How Railroad Companies Could Benefit From Shale Gas Boom

U.S. railroad companies have started to experience an upswing in petroleum products shipments from shale formations. U.S. carloads of petroleum and petroleum products registered a whopping 48% y-o-y growth in Q2 and by 47% y-o-y in July, 2012. ^{[1] [2]}

Shale exploration also requires fracking sand, which is used for hydraulic fracturing and pipes and other drilling equipment. The volumes in crushed stone, gravel and sand category increased by 6.4% in Q2. We believe the railroad companies are well positioned to tap this opportunity, which has happened at the right time when coal carloads are falling rapidly. Let’s look at how rail companies can benefit from the shale gas boom.

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Location of shale formations

Union Pacific (NYSE:UNP) is the largest player in the railroad industry with operations over all of U.S. except in the eastern part, which is dominated by the other two players CSX Corporation (NYSE:CSX) and Norfolk Southern (NYSE:NSC). Some of the richest shale plays in the U.S. are Eagle Ford, Marcellus, Utica, Barnett, and Bakken.

UNP is going to benefit from Bakken, Barnett, Fayetteville, Eagle Ford, and Woodford plays, while CSX and NSC can take advantage of Marcellus, Utica and Big Sandy shale plays. NSC has a very dense network near the Marcellus shale, which is likely to give it an advantage over its competitor CSX in that region. The companies will benefit in two ways: bringing in fracking sand and other materials into the formations and shipping out petroleum products. The volumes of the outgoing cargoes are, however, going to be heavily reliant on the output profiles of the shale plays. If the output contains significant amounts of oil or Natural gas liquids (NGL), it will add to railroads volumes. Until now, the liquids volumes have been high as reflected by the sudden surge in petroleum carloads lately.

How companies are gearing up for this opportunity

The companies are spending heavily on cube hoppers, special freight cars that are specifically designed for fracking sand. CSX purchased about 900 cube hoppers, especially for fracking sand in 2011. ^[3] Norfolk Southern has also allocated nearly 14% of its 2012 capital expenditure i.e. $346 million for new freight cars primarily for fracking sand. ^[4] Overall, we believe, railroad industry is well prepared to glean from the ongoing boom in shale gas in North America.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Rail Time Indicators For July, Association of American Railroads, July 6, 2012 [↩]
2. Rail Time Indicators for August, Association of American Railroads, August 3, 2012 [↩]
3. Transportation Markets: Chemicals, CSX Corp. [↩]
4. Norfolk Southern increases capital spending, railwayage.com, January 25, 2012 [↩]