Warren Buffett’s Union Tank Car Co., is earning serious dividends on the firm’s contracts to haul shale oil, according to a report from Bloomberg. Union Tank specializes in providing rail transport services to firms, particularly those that need to transport liquid cargo.
Hydrofracking has vastly increased the potential for oil and natural gas production in the mainland United States, but it also changed the traditional location of oil sources. The lack of pipelines to the new hotbeds of production has resulted in an economic profit for the rail companies able to haul the oil to treatment facilities.
Up-and-Coming Small- and Mid-cap Portfolio Managers #MICUS (Morningstar Conference)
Notes from Laird Bieger of Baron Capital, Mark Wynegar of Tributary Capital Management, and Amy Zhang of Alger Funds' presentation from the 2020 Monringstar Investment Conference. Q2 2020 hedge fund letters, conferences and more Up-and-Coming Small- and Mid-cap Portfolio Managers Our manager research team has been publishing its semiannual Morningstar Prospects report for several years. Read More
The new logistics system will more than likely become prominent in the energy market as shale deposits begin to make up a larger part of the active oil market. Because deposits like these are more spread out, it makes little sense to build pipelines to all of the new oil sources. Train lines have filled the gap in the transport system.
Environmental regulations, unable to restrict the growth in fracking, are only able to increase restrictions on pipeline construction, and also add to the problems in the industry.
This is yet another indication that trains are still a vibrant part of the US economy. Train operators simply need to be creative and definite about the kinds of work they want their machines to provide. The success of Warren Buffetts Union Tank Car Co. should be a lesson to any in the industry.
Another beneficiary of the change in the structure of the energy market has been Carl Icahn. His company American Railcar Industries Inc. (NASDAQ:ARII), is involved in the manufacture and conversion of rail cars that are able to transport the volatile crude oil. The boom in shale drilling added to the near 35% boom in the American Railcar Industries Inc. (NASDAQ:ARII) share price in 2012.
Carl Icahn has reveled his intentions to continue expanding in the market. It is certainly one that appears to be growing and has captured the attention of many in the financial markets. Next year will provide the largest growth in oil production in the United States, according to industry experts.
Icahn attempted to purchase a second rail car manufacturer, Greenbrier Companies Inc (NYSE:GBX) in November. A deal was not agreed upon and the talks were abandoned in early December. Icahn sold his stake in the firm just before Christmas.
According to Bloomberg, Icahn control of both American Railcar Industries, Inc. (NASDAQ:ARII) and Greenbrier Companies Inc (NYSE:GBX), would result in his control over the largest single part of the rail car manufacturing industry in the Unites States. This would give him a large share of the profits.
The Buffett and Icahn investment in the oil transport market points to a great investment strategy. Both are well aware of the exposure that can be built to a growing industry by investing in a related product. The risks, at least in rail, are lower, and the potential profits are astronomical.