Ever wonder what it would take to ruin a billionaire’s dinner?
For Warren Buffett, it was most likely the news last week that possibly more than a million dollars’ worth of crude oil went up in smoke as one of BNSF’s trains collided with another train near Casselton, North Dakota, which lies west of Fargo.
Just think… if your average tanker car can hold around 30,000 gallons of oil, then the 18 tankers that exploded last Monday potentially held up to 13,000 barrels of light, sweet crude, which was lost in the accident.
Even though the money didn’t directly drain out of Buffett’s $60 billion fortune, the incident will inevitably spark a series of rash regulations for transporting crude oil by rail.
In other words, it’s about to get even more expensive to export crude oil out of the Williston Basin by rail car —and it’s already expensive.
Anyone hoping to send just a barrel of oil to a refinery on the Gulf Coast by rail can tack on an additional $12 to the price tag. Piping it to Cushing, meanwhile, can be done at more than half the cost.
Unfortunately, there really isn’t much choice in the matter. Refineries and pipelines in North Dakota hit their maximum capacity back in 2009!
Believe me, it wasn’t a coincidence that Buffett made a $44 billion gamble on rail that year. Between 2009 and 2013, the state’s oil capacity grew 280% to over 1.4 million barrels per day.
Right now, however, you’ll find the Oracle of Omaha is starting to hedge his bets.
A Most Profitable Flip-Flop
I’ve billed this infrastructure showdown before as a win-win for investors.
Although North Dakota’s rail capacity has grown considerably during such a short time-frame and will continue to play a significant role in carrying Bakken crude out of the state, the tables are about to turn…. and Warren is about to start another game of Follow the Leader.
If you don’t believe in coincidences, this will have you scratching your head for a bit. On the same exact day a fiery inferno of Bakken crude erupted on the tracks outside of Casselton, Berkshire Hathaway announced it was acquiring a division of Phillips 66.
Specifically, Buffett was buying Phillips Specialty Inc., and you don’t need more than one guess to figure out its business — polymers that help maximize the flow of pipelines.
Granted, the $1.4 billion Buffett spent this time isn’t nearly as large as his BNSF rail bet, but he’s on the right track.
By 2016, North Dakota’s pipeline and refinery capacity is expected to more than double to almost 1.4 million barrels per day.
(Click Chart to Enlarge)
In the chart above from North Dakota’s Pipeline Authority, you might notice another peculiarity in the rail-pipeline showdown.
Not only is there an abundance of pipeline and refinery capacity coming on-line in the next two years, but rail capacity is expected to stay flat.
Interestingly, the Bakken isn’t the only place where Buffett is betting big.
Jealousy Rears its Ugly Head
North Dakotans don’t get jealous very often these days, especially considering the state’s staggeringly low unemployment rate and exploding growth.
Today, the state’s rapid development of its unconventional oil resource has made it the darling of the U.S. oil industry.
The current lack of pipeline and refinery infrastructure, however, is one thing that makes North Dakota’s grass less green.
Texas, on the other hand, has nearly 375,000 miles of oil and natural gas pipelines inside its boundaries, accounting for approximately 22% of the pipeline mileage within the United States.
So, if Buffett is waging on oil these days, it’s only prudent to expect him to play the whole field… which is precisely what he did.
A month before the deal with Phillips 66 was announced, he bought a $3.45 billion stake in ExxonMobil.
Even though banking on the lack of infrastructure was his plan in North Dakota, buying more than 40 million shares of ExxonMobil gives him a considerable position in an area that produces over 12% of the United States’ oil supply.
(Click Chart to Enlarge)
You see, right around the time Buffett was hashing out the deal for his Bakken railroad, ExxonMobil spent $41 billion acquiring XTO Energy — the fifth-largest operator in the Permian Basin in 2012 and one of the largest producers in the Lone Star State.
Fortunately, you don’t have to bet on a super-major to capitalize on Buffett’s oil bet, and beating Exxon’s returns can be simple… if you look in the right spot.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
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