Berkshire Hathaway Inc. (NYSE:BRK.A)’s railroad holding, BNSF, is projected to currently have one of the largest exposures to the Bakken shale, controlling 82% of capacity for oil. However, the rail’s share of the Bakken is projected to peak in late 2014 as new pipelines are brought on line. In terms of revenue, BNSF only accounts for 12.82% of the overall company, as Berkshire Hathaway Inc. (NYSE:BRK.A) is highly diversified. Earnings for the overall company are expected to grow 5.88% from 2012 to 2014, and with a price-to-earnings ratio of 16.88, Berkshire Hathaway Inc. (NYSE:BRK.A) appears reasonably priced.
Kansas City Southern (NYSE:KSU) owns land near major refineries in Port Arthur, Texas, and is currently ironing out a deal to turn this land into a key terminal for northern crude, which could boost earnings by as much as $1 by 2015. Earnings for the company are expected to rise from $3.40 per share in 2012 to $6.10 per share by 2015, more than compensating for the price-to-earnings ratio of 28.76 the company presently carries.
CSX Corporation (NYSE:CSX) possesses significant exposure to eastern shale fields such as Utica and Marcellus, as well as the Bakken and Canada oil sands. Earnings generated by the company are projected to grow from $1.80 per share achieved in 2012 to $2.30 per share by 2015. At the moment, CSX Corporation (NYSE:CSX) carries the lowest price-to-earnings ratio in the pack, 12.83.
What are some factors that could reverse this trend? For one, a drop in oil prices could lead to US drillers cutting back on production, which would lead to a deterioration in the surplus of US oil, and in turn lessen the spread between WTI and Brent crude, making it no longer sensible for refineries to pay the premium fee associated with rails.
Moreover, a more widespread slowdown in the United States economy would lead to decreased shipment volumes of all products, as is expected.
The Foolish bottom line
The United States currently produces more oil than our pipelines can handle. Despite the fact that pipeline companies are tirelessly attempting to establish additional pipelines in fields across the United States, several years are required for construction, which is on top of strict environmental scrutiny. As long as the spread between WTI and Brent crude remains large, refineries will turn to the rails to transport the excess oil, presenting significant opportunity for the railroad companies to meet rising demand in a lucrative venture. The five companies covered possess exposure to potential growth derived from this market condition, and should benefit from this fundamental trend in the American economy.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article All Aboard the Rails in Search of Black Gold? originally appeared on Fool.com is written by Ryan Guenette.
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