Email of the day (2)
Comment of the Day

March 04 2013

Commentary by Eoin Treacy

Email of the day (2)

on transporting oil via railroads
“This is an interesting article that deals with the rising use of rail in Canada for shipping crude oil.

“While companies such as Gibson are biting off small chunks of the pipeline business away from TransCanada Corp. and Enbridge Inc., others such as Canadian Pacific and Canadian National Railway are taking increasingly large mouthfuls.”

“I am currently invested in CNR.”

Eoin Treacy's view Thank you for this informative article which may be of interest to subscribers. Here is a section:

“Our network provides direct access to the Bakken as well as heavy oil and bitumen production areas in the Lloydminster, Peace River, Cold Lake, and Athabasca regions,” said Mark Hallman, CN director of communications and public affairs.

FirstEnergy Capital expects CN to move 100,000 barrels of crude oil per day by rail in 2013, plus fracking sand and drill pipe. The company told investors crude shipments contributed $50-million of incremental revenues during the fourth quarter with an incremental 9,000 carload.

Despite the surge in rail shipments, some analysts remain unconvinced that crude-by-rail is a long-term proposition for shippers.

Industry estimates vary, but Bernstein estimates that pipelines are 65% cheaper than rail.

But as long as Western Canada Select and West Texas Intermediate trade well below Brent crude benchmark prices, it remains a viable option.

Southern Pacific, which is shipping its entire bitumen via CN, sees its transportation cost at US$31 per barrel, but it is fetching higher prices in the Gulf Coast than it would from Western Canada.

Rail becomes more expensive as differentials between Canadian crude and other benchmarks start to tighten, CN's Mr. Ruest told investors. “It's a question of depending where you're going and how that works out,” he said. “Rail is not the cheapest mode for the crude but it's a very good mode to get to a more profitable market.”

As volumes grow from new oil and gas fields across North America, the challenge of how to ship the product to where it can be turned into valued added products is becoming increasingly pressing. (Also see Comment of the Day on February 6 th) . Railways have benefitted from this evolution because they have networks already in place with access to relatively remote areas which are not currently serviced by pipelines. How long this remains the case will be influenced by the potential for continued production from new fields, the long process of attaining permits to build pipelines and the spread between various markets for crude oil.

The spread between Brent Crude and West Canada Select hit a medium-term peak near $65 in December and has contracted to $47. The equivalent spread for WTI is close to $27. Provided the spread justifies the cost of transportation ($31 is quoted in the above article), railroads are likely to benefit. However, the tighter the spread becomes the more compelling the argument for building pipelines. This would suggest that while railroads are likely to benefit in the short to medium term, they are unlikely to represent long-term haulage solutions for crude oil if the size of the reserves are as large as we expect.

Canadian Pacific Railways and Canadian National Railway continue to hold progressions of higher reaction lows and are becoming progressively more overextended relative to their respective 200-day MAs, Breaks below $100 and $116 respectively would suggest a deeper process of consolidation is underway.

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