Plains All American Pipeline Adds to Rail Capacity

We noted last week the sharp increase in crude oil transportation by rail. The Bakken field, as well as those in the DJ basin, are not well-served by pipelines, and construction of new pipelines is often held up by regulatory constraints. Crude transport by rail is significantly more expensive, but as crude prices rise margins return. The strong showing by crude refiners during the second quarter is prompting both Tesoro Corp. (NYSE: TSO) and Phillips 66 (NYSE: PSX) to begin running their own trains out of the Bakken play.

When railcar maker American Railcar Industries Inc. (NASDAQ: ARII) reported earnings late last month, it noted specifically a “shift to more tank railcars” as a reason for its record earnings and 2,200 railcar shipments in the quarter, more than double the number from the same period a year ago. Greenbriar Companies (NYSE: GBX), another railcar maker, noted:

As a result of increased demand for tank cars, we are increasing tank car production rates, and plan to open a second tank car line in fiscal 2013.

Another railcar maker, FreightCar America Inc. (NASDAQ: RAIL) is getting beaten up today after missing estimates on declining demand for coal cars. The company did not refer to tank railcars in its quarterly report.

Whether or not more pipeline MLPs will expand rail services remains to be seen, but building a rail terminal and getting crude oil flowing by rail is a lot easier than getting new pipelines approved.

Paul Ausick