What are those “Movable Pipelines” that might hand us “a small fortune?”

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Want to know what those “Movable Pipelines” are that are being teased by the folks at Contrarian Profits? So did we … here’s how they teased the idea in their recent ad:

“The $5.8 Billion Reason the U.S. Government May Never Approve Another Pipeline…

“So much American oil is flowing out of the ground there aren’t enough pipelines to move it all. And the government takes years to approve more construction. Fed up, Big Oil is increasingly turning to a new, more lucrative way to ship oil. It’s five times faster than a pipeline, it takes days, not years, to set up – and it doesn’t need special approval.

“This breakthrough could make pipelines obsolete…

“And hand you a small fortune in the process.”

Sounds good, right?

Now, they don’t keep it a “deep, dark secret” forever — and you could probably figure out the “big picture” part yourself with no problem anyway, the “movable pipeline” is made up of rail cars.

This is something that’s been teased a few times before, and the big driving force behind the increased use of rail cars in the transportation of crude oil is really North Dakota — a place with a fine rail infrastructure (thanks, agriculture!) but not much pipeline capacity to take up all those millions of barrels flowing out of the Bakken Shale.

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And it’s also a big part of the reason why Warren Buffett’s 2009 purchase of the Burlington Northern Santa Fe railroad, a seemingly risky and rare deal Berkshire Hathaway made to buy a public company at a premium price, turned out to be so brilliant — BNSF is transporting a lot of that oil, and it so happens that Berkshire also (separately) bought one of the major builders of tanker railcars which are, not surprisingly, also in very high demand (that’s Union Tank Car, part of the Marmon group of companies that Buffett bought control of in 2008).

So the stories have flowed about these railcar companies and railroads several times in the Gumshoe teaser Universe over the last couple years — but it’s been a few months since we saw one of these pitched, so it seemed a good time to have a look. Last time we hit this topic, if memory serves, was back in January when John Mauldin was launching his Yield Shark newsletter with a pitch for “Fiscal Cliff Winners” — remember when we thought the Fiscal Cliff was the worst thing that could happen? Ah, those were the days … Mauldin at the time was teasing American Railcar Industries (ARII), by the way, which had a nice run early in the year from $30 ($35 when Mauldin pitched it) to $45 or so and is now back at $40.

What’s the stock being pitched this time by Brett Owens? He’s selling his Contrarian Advantage newsletter, which I think is a new “entry level” letter from Contrarian Profits (they’ve changed their name so many times it’s a bit hard to keep track), and here’s how he teases the pick:

“You’ve might’ve heard about the Keystone XL pipeline… the paperwork still sits on President Obama’s desk.

“He says he’ll make a decision by the end of the year, but even then, it will take another two years to build.

“The lost time could mean billions in missed oil revenue.

“But here’s the thing…

“It doesn’t matter anymore.

“North Dakota no longer needs the pipeline….

“Enbridge’s $2.5 billion Sandpiper pipeline, designed to move more crude out of the Bakken, has met with difficulties.

“One potential customer told the U.S. Federal Energy Regulatory Commission that Sandpiper’s capacity ‘was not necessary in view of… pipeline alternatives.’

“Kinder Morgan, a major player in the pipeline business, already canceled a $2 billion project to build a pipeline from West Texas to California….

“The shocking truth is the U.S. government may never have to approve another pipeline again.

“That’s because pipelines are rapidly becoming obsolete. They’re no longer the most effective way to move oil across the U.S.”

So that’s the basic pitch for the “Movable Pipelines,” which are, of course, railways — and here’s a bit more in case you’re not hyped up enough about the opportunity:

“In just under two years, the amount of North Dakota oil traveling by “moveable pipeline” has increased tenfold.

“These days, nearly 75% of the oil produced in North Dakota leaves the state by “moveable pipeline.”

“That’s more than 800,000 barrels per day…

“More than the Keystone XL pipeline was designed to carry.

“Thanks in part to ‘moveable pipelines,’ North Dakota just passed Alaska to become the second-largest oil-producing state in the U.S.

“Texas remains No. 1, and it’s started to take full advantage of ‘moveable pipeline’ technology as well.

“That’s why a number of Texas pipeline projects have been canceled or delayed – the oil meant for these pipelines is already being shipped by ‘moveable pipeline.’”

And there’s more that I won’t force you to read your way through — chatter about how pipelines are not only difficult to build and inflexible but also old and leaky and hard to monitor.

All of this has clearly been a boon for the railroad companies, which as of the mid-2000s were, in most cases, quite dependent on coal shipments for a large part of their revenue. And Owens goes on to mention that Warren Buffett connection as well (when in doubt, mention how your idea is similar to Warren Buffett’s idea — that never, ever hurts in the investment newsletter world), and then finally gets around to teasing his specific idea:

“Right now, you have a chance to buy while they’re still cheap…

“There’s one company I’m particularly excited about.

“See, the companies that supply ‘moveable pipelines’ already have a 2.5-year backlog.

“One small Dallas supplier, in particular, is booming.

“In fact, some estimates say it has $5.1 billion in revenue already booked for the next two years.

“But its price-to-earnings ratio is barely 12 – phenomenally low for a company with that much cash and a cheap share price.

“So far, it’s attracted the attention of only the most dedicated market watchers.

“I believe that will change before the end of the year.

“The amazing story of this company’s future earnings will reach the general market. And that could send the stock skyrocketing.

“I’m talking about potentially doubling your money before the end of the year.”

OK … so, hoodat?

Well, even before I got around to reading this ad or listening to the “presentation” an alert reader sent in his suggested answer for us, so we’re going to go democratic here and share this in his words — his name is Bruce, in case you’re curious, and this is what he said:

“I’m about 99% certain that the company being teased is Trinity Industries, Inc. (TRN).

“Owens provides a song and dance about ‘Moveable Pipelines’ for shipping petroleum products from remote areas (like the Bakken oil field) to places like the East Coast (like the Washington-Boston metroplex). Of course, the Moveable Pipelines are trains. He goes on to explain that Bakken oil is a major reason why Warren Buffett’s Berkshire Hathaway Inc. bought the BNSF railroad. That purchase was not just about Bakken oil, but low-sulfur coal from Wyoming, being shipped to midwest and eastern electric utilities.

“Owens doesn’t advocate buying stock in a railroad (Warren Buffett beat us to that punch, buying all of the most relevant major railroad). Owens suggests buying the company that builds railroad cars. The clues just scream Trinity Industries, Inc (TRN). P/E of 12 (As of this morning it’s 12.22). Headquartered in Dallas (Yup). Small[ish] (Market cap of $3.6B). Yes, TRN pays a dividend (1.3%). And the share price for TRN is up 30% YTD. My wife and I hold shares of TRN. We’ll probably maintain that position for a while. And Union Pacific Corp (UNP), the closest thing to a competitor to Buffett’s BNSP railroad.”

And Bruce is right, this is Trinity — which is not a “pure play” on railcars or tanker cars. American Railcar (ARII) is a bit more dependent on tanker cars, as is their former takeover target Greenbrier (GBX), but Trinity Industries does get more than half of their revenue from rail businesses (railcar manufacturing, with tanker cars being the biggest demand driver now, as well as component and coupling manufacturing and management and leasing of railcars). They also build barges, windmill towers, and other steel stuff for construction customers (like guardrails for highways). You can see their latest investor presentation here if you’re curious.

Train transport is not cheaper than pipelines on an operating basis, for sure, and you can argue whether it’s safer given the aging pipeline system and the leaks that crop up now and then weighed against the occasional railroad accidents which, when they involve hundreds of tanker cars filled with flammable fuel, can cause serious damage (like the recent accidents in Alberta a few days ago and in Quebec earlier in the Summer). I expect we’ll continue to see more and more oil and perhaps even LNG shipment by rail, given the difficulty in getting pipeline capacity to where it needs to be with shifting production and consumption centers, but it’s by no means a “gimme” that trains are safer or more sustainable as an option than pipelines — and there could be backlashes following these types of accidents that make the transport more difficult or slower or less profitable in some way. I’ve seen industry estimates that train transport is about three times more expensive than pipelines, and about three times more dangerous (in terms of spill potential and/or lives lost), but these days pretty much all the press flacks are focused on singleminded pitches for or against the Keystone XL pipeline, so most likely both sides are exaggerating.

The easy choices for an investment play on “movable pipelines” that I’m aware of are Trinity (TRN), American Railcar (ARII), Berkshire Hathaway (BRK-B), and Greenbrier (GBX), and there may be others that I’m unaware of. ARII is controlled by Carl Icahn, and tried last year to take over Greenbrier to build a larger industry player but was rebuffed. All are reasonably valued, I’d argue, and I don’t know the ins and outs of them well enough to tell you that TRN is better than ARII or vice versa, though ARII looks on the surface like it’s a bit cheaper and I’m cheered by their much lower debt level. I’ve personally been happy holding Berkshire Hathaway for my exposure to this particular business (Burlington Northern and the other railroad investments like Union Tank Car could easily be considered to make up roughly 25-30% of Berkshire Hathaway’s value now, in my estimation), I last added to my Berkshire Hathaway holdings at about $111 last month.

All of the direct plays on railcar manufacturing are trading at pretty low valuations mostly in the 10-12 PE neighborhood, arguably because there’s concern about a glut or about this “gravy train” of demand for tanker cars ebbing in the years to come — I don’t know if demand will slow down in the future, but Trinity did indeed report having a $5.1 billion backlog as of their last quarter and that’s almost a year and a half of revenue for them at the current run rate, and they raised their guidance last time they reported, which tells me that railcar demand has not started to wither just yet.

So if you like TRN like Contrarian Advantage (and like our reader Bruce), or ARII like Carl Icahn, or something else in this neighborhood, let us know with a comment below.


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43 Responses to What are those “Movable Pipelines” that might hand us “a small fortune?”


    • You’re better off buying Canadian gold mining companies like Yamana Gold. Currently $8 a share. For a minor miner, buy Timmins Gold currently at $1 per share.

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    • I owned CNI for a long time then sorry I sold it. The oler idea that railroads are the way to go seemed ancient to me now I’m not so sure. With OBAMA hating Keystone we have 4 years to see how the Railroad play turns ot. He is a joke when it comes to the real world of oil and gas being a left wing ideolog bent on having dead eagles all over the place from the wind turbines but that being said. I am so in a flux about the transportaton part of my portfolio. Maybe I’ll just do what Travis did and buy Birkshire Hathaway and let a real businessman decide what will be profitable. Because I am a real American that actually LIKES profit and thinks its good to be independant I find that with this current adminsitratoion a real downer on anything related to capitalism. WI don’t usually get political with investing but there is a real hatred for anything to do with business in this WH > He has in my opinion made it difficult to invest without the worry of what the government will do to investors next. It’s not enough we have to worry about the markets, we have to worry what he is going to do to us or say on a daily basis that COULD tank them

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  1. operating costs for rail may be higher for rail but the capital costs for pipelines are huge. Don’t just count the cost of laying the pipeline which is billions, the shippers have to commit to contributing their portion of the fill. That’s right to reserve capacity on a new pipeline you have to contribute a proportionate share of oil. Enbridge’s Alberta Clipper pipeline took 6 million barrels to fill before any oil emerged out the end. That fill represented another 2/3rds of a Billion dollars in capital that the oil companies using the pipeline had to tie up for as long as they use the pipeline.

    In addition for the Keystone to ship DilBit, the industry name for the Oil Sands crude (Diluted Bitumen) they have to add 30% diluent (mostly condensates from wet gas) to get the gooey tar sand oil to flow. Once the DilBit makes it to the refinery the diluent is extracted and has to be shipped back to the head end of the pipeline to be reused. So my 800,000 Bbl/day pipeline now only really carries 560,000 Bbl/day of crude and I have to backhaul 240,000 Bbl/day of diluent. So my operating cost is not so easy to compare anymore. My rough calculation is an operating cost of $7.40 per barrel of actual crude coming out the end of the Keystone (loading in the overhead of shipping the diluent and backhauling the diluent) compared to unit train costs that are in the neighborhood of $8.75+ per barrel (with no diluent). With much much lower capital costs. And I can buy a lot of heated rail cars just for the cost of my fill contribution. The Keystone is not economical compared to rail and anyone building heated rail cars is going to have a very good couple of years.

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  2. CJ asked about Canadian National Railway (Stock ticker CNI; railroad reporting marks CN). My wife and I did own a few shares of CNI, but we closed that position a few months ago — CNI was making money for us, but we thought we could find a more promising home for that money. I’m still following CNI stock, And I still like CNI. CN serves Canada from the Atlantic to the Pacific, and it also connects Canada to the Gulf of Mexico through subsidiaries in USA.
    In terms of the location of their main east-west railroad lines west of Winnipeg, CNI is further north than the Canadian Pacific (Stock ticker and reporting marks CP). That gives CNI a geographic advantage for petroleum found in northern Alberta and northeastern British Columbia. On the other hand, CP has a geographic advantage for petroleum found in the Canadian portion of the Bakken oil field. I have been following CP for several years, but according to some of the other criteria I use for purchases and sales, CP doesn’t measure up to CNI. We’ve never owned CP stock.

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  3. Bought TRN in July when it was down around $34.00. Everytime I drive from Dallas to Houston, I would see their railcars all over the place going through Ferris. Got curious enough to study up on them. Have been pleased so far. Hope this guy is right about them going up more.

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  4. I wonder if Berkshire-Hathaway greased the O’Bummer Adm. to delay the Keystone.
    Naa this is the most transparent Administration ever–O’Bummer said so-it must be True.

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  5. Movable pipelines and floating pipelines obviously mean railroads and barge lines.
    I agree that TRN is one stock being touted but which barge lines could be involved..
    Would need connection to Bakken Or Alberta in some way. Mississippi line from KC
    to New Orleans could fill bill for transport to Louisiana ,Gulf refineries. Any thoughts?
    Water transport least cost going per ton/mile

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  6. By the way… Gunderson part of Greenbrier group is fairly small but growing & is based in
    Oregon for Columbia river system & west coast transport. California is finding huge oil
    fields if they can be developed under current political climate.

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  7. Great post guys. I listened to the promo video by Owens. He also banged on about a little known enrgy source that he says is set to soar too. Any one have any ideas which energy he is talking about? He said it wasn’t coal, wind, solar, gas or oil.

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    • Australia Pacific LNG and Ichthys LNG projects in Australia, the officials said.

      Kansai Electric has a 20-year supply agreement to import 1 million mt/year of coalbed methane-based LNG from the APLNG project from 2016, and it has a 15-year contract to buy 800,000 mt/year of LNG from 2017 from the Ichthys project, both on a FOB basis.

      In September 2008, Kansai Electric gained the 145,000 cu m LNG Ebisu, which is also jointly owned with MOL, as its first LNG tanker dedicated mainly to its Pluto LNG supplies.

      Kansai Electric has a 15-year term contract to import 1.75 million-2 million mt/year of Pluto LNG, mainly on a FOB basis, including partial supplies on an ex-ship basis.
      Source: Platts

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      • The Project brings together a joint venture between three industry leaders in the fields of coal seam gas and liquefied natural gas production –
        Origin (37.5%), ConocoPhillips (37.5%) and Sinopec (25%).

        Like(0)

  8. I just sat through listening to Frank Curzio tell me about 43 small stocks that could earn up to 30% dividend, and he would like me pay $39 for the top three companies, any idea’s as to who they are?

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  9. Hey everyone! I’m “new to the shoe” and love it all so my here’s my first 2 cents worth,
    If your really interested in floating and movable or fixed pipeline plays, just invest and hold long term a power player like Quanta (PWR). I like there 3 year chart and there short term stuff too. I simply ask myself where do you think oil, LNG, shipping through the Panama Canal, etc. will be in three years? I bought in at the recent dip and have been up ever since.
    Thoughts? Comments?
    AU2U! ( or for you southerners AU 2 Y’all! )

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  10. Starting to see the “overcapacity” chatter more about these tank cars now, there have been some downgrades, here’s one from Raymond James, reported in Barron’s:

    “Risks outweigh the rewards in American Railcar (ticker: ARII), Trinity (TRN) and Greenbrier (GBX) at current valuation levels, in our opinion, with peak earnings this cycle likely either in 2014 or 2015 for most of the manufacturers. Top-line growth, margin expansion and earnings growth are all likely to be pressured as the tank cycle plateaus and nontank demand (which carries lower average selling prices and lower margins) picks up (we’ve already seen over the last couple of quarters). We expect the tank cycle to plateau as crude-by-rail demand eases (with an overbuild likely at some point) and more conventional tank-car demand picks back up.”

    Full note here: http://online.barrons.com/article/SB50001424053111904253404579211991387977638.html

    One more reason I’m happiest letting Warren Buffett be my railroad and tank car guy, though the stocks still aren’t necessarily expensive.

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  11. Beware of environmental issues as railcars area target of opportunity. In the PNW the tank cars have been routed adjacent to the Puget Sound on tracks that recently allowed a freight train to slide off the tracks and almost into the drink. A car carrying liquids would have been much more fluid.

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  12. This is a comment posted for BF on the way the figure of 8.75$ per barrel of crude oil transported via rail car. Does that figure include return freight cost for the rail car back to the origin of the oil source? If not it might understate the cost there of. Thank you for your clarification.

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  13. in reference to my Oct 22 comment – yes it could be barges for oil – but i was referencing to the activity happening in the ocean about a 300 miles north of Australia – a drill ship that has a gas well under it and can convert the gas to LNG on board, off load it to LNG carriers and ship it to Japan etc. – its the “floating pipeline” – the hull for the LNG conversion ship (some 1,600 ft. long) has been launched in South Korea Samsung shipyard – the ship called a FLNG is a joint venture led by Shell with INPEX and KOGAS – this has been in the news for sometime and looks interesting ????

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  14. Keystone will not be approved until Buffett tells Obama to. Remember how Buffet told the world he shouldn’t pay less taxes than his secretary on behalf of Obamas campaign and that the rich should pay more taxes. Buffet then bought his railroad and has made his fortune. Would one say ‘Quid Pro Quo’?

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