, PSX, railway, shale gas, shale oil, transport logistics, transportation infrastructure, USA energy infrastructure, Valero, vlo, Warren Buffett, warren buffett's latest bet