Warren Buffett’s Burlington Northern Santa Fe railroad and Union Pacific Corp. are combating a drop in coal cargoes by catering to the industry responsible: the hydraulic fracturing of shale formations.
BNSF, Union Pacific and their peers are hauling in energy producers’ gear to extract crude oil and gas from shale, then shipping out petroleum products. BNSF’s petroleum carloads rose 75 percent in the second quarter from a year earlier while Union Pacific saw a 12 percent gain in the unit where it groups fracking-related freight.
“This is a whole industry that just sprung up on all the rail properties,” Jeffrey Kauffman, an analyst at Sterne Agee & Leach Inc., said. “It’s a new growth source that helps to mitigate what’s probably a temporary dislocation of an old energy source.”
The dislocation has come with a hefty cost, as many North American utilities stopped generating power from coal in favor of cheaper natural gas released by fracking. Coal cargoes at Class Irailroads, North America’s largest, dropped 11 percent in the second quarter. Neither Union Pacific’s chemicals segment nor BNSF’s petroleum shipments rival their coal volumes.
“The shale opportunity has been a double-edged sword for the rails,” said Ben Hartford, a Robert W. Baird & Co. analyst in Milwaukee. “The abundance of natural gas domestically has pressured prices, and the resulting degradation to the coal demand has been palpable.”
Union Pacific’s shale business will probably grow to almost 400,000 carloads in 2012, Chief Executive Officer Jack Koraleski said. That’s roughly double the number of carloads the Omaha, Neb.-based company moved from the Bakken shale formation in the northern United States in 2011.
“While the coal business, which is our largest book of business, has softened, we’ve been able to offset that with strength in crude oil, in frack sand, in automobiles, in pipes and domestic intermodal,” Koraleski said.
The trend holds across the industry.
Petroleum-productshipments at major U.S. railroads have gained 40 percent this year from the same period in 2011, while coal cargoes have dropped 9.6 percent, according to a report by the Association of American Railroads.
BNSF and Union Pacific transport most of their Bakken region crude shipments to Oklahoma, California, Louisiana, New Mexico and Texas. The companies are more insulated from risk associated with the abundance of natural gas than eastern rails since coal in the Powder River Basin of Wyoming and Montana costs less to mine than in the Appalachian region.
Union Pacific, the biggest North American railroad, lacks direct access to the Bakken shale oil field. It benefits from interchanges with traffic originated by BNSF and Canadian Pacific Railway Ltd. bound for Louisiana and Texas terminals.
The largest contiguous oil deposit in the continental United States, the Bakken includes parts of North Dakota, South Dakota and Montana in the United States and Saskatchewan and Manitoba in Canada.
Business, Pages 52 on 08/05/2012