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Berkshire Hathaway's (BRK.A) BNSF Railway Co. intends to invest $4.1B on capex this year in...
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Sunday, January 20, 7:01 AM ETBerkshire Hathaway's (BRK.A) BNSF Railway Co. intends to invest $4.1B on capex this year in order to handle increasing oil shipments from the Bakken shale formation, which is concentrated in North Dakota. BNSF's spending will include $2.3B on its core rail network and $1B on locomotive, freight car and equipment.
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"As a result, companies have made massive investments in oil-related rail infrastructure in the past three years, including a dozen oil-loading terminals that serve the Bakken alone. They include the Bakken Oil Express, a complex of four long loops of rail. This allows 100-car trains, more than a mile in length and usually entirely dedicated to oil, to coil around compactly as they pass a loading station.
"These are very substantial investments. We expect rail to be a player for a long time," said Steve Magness, the terminal's general manager.
BNSF Railway ships the bulk of oil out of the Williston Basin, which holds the Bakken formation. Over five years, the railroad saw oil shipments soar 7,000 percent, to 88.9 million barrels, the company reported in September. Union Pacific (UP) and Canadian National Railway are other major beneficiaries.
"The hot sexy thing right now is the energy business in North America," Bob Noorigian, a vice president at Canadian National Railway, recently told analysts.
Nobody seems more surprised at the fast growth than the railroads themselves. "We went from people thinking, 'That can't be,' to 'Let's give it a try,' to 'This is real. Let's really focus,' " Canadian National CEO Claude Mongeau told analysts."
I think rails are going to continue to be an interesting play, but the average investor really has to take a look at who benefits and who doesn't. I think with Canada working to try to pull together a large free trade agreement with the EU, I think Canadian National and Canadian Pacific stand to benefit on that, and Canadian National also stands to benefit from what's going on with energy.
Norfolk Southern and CSX are undervalued, but the story right now remains the ones focused on energy.
Any which way, in terms of inflation, the rails own a ton of hard assets.
So is there not a risk for the railroads that someone will improve the pipelines?
article: (Enbridge Losing Bakken Oil Business to Railroads, Refiner Says)
http://bloom.bg/U4JY5Q
The issue after all is not how much oil is potentially available, rather it is how much oil can be profitably extracted. On this basis , it is quite likely that today's euphoric estimates of future Bakken production are way off mark.
Its a fast decline in the first year, but then a more steady return slightly declining each year. Obviously it depends on the location, type of well etc.
Actually, drilling costs are coming down (at least for the companies I follow). Technology continues to improve, as does well design. And keep in mind that as the technology is improving they are able to extract more of the oil and gas thats in the formations.
Some of these plays will be producing long after I'm gone IMO.