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Did Buffett buy Railways because of Peak Oil?

|Includes: BNI, Berkshire Hathaway, Inc. Cl A (BRK.A), BRK.B

From long-term passion for model trains to stake-building of several years, Warren Buffett, the billionaire investor, has decided to acquire one of United States' largest freight railway firms, Burlington Northern Santa Fe (BNI), for $34 bn. Berkshire Hathaway INC., the company run by Buffett will pay $100 per share in cash and stock, the biggest ever deal for this company. BNSF is America's second highest-grossing freight railway company, with 220,000 freight cars. It is also one of the oldest railway companies founded in 1839 in Texas and covers about 32,000 miles.

 

Where is the value? The railroads are considered by many an ailing business. The decrepit US railroad system puts the US to shame compared to other advanced nations: Amtrack, the intercity passenger service in the US, is one of the slowest among the advanced nations. A comparison: the 393-mile journey from London to Edinburg takes four and a half hours. But in the US, the 40 mile Cardinal from New York to Charlottesville takes seven hours. No respectable speed trains in the US matches to France's TGV which has enabled passengers to affordably commute at 200mph for the last 30 years.
So at first glance it comes at a surprise that Buffett, known as value investor would invest so much in something perceived by many as having so little value. Well there is more than meets the eye.

 

Buffett sees little oil in the US futureThe 'Sage of Omaha' built, what we would like to call, an insurance empire. An empire built on guessing what is likely to happen and how likely it is to happen. Warren has an army of Math PhDs at his fingertip who study, analyze the world, run statistical simulations and provide insight on trends and things to come. Crunching numbers to figure out what is likely to happen to anyone is what the insurance companies do, and Buffett's insurance companies are some of the most profitable, meaning they tend to be more right than others.
So why would anyone with the cumulative intelligence of Buffett and his advisers buy a major stake in the decrepit US railroad system? Warren's move to buy this railroad is motivated by the following calculated bets:
  1. His awareness of the imminent oil crisis and his long term vision of what life will be like with oil shortages. Oil is on a roller-coaster ride. Demand is soaring, particularly from energy hungry economies like India and China. But production is decreasing with Peak oil, point where the maximum rate of oil extraction is reached, predicted in 2010 by the ASPO (Association for the Study of Peak Oil and Gas). If not 2010, as previously reported in Oil-Price.net many analysts believe that the oil peak would most certainly be achieved by 2020. This will cause serious adjustments in nations around the world and the US in particular.
  2. Buffett loves to buy companies with an unfair competitive advantage (read monopoly) over anyone else. BNSF was started in 1839 when land was plentiful and cheap. Back then and still today, trains travel mostly in a straight line and buying lined-up parcels of land, while trivial back then is impossible with today's population density. In other words, it is impossible for someone to start a new large-scale railway today. All railways that will ever exist already do. Creating new ones requires seizing properties on a large scale, politically unlikely to happen. Buffett bought a business with no competitor.
  3. Railways made the industrial revolution happen 150 years ago. Trains brought us the modern world as we know it before there were cars and trucks. When cars and trucks are not suitable anymore our civilization will revert to the last known modern means of tranportation, the train. As peak oil sends everyone scrambling for new energy sources, coal which once powered trains will rise again as a suitable fuel for heating and power generation. BNSF virtually has all the coal it needs in its own backyard: the Powder River Basin in the Rockies. 1/5th of all US coal is already being hauled by BNSF, representing 25% of the company's revenue.

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