There are a lot of ways to play the booming natural gas industry, but today’s recommendation is the first railroad I’ve seen recommended using that rationale. Here’s Keith Kohl, Editor of Energy Investor, with the explanation:
“Believe it or not, there’s a downside to the North Dakota oil industry.
“It isn’t production, which has been setting the pace for our domestic oil boom. In fact, there’s a good chance that North Dakota will displace Alaska as the second-largest oil producing state.
“Not only has state production more than doubled during the last three years, but it’s on track to break the 600,000 bbls/day mark by this fall. We think it’ll happen sooner.
“As it happens, some of our best profits have come from North Dakota’s oil patch. Plays like Brigham Exploration, Northern Oil and Gas, and Continental Resources have provided us with solid gains time and time again.
“And that brings us to the growing problem for all Bakken players:
“The difficulty for companies isn’t increasing production, but rather getting their oil to market. Above, you can see that pipeline capacity in the Williston Basin was reached four years ago, forcing producers to find more expensive alternatives.
“So far, their options have been limited to trucks and railway — and this is where we’ll find our next play.
“We’ve already staked out a claim on two of the rail terminals in the Bakken. ... Today, we’re going to add Canadian Pacific Railway Ltd. (CP) to our portfolio.
“In March, the company announced it will begin shipping Bakken crude via the Van Hook terminal in North Dakota. The terminal, which will have an initial capacity of about 35,000 barrels per day, is expected to be on-line around July.
“Canadian Pacific Railway will be the only North American railroad company using the terminal. In 2011, the company shipped approximately 23,000 barrels per day out of North Dakota. Within the next few years, that amount will increase to nearly 125,000 barrels per day — or about 70,000 carloads.
“Even with a short-term pullback, this is an opportunity we can’t ignore. We’re recommending you buy Canadian Pacific Railway Ltd. (CP) under $85.”
- Keith Kohl, Energy Investor, May 2012