Oil Via Rail Is The Bakken's Most Dangerous Friend
We all have a friendship that isn't necessarily healthy. For oil producers in the Bakken, it is becoming more and more apparent that oil via rail is one of those unhealthy friendships. Sure, companies like Continental Resources (NYSE: CLR ) , Hess (NYSE: HES ) , and Oasis Petroleum (NYSE: OAS ) have used oil via rail to move their product to places where it can get the best price, but recent accidents have made it more apparent that moving Bakken crude could be a dangerous dance that could lead to big issues. Let's take a look at why this is a very Bakken problem and what it could mean for the companies involved.
Unfortunately, moving Bakken oil via rail is proving to be a risky bet. In the past several months there have been three major train incidents that have resulted in oil fires. One in Lac Megantic, Quebec, one outside of Casselton, North Dakota, and another near the U.S. border in New Brunswick. Bakken crude is extremely light crude, so it is more volatile and thus more likely to catch fire in the event of an accident in comparison to other crudes such as bitumen from Canadian oil sands.
Sure, all companies that use rail will suffer, but Continental and Oasis would disproportionately suffer because they are so dependent on rail to move oil. If the two companies were to commit more of their oil to pipelines, they would take a small hit on realized prices, but reduce the risk of disrupting their takeaway capacity.
This could also be a very opportune time for pipeline companies such as Enbridge Energy Partners (NYSE: EEP ) and Plains All American (NYSE: PAA ) to increase their pipeline offerings in the region. Enbridge is currently running an open season for its 225,000 barrel per day Sandpiper pipeline that would transport oil from the Bakken to its mainline in Clearbrook, Monnesota. With oil via rail looking more vulnerable, Enbridge could even look to expand the capacity of that pipeline and lock in volumes for longer term contracts. (Link)
Full disclosure - I own stock in the following pipeline companies. While there's a good chance these stocks may appreciate in price, I bought them primarily for their yield (yearly yield at current stock prices indicated in parenthesis):
1. EPD (4.2%)
2. PAA (4.7%) - just bought a little more today @ $51/share
3. KMP (6.7%)
4. WPZ (7.0%, gas)
Note: I posted this for informational purposes only, nothing herein is to be taken as a recommendation to buy or sell any security. Investing in stocks may involve loss of part or all of the money you invested.
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Around this area we see Bakken crude pass by everyday (actually can look out my frontroom window and watch it go by, about 5 blocks away). After the latest incident in Casselton, people here are becoming more wary and asking some tough questions. I'm not sure what the answer is, but using antiquated rail systems to move such a volatile chemical is not a good idea.
Most high dividend payers have a slight pullback in stock price due to the probable upcoming raises in interest rates (when interest rates rise bonds become more appealing as they provide income with less risk-- so some money that now goes into dividend paying stocks goes into bonds instead in anticipation of higher rates).
IMO this pullback is a good buying opportunity to increase holdings of those I already own. I had intended to buy more CLMT, not a pipeline, (at current prices it pays out close to 10%/year!) but decided to go with slightly less risky PAA instead.
I missed the railroads, haven't looked at them. But in the interests of diversification, I would like to own one of these. Perhaps there will be a good pullback...
Just 5 blocks away? OMG!
Well, I don't know what the answer is. Technology in all areas is constantly improving, so my guess would be that sometime in the future , transport by both rail and pipeline will be made safer.
The problem, of course, is that sometimes that technology does not yet exist. But even when it does, it costs lots of money to replace/modify existing systems, so there's a reluctance to do it. Unfortunately its not usually improved until after a serious calamity (or a series of them) force the companies to spend the money to improve things.
(Given the huge amounts of money some of these companies are making, even if they spent a huge sum on improving infra-structure, they would still be doing quite well financially).
Friends that work forBurlington Northern railroad have been hearing internal discussion about upcoming improvements,,,improvements that shoulda been made sometime ago, but were not feeling the pressure to do so until Casselton. It's sad but true that most change doesn't come about unless the necessity to do so is pushed.
LOL!I'm more concernedaboutthe bison farm just outside of town. A couple of weeks ago a buddy and I went out and drank some beer, we stopped by the farm for a visit and I tried to pet one of these furry critters,,, the beast got upset and tried to trample me! Of all the nerve!
:~)
And when the pipeline bursts and thousands of gallons of this shit flows into the water supply. Than what!!!
I think it is safe to say that a pipeline would not have been a good idea this year . The extra cold weather would have likely caused big freezeup problems ...
Here is another one that just happened in Canada.
There's already a huge network of pipelines in existence. I wonder how they have avoided freezing and pipelines breaks so far this winter?
Just googled it. With oil they don't refer to a freezing point, but rather a "pour point". Hard to find a definitive answer, it seems it depends upon the grade and type of crude. But it seems most of it becomes very viscous at about -35 degrees F.
If they add something to keep it flowing at very low temperatures, they could probably keep it liquid far below any temperatures seen in North America. (?)
I once was chased by a Bison on a farm we visited.
He was delicious!