The continuing oil boom in North Dakota and Texas has created a unique opportunity for railroad consolidation.
Berkshire Hathaway's (BRK.A) Burlington Northern would be the company doing the consolidating. They are the only major line that has access to the North Dakota Bakken fields, and they have a line running from Houston to Eagle Pass that can easily serve the Eagle Ford shale fields.
What Burlington lacks is direct access to eastern refineries that are now spending up to $110 per barrel, the Brent price, for their oil. West Texas prices of $95/barrel sound good, but they are sub-optimal for producers.
Even if the President approved a Keystone pipeline deal today, that pipeline would take years to reach the Alberta tar sands fields - Alberta prefers they be called oil sands - although the crying need for carrying capacity in the Bakken raises the likelihood that approval will be forthcoming.
Producers told Bloomberg they expect to turn more to rail as a short-term solution to their current transport problems. Bloomberg says enough rail cars are being produced to hike capacity by 1 million barrels/day this year.
What does all this have to do with rail consolidation? While Burlington Northern can reach west coast refineries, its network does not extend east of St. Louis. Norfolk Southern (NSC) and CSX (CSX) do extend all the way east, and both are currently selling at below-market multiples of 11.5 times earnings.
The value of these two lines is being held down by the fact that their results are closely tied to the dwindling coal plays of West Virginia and Ohio, both of which have been shutting down due to competition from natural gas, much of it produced in the east.
Thus, they're cheap. A bid of $25 billion for CSX, for instance, would be eagerly accepted, even if much of the payment were in BRK.B shares (in order to give smaller shareholders a chance to cash out their holdings), and it would be likely to sail through the Justice Department, especially if it were accompanied by a bid by Union Pacific (UNP) for Norfolk Southern, giving Texas producers more options for their product. That would still leave U.S. shippers with competition in the market, in this case transcontinental competition.
Such a combination could also be good for eastern coal, which could still develop markets in China using cheaper rail transport and ships.
Increased rail shipments of oil, by the way, would also buoy the stocks of all eastern refiners, as well as Delta Air (DAL), which bought a refinery for making jet fuel last year.
While Berkshire originally bought Burlington Northern for coal shipments, oil looks like the way to wealth here.
Disclosure: I am long CSX.