Kinder Morgan Energy Partners LP (KMP), Enbridge Energy Partners, L.P. (EEP), Union Pacific Corporation (UNP): Do Rails Trump Pipelines?

While the party lasts

On the other hand, stocks of railroad companies such as Union Pacific (NYSE:UNP) are surging, as it has become clear that they are the winners, at least in the short term. More than half the oil produced in the prolific Bakken Shale in North Dakota is transported through rails, as the pipeline capacity is just not there.

Union Pacific has surged 15% over the quarter. The company does not provide a break-down of its profits, but it is not difficult to see that better rates for transporting Bakken crude shipments is one factor behind the 10.9 % growth in net profits during the latest quarter. In January 2013, the company signed a five-year contract with Phillips 66 (NYSE:PSX) to deliver crude oil from the Bakken region to Phillips 66 (NYSE:PSX)’s Bayway, N.J. refinery. In line with its improving finances, the stock has also advanced. Nevertheless, its forward price-earnings ratio of 14.5, coupled with a low gearing of just 0.5 means there is a lot more to come.

The Foolish bottom line

Rail shipping is more costly than using pipelines, but transporting crude oil by rail offers shippers and consumers more flexibility as the infrastructure is already in place. It is essentially a stopgap measure, but until enough pipeline capacity is installed, companies such as Global Partners stand to benefit. Given the significant cost benefits pipelines offer over railroad transportation, there is no denying that prospects of pipeline companies are bright. However, the long-drawn requirements of pipelines such as 20-year contracts swing the short-term balance in favor of railroad companies.

The article Kinder Morgan, Enbridge, Union Pacific: Do Rails Trump Pipelines? originally appeared on Fool.com.

Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.