Post by calzephyr on May 13, 2013 9:00:01 GMT -8
Rails Turning on to Natural Gas
By Howard Rothman - May 13, 2013| Tickers: BRK-B, CNI, CSX, NSC, UNP| 0 Comments
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Howard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Driving that train, high on… natural gas? Granted, it isn’t as catchy as the Grateful Dead original. But if major North American freight railroads keep moving as they are, this could be the version many are singing well into the 21st century.
Freight railroads have never been very exciting. They operate much the same today as they have for more than a century, and few of us think about them unless we’re stuck at a crossing waiting for a mile-long train to pass.
But they move nearly half the stuff we rely upon, from orange juice to automobiles and lumber to scrap iron. Accordingly, they’ve proven a strong lure for investors who value steady performance over flashy potential.
The past few years haven’t been particularly kind, though. A primary culprit has been the collapse of coal shipments — traditionally more than 20% of railroad volume and as much as one-third of revenue — as electric utilities increasingly move toward cleaner, lower-cost natural gas.
A year ago, in fact, the headlines were particularly ominous. “Will Natural Gas Keep Sapping Power From Rail Traffic?” one online site asked. Another was more certain of the outcome: “Weak Coal Demand Hurting Railroad Industry,” it announced.
Old king coal is no longer a merry old soul, but…
To paraphrase something Mark Twain may or may not have said, reports of rails’ death from coal withdrawal have been greatly exaggerated.
To be sure, coal remains a weak spot. Union Pacific (NYSE: UNP), the largest publicly traded railroad, said in April that first-quarter coal volumes were down 19% year over year. CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC), number two and three respectively, reported similar declines.
But the big news was that this was no longer the big news. All three reported higher profits despite the coal shortfalls, and projected continuing improvement.
Why? The railroads said they benefited from a recent uptick in the shipment of manufactured goods, which they have increasingly stolen away from a trucking industry hampered by high fuel prices, stricter regulations and other challenges. The recent growth in auto sales and construction also translated into additional rail shipments and more profits.
But a lot of the improvement has to do with railroads swapping their old reliance on coal for a new partnership with natural gas.
It seems railroads are perfectly situated to take advantage of the current oil boom. As producers began working huge deposits in North Dakota, for example, rails were already well positioned to transport the output — and by the end of 2012 more oil was moving out of that state by rail than pipeline. The giant BNSF Railway, owned by Warren Buffett's Berkshire Hathaway, is the major beneficiary and expects to increase daily shipments from the state to 700,000 barrels in 2013 from 500,000 last year.
Some looking at natural gas as more than a product to ship
Ironically, while they haul increasing amounts of it from isolated oil fields largely underserved by pipelines, some North American railroads are also looking at natural gas as a way make their trains run more economically.
BNSF, one of the country’s largest diesel fuel consumers, announced plans in March to test natural gas-powered locomotives later this year. If it catches on, the impact will be comparable to the industry’s switch from steam to diesel a century ago.
“The use of liquefied natural gas as an alternative fuel is a potential transformational change for our railroad and for our industry,” BNSF Chief Executive Matt Rose said when unveiling the plan.
While there are daunting technical and regulatory challenges still to be faced, this pilot project is an important first step that will allow BNSF to evaluate the technical and economic viability of the use of liquefied natural gas in through-freight service, potentially reducing fuel costs and greenhouse gas emissions.
If the test succeeds, Rose said, the company will begin retrofitting existing locomotives. BNSF had considered using gas-powered locomotives in the late 1980s, but changed direction when prices rose. This time, though, that seems unlikely. The average price for a gallon of diesel fuel last year was $3.97, compared to 48 cents for enough natural gas to produce the same amount of energy.
BNSF is working with General Electric and EMD, a unit of Caterpillar, to develop duel-fuel locomotives that can operate on either diesel or gas. And it isn’t alone. Canadian National Railway (NYSE: CNI), the largest railroad in that country, initiated a similar pilot project last fall with a pair of locomotives retrofitted to run on a natural gas-diesel mixture.
The process, of course, won’t be problem-free. The industry must gain federal regulator approval on fuel-tank safety, develop new fuel depots, build special tanker cars and retrain depot workers. And all this will not come cheaply. One report estimates retrofitting a diesel locomotive and adding a tanker car could initially boost a locomotive's $2 million price tag by 50%.
The bottom line
With railroads currently using a little more than 3 billion gallons of diesel a year, there are compelling reasons to cut that consumption despite the challenges. Fuel cost is tops, of course. But also huge are upcoming Environmental Protection Agency air pollution standards that require pricey emission control equipment on new diesel rigs in 2015.
Some observers believe it could take five years or more before a real shift takes place. But with trains already three to four times more efficient than trucks, such a change could give them an even greater marketplace advantage.
If other industries continue with their current nascent plans to ease into the natural gas arena, railroads will also be hauling a lot more in years to come. The combination could make that “Casey Jones” lyric change a reality.
With 21,000 miles of track serving two-thirds of the U.S. population, CSX maintains a valuable proprietary asset. Still, this railroad will face difficult obstacles in the years ahead due to a domestic surplus of natural gas and coal’s declining popularity. To help investors better understand how CSX can deal with these challenges, The Motley Fool has released a brand-new premium research report authored by Isaac Pino, Industrials Bureau Chief and transportation expert. Isaac provides an in-depth look at CSX’s competitive advantages, risk areas, and prospects for the future. Simply click here now to access your copy of this invaluable investor's resource.
The testing by GE on the Union Pacific Dash 8's 15 years ago did not work out. It will be interesting to see if technology can overcome the problems that were encountered on the first try.
Larry
By Howard Rothman - May 13, 2013| Tickers: BRK-B, CNI, CSX, NSC, UNP| 0 Comments
Share on emailEmail
Share on printPrint
Howard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Driving that train, high on… natural gas? Granted, it isn’t as catchy as the Grateful Dead original. But if major North American freight railroads keep moving as they are, this could be the version many are singing well into the 21st century.
Freight railroads have never been very exciting. They operate much the same today as they have for more than a century, and few of us think about them unless we’re stuck at a crossing waiting for a mile-long train to pass.
But they move nearly half the stuff we rely upon, from orange juice to automobiles and lumber to scrap iron. Accordingly, they’ve proven a strong lure for investors who value steady performance over flashy potential.
The past few years haven’t been particularly kind, though. A primary culprit has been the collapse of coal shipments — traditionally more than 20% of railroad volume and as much as one-third of revenue — as electric utilities increasingly move toward cleaner, lower-cost natural gas.
A year ago, in fact, the headlines were particularly ominous. “Will Natural Gas Keep Sapping Power From Rail Traffic?” one online site asked. Another was more certain of the outcome: “Weak Coal Demand Hurting Railroad Industry,” it announced.
Old king coal is no longer a merry old soul, but…
To paraphrase something Mark Twain may or may not have said, reports of rails’ death from coal withdrawal have been greatly exaggerated.
To be sure, coal remains a weak spot. Union Pacific (NYSE: UNP), the largest publicly traded railroad, said in April that first-quarter coal volumes were down 19% year over year. CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC), number two and three respectively, reported similar declines.
But the big news was that this was no longer the big news. All three reported higher profits despite the coal shortfalls, and projected continuing improvement.
Why? The railroads said they benefited from a recent uptick in the shipment of manufactured goods, which they have increasingly stolen away from a trucking industry hampered by high fuel prices, stricter regulations and other challenges. The recent growth in auto sales and construction also translated into additional rail shipments and more profits.
But a lot of the improvement has to do with railroads swapping their old reliance on coal for a new partnership with natural gas.
It seems railroads are perfectly situated to take advantage of the current oil boom. As producers began working huge deposits in North Dakota, for example, rails were already well positioned to transport the output — and by the end of 2012 more oil was moving out of that state by rail than pipeline. The giant BNSF Railway, owned by Warren Buffett's Berkshire Hathaway, is the major beneficiary and expects to increase daily shipments from the state to 700,000 barrels in 2013 from 500,000 last year.
Some looking at natural gas as more than a product to ship
Ironically, while they haul increasing amounts of it from isolated oil fields largely underserved by pipelines, some North American railroads are also looking at natural gas as a way make their trains run more economically.
BNSF, one of the country’s largest diesel fuel consumers, announced plans in March to test natural gas-powered locomotives later this year. If it catches on, the impact will be comparable to the industry’s switch from steam to diesel a century ago.
“The use of liquefied natural gas as an alternative fuel is a potential transformational change for our railroad and for our industry,” BNSF Chief Executive Matt Rose said when unveiling the plan.
While there are daunting technical and regulatory challenges still to be faced, this pilot project is an important first step that will allow BNSF to evaluate the technical and economic viability of the use of liquefied natural gas in through-freight service, potentially reducing fuel costs and greenhouse gas emissions.
If the test succeeds, Rose said, the company will begin retrofitting existing locomotives. BNSF had considered using gas-powered locomotives in the late 1980s, but changed direction when prices rose. This time, though, that seems unlikely. The average price for a gallon of diesel fuel last year was $3.97, compared to 48 cents for enough natural gas to produce the same amount of energy.
BNSF is working with General Electric and EMD, a unit of Caterpillar, to develop duel-fuel locomotives that can operate on either diesel or gas. And it isn’t alone. Canadian National Railway (NYSE: CNI), the largest railroad in that country, initiated a similar pilot project last fall with a pair of locomotives retrofitted to run on a natural gas-diesel mixture.
The process, of course, won’t be problem-free. The industry must gain federal regulator approval on fuel-tank safety, develop new fuel depots, build special tanker cars and retrain depot workers. And all this will not come cheaply. One report estimates retrofitting a diesel locomotive and adding a tanker car could initially boost a locomotive's $2 million price tag by 50%.
The bottom line
With railroads currently using a little more than 3 billion gallons of diesel a year, there are compelling reasons to cut that consumption despite the challenges. Fuel cost is tops, of course. But also huge are upcoming Environmental Protection Agency air pollution standards that require pricey emission control equipment on new diesel rigs in 2015.
Some observers believe it could take five years or more before a real shift takes place. But with trains already three to four times more efficient than trucks, such a change could give them an even greater marketplace advantage.
If other industries continue with their current nascent plans to ease into the natural gas arena, railroads will also be hauling a lot more in years to come. The combination could make that “Casey Jones” lyric change a reality.
With 21,000 miles of track serving two-thirds of the U.S. population, CSX maintains a valuable proprietary asset. Still, this railroad will face difficult obstacles in the years ahead due to a domestic surplus of natural gas and coal’s declining popularity. To help investors better understand how CSX can deal with these challenges, The Motley Fool has released a brand-new premium research report authored by Isaac Pino, Industrials Bureau Chief and transportation expert. Isaac provides an in-depth look at CSX’s competitive advantages, risk areas, and prospects for the future. Simply click here now to access your copy of this invaluable investor's resource.
The testing by GE on the Union Pacific Dash 8's 15 years ago did not work out. It will be interesting to see if technology can overcome the problems that were encountered on the first try.
Larry