“Easy 519% Profits from Buffett’s Oil Monopoly”

How to profit from railroads moving Bakken crude following "Warren Buffett's $34 Billion Presidential BRIBE"

By Travis Johnson, Stock Gumshoe, January 28, 2013

There’s a good, blustery ad up from Brian Hicks and the folks at Angel Publishing about Warren Buffett and his insider connections …

… connections that have not only helped him make big, profitable deals for his shareholders (including yours truly, so thanks for that), but that have enabled him to drive government policy to further his own aims.

Now, that bit is controversial and speculative — and while I know billionaires have a lot more access and input in the halls of government than I do, I have no idea whether or not there was any backroom dealing. But it doesn’t really matter — the hype about Buffett whispering in Obama’s ear gets your attention (that’s the point, after all), but the big picture trend that’s being teased is real, at least for now, and perhaps we can make some money from it if Hicks and his analyst, Jeff Siegel, are correct.

As you can imagine, Siegel and Hicks would like you to subscribe to the Power Portfolio newsletter to learn more — that’s the letter that used to be called Green Chip Stocks, back when alternative energy was a positive buzzword in the stock market (I assume it will be again before too long, these things go in waves) and he was touting microcap alt energy stocks like New Energy Technologies (NENE) and US Geothermal (HTM). Now, it’s all about oil.

So let’s see what the story is behind the hype this time, shall we?

First, a taste of the spiel:

“Warren Buffett’s $34 Billion Presidential BRIBE

“How the world’s greatest investor bought his own set of legal loopholes that could earn him — and YOU — 519% gains in the coming months

“In early July 2010, Warren Buffett made a controversial telephone call to the White House.

“The world’s most prolific investor needed a favor.

“At the time, Obama’s Press Secretary, Robert Gibbs, said, ‘He wanted to come in and see the president, and you don’t turn down the opportunity to talk to Warren Buffett.’

“And it’s true…

“Even the president of the United States doesn’t say ‘no’ to the second-richest American — especially when there’s a deal to be cut.”

And the “deal” that Hicks says was cut by Obama and Buffett was … to kill the permits for the extension of the Keystone XL Pipeline that is intended to help move oil from Canada and North Dakota South to Oklahoma and then to refineries (or maybe someday even export facilities) on the Gulf Coast. Hicks is not the first one to suggest this, plenty of folks have noticed that Burlington Northern Santa Fe, the railroad Berkshire Hathaway bought about three years ago, is the dominant rail provider connecting North Dakota to the world, and is poised to move a lot of that crude oil via tank car if more pipeline capacity isn’t added — and the spiel that railroads are going to profit from Bakken crude and Canadian production increases, partly because of limited pipeline capacity, has been in the mainstream investing press quite a bit as well.

There was an article in Bloomberg about a year ago … as well as an updated article just last week about how railroads have cut into the business of existing pipelines in the area (rail transport is more expensive than pipelines, but far more flexible — so they can ship to places where demand is greater and prices higher). There’s more coverage here about Berkshire’s plan to invest more in BNSF to increase capacity to handle this crude, which is helping to make up for the lower coal shipments that main railroads have seen over the last year or so — and that article also touches on something we wrote about a week or two ago, the huge demand for tank cars that has been building for a couple years, and that happens to benefit another arm of Berkshire’s octopus (they own Union Tank Car, one of the major tank car builders).

So yes, it’s a big trend and a substantial story, and it doesn’t really matter whether you think Warren Buffett is engineering the death of the Keystone XL, or if it was just caution that slowed that down, or fears of oil pipeline spills (thanks in part to Enbridge’s recent big leak in Michigan), or pleas from non-Buffett Nebraskans to spare their aquifer.

It also doesn’t necessarily matter, for the next few years at least, whether you think the Keystone XL will eventually be built or not — my guess is that we’ll continue to add more pipeline capacity over time, despite complaints from anyone who lives near those pipelines, but it sounds like railroads are in a pretty good spot since the pipeline networks can never be quite as flexible as the rail network already is. Railways are really leveraging their far more extensive route networks to enable them to take advantage of the many location-dependent pricing inefficiencies we’ve read and written about over the last couple years in the energy markets (like the discount for Cushing oil vs. Brent oil, etc.) — and big industries like oil and gas extraction and pipeline construction require lots of rail hauling regardless of whether they haul 20% or 80% of the crude oil in ten years.

If you’ve gotten this far, then you’re probably guessing that the newsletter is teasing another railroad — they’re not hinting around about buying Berkshire Hathaway, of course. I own Berkshire shares (BRK-B — I own the B-shares, since I’m not in the private jet demographic just yet) and that’s still a great stock to buy on dips, in my humble opinion, but it’s no “pure play” on this crude transport demand from the Bakken (Burlington Northern recently has generated roughly a quarter of Berkshire’s profits, and is probably a bit less than a quarter of “net asset value” depending on how you calculate that).

What, then, is Brian Hicks teasing? Well, he says he has a lineup of picks to buy — and he teases that you can look forward to 519% gains if you buy in now …

“… we’re talking about a small group of stocks with significant upside. Given recent earnings growth for these companies, these stock prices should grow +20% a year… for the next 10 years.

“Most investors simply have no idea how bullish the outlook is for these stocks.

“Finally, there are above-average dividends involved that will juice your profits even higher. These are the kind of dividends that can shore up any retirement portfolio and create wealth for generations to come.

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“Plus, these dividends are prime candidates to get much bigger in the near future (I’ll show you why in a minute)…

“My research indicates this investment should easily turn an average of 25% every year for the next decade.

“Now, 25% gains over the course of 12 months may not sound like much… but if you can grow your money at that rate for 10 straight years, you’re talking about a 519% profit.

“And this will be one of the easiest and safest 519% gains you’ve ever seen (and these days, I’m sure you know that worry-free profits are worth their weight in gold).”

OK, so 519% sounds a lot sexier than “25% a year” … but still, 25% a year is great, and if you can do it at all consistently it’s beyond spectacular. Buffett has compounded the book value of Berkshire at just about 20% a year for almost 50 years, which is what built that billion-dollar fortune (though that is after seeing annual returns decline a bit as the company grew, the average would have been substantially higher if you calculated it 15 years ago).

And this sounds like it’s almost an industry-wide bet, probably suggesting several of the big railroad stocks (there aren’t that many of them), but he does say he has one favorite and he uses another part of the energy business to tease that specific stock:

“Every natural gas well in America that uses hydraulic fracturing, or fracking, requires between 3,000 and 10,000 tons of sand. And 13,000 new shale gas wells are drilled every year.

“Just a couple weeks ago, the Minneapolis Star-Tribune said: ‘Hydraulic fracturing — the oil drilling technique widely known as ‘fracking’ — has created a major new business for railroads, because each horizontal well requires between 3,000 and 10,000 tons of sand.’ …

“One railroad has already seen a 265% increase in fracking sand shipments in the last 24 months. This company is investing millions to open up new tracks in Wisconsin and Minnesota to get even more sand to market.

“And with 60 new sand mines coming online, this railroad will be plenty busy…

“I’ve selected this particular company as the Top Rated Railroad Stock in the Special Report, ‘Easy 519% Profits from Buffett’s Oil Monopoly.’

“This company will see its revenues, profits, and stocks prices shoot higher as it supplies high-growth natural gas fields like the Marcellus in the Northeastern U.S…..

“… this railroad is the only other company servicing North Dakota’s Bakken — the very same oil field that’s pushing profits of Buffett’s railroad higher.

“Fox News says this company’s Bakken shipments have ‘… surged 2,500% since 2009, to 8.5 million barrels per year. The company expects to move 45 million barrels per year within the decade.’

“With growth like that, it’s easy to see why I say your profits will be safe and easy.”

So which one is the “top rated railroad stock” in this special report? Thinkolator says it must be Union Pacific (UNP), which is the biggest and arguably the most expensive of the major US railroads — and also the one that has a strong position in that sand shipping, and a secondary position behind Burlington Northern in North Dakota. The slightly smaller ones, CSX (CSX), Kansas City Southern (KSU) and Norfolk Southern (NSC), are still big companies ($10-20+ billion market cap each), and with the exception of KSU they’re not valued quite as high — largely because they depend a bit more on different volume drivers (like coal for CSX, or intermodal and Mexican trade for KSU) and have less exposure to these growth markets, though everyone seems to be buying plenty of tank cars.

The other railroads are really talking up their oil transport capacity in many cases, since that’s what investors want to hear in the conference calls after they’ve been warned about coal mine shutdowns in Appalachia … but KSU is a Southern US-Mexico railroad and both CSX and NSC have routes that are almost entirely east of the Mississippi and focused largely on the industrial midwest and the East Coast coal mines and ports. UNP and BNSF have been the big midwest grain carriers in the past, and are the companies with North Dakota and Western exposure now, but all of the railways are diversified across major intermodal, commodities, and manufactured goods (like autos) shipping to some degree, and they are all constrained to some degree by rights of way and regional route networks that were put together and designed for flows of trade 50 or 100 years ago. They’re a lot more efficient and less flexible than trucks, and a lot less efficient and more flexible than pipelines.

And frankly, they’re all doing pretty well right now. You can also add in the two major Canadian railroads, Canadian Pacific (CP) has gotten a fair amount of attention from investors over the past couple years as Bill Ackman has built a major position and pushed through some management changes, which have helped the stock price tremendously, and Canadian National Railway (CNI) is probably the company that should benefit close to as much from the Bakken and Canadian oil as Union Pacific based on their route map (CNI has a central US route down to the Gulf of Mexico, and also touches both coasts in Canada). The other big publicly traded North American railroad is Genesee & Wyoming (GWR), which runs a lot of short lines around the country (and in Australia and Canada) and just bought competitor RailAmerica last Fall, they have good exposure to frac sand mines in the Midwest, and to the Marcellus shale.

The Motley Fool has recommended CNI and GWR in the past, I know, though their CNI pick was several years ago. Railroads have been pretty hot for the past year or so and most of the rail stocks are at or near their highs. So none of these are dirt cheap, but they’re all seeing business be better than the coal slowdown would lead you to expect, and they are mostly cyclical companies that move on demand for natural resources and on rising global trade in general, so folks may also be piling on as optimism rises for a real economic recovery taking hold. I’ve been satisfied with getting my exposure to the railroads through Berkshire Hathaway so far, but there is something compellingly “real” and delightfully monopolistic about the railroads — there’s always reason for concern, since the railroads have been awful businesses for long stretches of time in the past, too, but perhaps the modern day railroad barons are, well, running a better railroad.

Any favorites for you? I’m sure that he’s pegging UNP as his top pick in this “special report”, and I’ll make a wild guess that CP, CNI and GWR are three others that rank high based on the pitch, but those are just guesses. Do you have a favorite railroad? Let us know with a comment below.

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Jonathan Dean
Jonathan Dean
January 28, 2013 4:03 pm

Barron’s had an article on UNP which echoes your analysis this weekend. Pretty convincing.