by Travis Johnson, Stock Gumshoe | October 22, 2013 2:49 pm
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.
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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