This train is bound for glory, this train.
This train is bound for glory, this train.
This train don't carry no gamblers,
No High Flyers, no midnight ramblers,
This train is bound for glory, this train. - American Gospel Spiritual, Author Unknown
When my Great Grandfather immigrated to the U.S. just prior to the turn of the century, he took a job with the Pennsylvania Rail Road. Ever since then, there has been some association between my family and the iron horse industry. From working the rural lines in Pennsylvania, to manning the production floor of Westinghouse Air Brake, to the toy models circling around the Christmas tree each year, we love trains.
So, it should be no surprise that I have railroads in my portfolio. The difficult question has always been which one (or ones). In the past I have had positions in Kansas City Southern (KSU), Norfolk Southern (NSC) and Union Pacific (UNP). I also follow Canadian National (CNI) and Canadian Pacific (CP) and any other associate of the industry you can think of and currently own CSX (CSX). But, it is a little gem that started as a short line in New York that I'm expecting the biggest bang for my buck, thanks to the coming boom in the Marcellus and Utica shale region.
This article will introduce you to Genesee and Wyoming Inc. (GWR) and discuss their positioning in Ohio, Pennsylvania, and New York and the potential provided by the energy industry to this member of the Russell Small Cap 2000.
(Edward L. Fuller and Partners)
In 1899, Edward L. Fuller and his partners purchased a 14 mile short like rail road to transport rock salt from their mine in upper state New York. 78 years later, Mortimer E. Fuller III purchased a controlling stake in the rail road and formed Genesee and Wyoming Industries, the holding company. In 1980, the Staggers Act deregulated the rail industry and allowed the company to start expanding into diverse short lines throughout the continent, and internationally.
Today, the company owns and operates short line and regional freight railroads in the United States, Canada, Australia, the Netherlands and Belgium. This includes service at 36 ports in North America, Australia and Europe and the operation of the Tarcoola to Darwin rail line which links the Port of Darwin with the Australian interstate rail network in South Australia. In total, Genesee and Wyoming operates 111 railroads organized in 11 regions, owns or leases more than 15,000 miles of track and has approximately 2,500 additional miles under track access arrangements. One of the most important railroads, for purposes of this article, is the Buffalo and Pittsburgh Railroad.
(Buffalo & Pittsburgh - Penn Hills, VA)
As an aside, every year since 2010, The Buffalo & Pittsburgh Railroad has been awarded the E.H. Harriman Gold Award for best safety performance of any U.S. railroad between 250,000 and four million man-hours. It has also received at least three ASLRRA President's Awards for best safety performance and most injury-free man-hours of a short line railroad.
Overview of Operations - Ohio, Pennsylvania, and New York
In total, Genesee and Wyoming owns 15 short line railroads operated in the region. These range from the itty bitty 6 mile Mahoning Valley and Aliquippa & Ohio River Railroads to the much larger Columbus & Ohio River and Buffalo & Pittsburgh Railroads. Most of these lines run directly through important development areas of the Utica shale, and most of the Marcellus share region.
Genesee and Wyoming is proactively prospecting the energy industry as an emerging market segment. Important services provided by the company far exceed just riding rail cars from point A to point B. The company provides railcar switching and storage, and has already expanded capacity to accommodate drilling related business. Genesee and Wyoming also provides key transload locations in places like Erie, Buffalo and Rochester, with connections to CSX, Canadian National, Canadian Pacific, and Norfolk Southern.
Each of the company's transload partners listed above is accessed through it's Buffalo and Pittsburgh Railroad. In addition, the Buffalo and Pittsburgh runs directly through Warren Pennsylvania, home of United Refining's 70 thousand barrel per day facility and Bradford Pennsylvania, home of American Refining Group's 5 unit facility. All combined, the Buffalo and Pittsburgh, and thus Genesee and Wyoming, are primed from growth as production from the Marcellus and Utica grow.
Marcellus and Utica Outlook
Estimates from exploration and production in the Marcellus and Utica are extremely promising.
Growth in natural gas liquids (NGL) are expected to rise from less than 200Mb/p to more than 400 Mb/d over the next two years. This is expected because exploration and development in the wet regions currently provide a better return on investment.
(click to enlarge)
Natural gas production is expected to grow at a slightly lower rate, from approximately 2.75 Bcf/d to almost 4 Bcf/d by 2016. However, this is based upon current expectations of natural gas prices and processing capabilities at existing planned cracking facilities like the one Shell Global (RDS.A RDS.B) is developing in Beaver County Pennsylvania.
Based upon the current economic conditions in the region, and the promising outlook for development in the Marcellus and Utica shale, Genesee and Wyoming is positioned to benefit through its existing short line railroads.
Other opportunities for growth and development exist for the company, through lines like the Columbus and Ohio River Railroad, and in other geophysical regions outside the Marcellus and Utica. These include port operations in the Netherlands and Belgium as a European recovery take hold, and the interstate rail system in Australia. However, these opportunities are outside the scope of this article, and may be covered in future articles, depending on reader interest.