In April, North Dakota’s oil production breached the 1 million barrel per day benchmark.
But while the state climbs the economic ladder thanks to the Bakken, what was once the biggest industry in North Dakota has been left behind.
According to a study by North Dakota State University, farmers in the state lost $66 million in revenue this year and could lose $95 million more if nothing changes.
You may be wondering how more oil production hurts farmers. Well, a closer examination of the situation in North Dakota shows that the two industries fight each other on a daily basis.
But their relationship offers us a way to build a valuable position in the energy sector.
The faltering agriculture revenues in North Dakota stem from a single culprit: railroads.
Regulators Push Trains to the Brink
On Thursday, the Surface Transportation Board held a hearing in Fargo where senators, state legislators, and Governor Jack Dalrymple implored railway operators to ship grain instead of oil.
The Canadian Pacific Railway and BNSF railroad control most of the trains that transport Bakken oil, and according to the NDSU data I mentioned before, they have been moving a lot more crude than crops.
While grain produced last year rots in storage tanks, railway operators blamed the cold winter for the lack of agricultural shipments.
However, this argument is flimsy at best…
Even if the unusually harsh winter caused trains to be less efficient, data leaked from the BNSF railroad shows that several oil trains carrying millions of gallons of crude have been traveling from the Williston Basin through the Midwest to ports on the East and West Coasts.
According to the data, as many as 27 oil trains move through Cook County, Illinois each week, and 13 travel through King County in Seattle weekly — and that’s just a small sample.
So, to me, it doesn’t seem like a case of bad weather… it simply looks like oil producers are willing to pay more to ship their assets.
But the solution to overcrowded railroads already exists, and it offers investors a valuable and unique way to see gains in U.S. energy.
Shoddy Construction Hurts the Rails
Industry experts say pipelines will ease railroad traffic caused by Bakken output.
After all, there’s over 800,000 barrels’ worth of pipeline capacity being built in North Dakota as we speak.
But midstream companies that install pipelines aren’t the best investments during construction, since pipelines are huge, debt-ridden projects.
However, Thursday’s meeting shows us that U.S. and North Dakota regulators will continue their heightened pressure on railways to end favoritism for oil companies… whether pipelines are built or not.
This means trains will have to operate faster and more efficiently than before so they can accommodate both farmers and oil producers enough to keep regulators off their back.
And there is one type of company that is will be crucial for this process…
It’s a type of company investors can rely on to ease the transition to pipelines while also offering solid gains and income.
The name of the game is storage.
Storage Stocks Boost Income Gains
Global Partners LP (NYSE: GLP) won approval last month to unload more oil from railcars at one of its terminals in Oregon.
Global is a master limited partnership that focuses on the storage of oil and petroleum products.
And the go-ahead last month is a precursor to similar agreements on the West Coast, as trains carrying Bakken crude search for more time to ship crops as well as oil.
Think about it… offloading more oil at once makes it easier to ship other commodities like grain and wheat, since there will be less of a backlog for time on the tracks.
With added storage capacity, farmers, investors, and drillers all receive a boost, and MLPs like Global are leading the way.
In fact, Global is a solid way to capitalize on railroad demand: It trades around $40, pays a 6.3% dividend, and has shown it can negotiate agreements like the one last month.
Given a solid starting position and some time, investors should see both income and capital gains on Global’s stock.
Until next time,
Alex Martinelli
