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I previously wrote that I thought missing 3Q13 estimates and having FY14 estimates reduced played a major factor in Berkshire (NYSE:BRK.A) (NYSE:BRK.B) underperforming the overall market since late last summer. Another major factor has been the series of spectacular and tragic rail deployments and explosions involving crude oil, notably Bakken crude. I did not discuss it in my previous article, because it is very hard to parse out such a "perception" impact accurately. I had expected the impact was major, but recent events seem to confirm this impact has been even greater than I thought.

It has been obvious that this hurts BRK.A stock. Each time an explosion occurred, investors pointed out how much BNSF subsidiary had profited from shipping Bakken crude over the last two years. For those not tracking it closely, note that BNSF's stated volume of "petroleum" cars shipped roughly tripled from 1Q11 to 4Q13. I estimate about 8% of BNSF's revenue now comes from moving "petroleum."

As for confirmation of the impact on BRK.A stock, investors should notice movements in BRK.A when an oil refinery CEO speaks. Since January 29th refinery CEOs have spoken and made two things clear:

1. The refineries are adamant about continuing to use as much cheap Bakken crude as they can get, and they'll get it by rail as long as pipeline capacity is insufficient. The refiners call Bakken crude "advantaged," because it sells at a discount to both Brent from Europe and West Texas Intermediate (WTIC).

2. The cost of using a safer generation of rail-cars will be borne by the refineries and other buyers of crude, not by the railroads. There is a subtle, mostly unnoticed, further positive for Berkshire in that. Berkshire owns Marmon, a major producer of rail-cars. As rail-car owners upgrade their fleet to newer, safer designs, Marmon will sell some of those cars.

When Refiners Speak, BRK.A Moves

Since late January, at least four refiners have announced quarterly results and reinforced their commitments to crude-by-rail.

Date

Refiner Commenting

Daily BRK.A change

Daily S&P 500 change

January 29th

Phillips 66 (NYSE:PSX) & Valero Energy (NYSE:VLO)

-0.30%

-1.00%

February 6th

Tesoro (NYSE:TSO)

1.20%

1.20%

February 13th

PBF (NYSE:PBF)

1.20%

0.60%

Total of 3 Days

2.10%

0.80%

Total YTD Change

-3.20%

-0.60%

All Other Days

-5.30%

-1.40%

So, on these three days combined, BRK.A performed almost 3x better than the S&P 500, but on all the OTHER days in 2014 combined, BRK.A performed almost 4x worse than the S&P 500.

On January 29th, PSX reported earnings and held a conference call, which can be found here.

PSX management said:

b) "In April, we'll tell you how we (plan to) get advantaged crudes to the West Coast, it's a combination of investments and third-party. All options to California are on the table."

a) That they still intend to expand their crude by rail offloading capacity at refineries in Bayway NJ and Ferndale WA (Puget Sound). They expect Bayway to have 50,000 barrels/day (bpd) of additional capacity operational first half 2014. They expect Ferndale to have 30,000 (bpd) of additional capacity operational second half 2014.

Valero also announced on January 29th. Its call can be found here.

VLO is more focused on the Gulf Coast, it uses less light crude than the others and is not likely to be a big buyer of Bakken, so there was less discussion of the issues. However, there was good news. In response to a question about tighter regulations, VLO said "I don't see that this is going to have any impact on our plans to move crude by rail. … We now have some 6,000 cars under lease in the fleet and we would ... replace the cars that we have now under lease with the cars that we own (buy) and continue to use them (the older cars) for other services such as asphalt and ethanol, so not a lot of downside for our investment in the railcars."

On February 6th, TSO announced results and held a conference call, which can be found here.

TSO announced that "Tesoro Refining & Marketing has begun replacing older cars in its crude oil rail car fleet with post-October 2011 design, CPC 1232-compliant rail cars, after evaluating rail car safety features. Its rail car fleet will consist entirely of the newer DOT-111 design rail cars equipped with reinforced shields and relief devices by mid-2014." The CEO said 90% of TSO's fleet meet the latest design standards and in just the next few months TSO will replace the remaining 10% with cars that meet the standards. TSO receives up to 50,000 bpd of Bakken crude at its 120,000 bpd refinery in Anacortes, WA. TSO also committed to focus on rail car design with anyone who may ship crude oil into TSO facilities, including Anacortes and the Tesoro-Savage Energy Distribution Terminal under development in Vancouver, WA.

As for its Bakken demand, TSO said "Our focus is to bring midcontinent crudes (mainly Canadian and Bakken) into the Port of Vancouver to then supply our entire West Coast system wherever we get the greatest value for those. That will happen late 2014 or early 2015." In response to a question about using pipelines to get crude to the west coast, TSO said "We don't see anything encouraging now to be able to do that. There is a possibility you could opportunistically move crude from the Permian by rail into CA which we have taken some very small amount of that but we don't see from a pipeline standpoint today." So, not only isn't pipeline a threat for Bakken shipments to the west coast, but rail may be used to get WTIC there also. It seems BNSF could win much of that business, since it has a direct route from Amarillo and Lubbock to Los Angeles.

On February 13th, PBF reported earnings. Their conference call can be found here.

The Chairman said PBF "will rely entirely on newer railcars to move Bakken crude oil starting on April 1. … While we are expanding our rail operations, we are doing so with a keen focus on safety." Note the word "expanding." Some investors expected Bakken rail volumes to begin to decline. PBF executives said that by July they expect to have two rail offloading projects completed with capacity to unload 80,000 bpd of heavy crude, up from 40,000 bpd, and 120,000-130,000 bpd of light crude, up from 105,000 bpd. In a negative point for BNSF, PBF said it expects crude trains generally to move more slowly across the country as the overall supply chain comes under scrutiny. Having to run trains more slowly would raise BNSF's costs, and if they raise prices to match, they could hurt demand.

The bottom line is that the weight of tighter, maybe very tight, crude-by-rail regulations may lift from BNSF and BRK.A this year. It has been a heavy weight. Since the Lac-Megantic explosion in early July, the S&P 500 has outperformed BRK.A by about 1,200 basis points. But, since January 29th, refinery executives have been adamant about continuing to use as much cheap Bakken crude as they can get, and they made it clear that the cost of using a safer generation of rail-cars will be borne by the refineries and other buyers of crude, not by the railroads. On the days they did that, BRK.A performed almost 3x better than the S&P 500, but on all the OTHER days in 2014 combined, BRK.A performed almost 4x worse than the S&P 500. That bodes well for a nice snap-back in BRK.A when the weight definitively lifts.

Disclosure: I am long BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Weight Of Crude Oil Explosions May Be Lifting From Berkshire