Crude oil, liquid petroleum gas, and petroleum products combined to account for 22% of the UP chemical carloads in Q4 2015. The entire chemical category was 18% of UP revenue in Q4 2015.
Most U.S. refining is done in the Gulf but almost none of that oil arrives by rail. There are some fracking areas like North Dakota where production exceeds pipeline capacity such that rail is needed. However, an April 2014 Forbes article explains that the overall role of rail with respect to oil and petroleum products across the country is relatively small:
In the U.S., 70% of crude oil and petroleum products are shipped by pipeline. 23% of oil shipments are on tankers and barges over water. Trucking only accounts for 4% of shipments, and rail for a mere 3%. In Canada, it's even more lopsided. Almost all (97%) of natural gas and petroleum products are transported by pipelines (Canadian Energy Pipeline Association).
Crude by rail movement is down with low oil prices and we can look at the AAR weekly carload numbers to see the extent of the decline. It is important to understand what other numbers are mixed with crude oil when looking at AAR reports.
We use the following abbreviations:
Union Pacific (NYSE:UNP): UP
Burlington Northern Santa Fe (BRK.A, BRK.B): BNSF
Norfolk Southern (NYSE:NSC): NS
Liquid Petroleum Gas: LPG
7% of 2015 Q4 UP chemical carloads were crude oil. It wasn't long ago when crude oil made up 17% of UP chemical carloads in 2013 Q1. That was when UP moved a large amount of Bakken oil to parts of the Gulf like St. James, Louisiana. Since that time the East Coast has become by far the largest recipient of Bakken crude by rail.
The November 2015 AAR U.S. Rail Crude document says that the average U.S. rail carload of crude oil today contains about 725 barrels of oil and we know each barrel contains about 42 gallons.
Canada is by far the most important country for U.S. oil imports and almost all the Canadian oil coming into the U.S. arrives in the Midwest via pipeline. Saudi Arabia, Mexico, and Venezuela are important oil sources as well.
The key areas for domestic crude oil production are Texas, North Dakota, California, Alaska, Oklahoma, and the Federal Gulf of Mexico. The high volume fracking areas are Bakken in North Dakota along with Permian Basin and Eagle Ford in Texas. Pipelines are the preferred mode for moving oil over land but there are areas like North Dakota where production exceeds pipeline capacity and rail provides some flexibility.
It is important to have an understanding of Petroleum Administration for Defense District [PADD] areas when looking at U.S. Energy Information Administration [EIA] data. PADD 1 is the East Coast area and the districts increase in number as they move west all the way to PADD 5 on the West Coast. Here are 2014 crude rail movements by rail by PADD from the EIA:
The above EIA link shows maps for earlier years going back to 2010. It is worthwhile to look at these past years for a minute in order to see how volume movements changed from 2010 to 2014.
Looking at UP crude oil by quarter based on the quarterly earnings slides, we see that the record days of 2013 are well behind us:
The main reason for the above decline is that Gulf refineries are now getting more crude from places like Eagle Ford and Permian Basin instead of crude by rail from the Bakken.
The drop in Q3 and Q4 2013 carloads in the graph above is explained in the 2013 UP fact book:
While crude oil shipments were up 19 percent for the full year versus 2012, volumes declined in the second half of the year as an increased supply of crude oil and new pipeline infrastructure in the Gulf Coast led to a decline in shipments from West Texas and Oklahoma. Second half volumes were also adversely impacted by the discount of Louisiana Light Sweet crude to Brent crude which displaced some Bakken shipments away from the Gulf to the East and West Coasts.
The 2014 fact book explains why the 2014 numbers in the graph above remained lower than the first half of 2013:
However, we do not expect to see much growth for the UP network over the next few years as the Bakken volumes are apt to continue to shift away from the Gulf to higher margin markets, and Canadian and Niobrara volumes are unlikely to grow quickly enough to backfill that loss.
The September 16, 2015 UP Presentation shows UP crude oil by shale through the first half of 2015 such that we are able to see the importance of Bakken and Niobrara:
The first half drop off for 2015 was drastic, especially with Bakken. 2015 ended with just 90,000 carloads of crude oil which was a 37% decline from 2014.
The NS Sustainability Report shows a different trend with respect to 2014 than the above UP numbers. NS went from 75,300 crude oil carloads in 2013 up to 102,000 in 2014 while UP decreased.
The AAR reported that crude oil movement by Class I railroads was negligible before fracking in North Dakota. The growth in terms of originating carloads between 2011 and 2014 was staggering. There were under 75,000 carloads in 2011, over 225,000 in 2012, over 400,000 in 2013, and 493,146 in 2014. The 2015 numbers are well down from 2014's record.
Petroleum Products and Liquid Petroleum Gases
15% of 2015 Q4 UP chemical carloads were LPG and Petroleum Products.
Argus Media lists Q4 2014 carloads of liquefied petroleum gases including propane and butane:
BNSF: 26,228 carloads
CSX (NASDAQ:CSX): 15,619 carloads
*UP: 14,932 carloads
NS: 13,099 carloads
*The UP 2015 Q4 earnings slide shows Q4 LPG carloads for both 2014 and 2015. They have 17,600 carloads for Q4 2014 meaning the above Argus Media classified differently and/or understated.
It was mentioned in the Q4 2015 earnings call that propane/propylene and butane did well while other categories under petroleum products such as residual fuel oil struggled.
AAR Carloads of Petroleum Products
As we saw above, UP separates crude oil from LPG and petroleum products in their earnings slides. However, these carloads are all lumped together in the "Petroleum Products" line of the weekly AAR carload reports. UP Investor Relations Manager Tony Dowling clarified that all the crude oil and LPG go in the "Petroleum Products" AAR line along with the majority of the petroleum products. However, a small number of petroleum product carloads go in the "Chemicals" line of the AAR reports.
Knowing that crude oil makes up a large part of the "Petroleum Products" line in the AAR weekly carload reports, we see UP's crude oil decline from 2013 in their yellow line below:
*I couldn't find NS AAR "Petroleum Products" numbers for 2011.
*The ending dates for the AAR numbers above were 12-31-2011, 12-29-2012, 12-28-2013, 01-03-2015, and 01-02-2016.
*Again, crude oil carloads are not the only part of AAR "Petroleum Products" but they play a big role.
The percentage of crude oil in the "Petroleum Products" carload numbers above varies from year to year. For example, an August 2014 EIA report cited AAR numbers saying crude oil was only 3% of the category in 2009 but it made up more than half of the category in the first half of 2014. It varies by rail as well. Looking at UP for 2011, 2012, 2013, 2014, and 2015, their percentages of crude oil were 22%, 51%, 53%, 49%, and 38% respectively.
The railroads east of the Mississippi saw increases when comparing 2014 to 2015 petroleum carloads while the railroads west of the Mississippi saw decreases. Much of this is because Bakken crude that used to go towards the Gulf via BNSF and UP went to the East Coast instead.
Oil prices were very low in January 2016 and we see that less oil was moved by rail in the first 4 weeks of January 2016 compared to January 2015:
NS Petroleum Products fell from 17,096 carloads for the first 4 weeks of 2015 to 15,696 carloads for the first 4 weeks of 2016 for a drop of 8.2%.
UP fell from 20,264 to 18,262 for a drop of 10%.
CSX fell from 19,206 to 16,960 for an 11.7% drop.
BNSF collapsed from 43,029 to 32,329 for a 24.9% drop.
*Again, there is more than just oil in the carload numbers above but oil makes up a large percentage.
Special thanks to Bob Gallamore, Joanne Shore, Mindi Farber-Deanda, Erika Coombs, and Tony Dowling for their help with my research.
Disclosure: I am/we are long UNP, BRK.A, 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.
Additional disclosure: Any material in this article should not be relied on as a formal investment recommendation.