Take Your Money off the Table
10/05/2013 8:00 am EST
Neil George, editor of By George, discusses oil trains, oil pipelines, railway risk and liability, and offers two safer ways for you to play oil.
SPEAKER 1: Hi, I’m talking trains with Neil George today. Hi Neil and thanks for coming by.
NEIL: Nancy, thanks very much for having me.
SPEAKER 1: We’ve been having some problems with trains carrying oil around the country, haven’t we?
NEIL: Yes we started to see this bit of a problem. It has really been in response to some developments in the oil industry. You’ve seen a lot of oil being pumped out of the ground, fracking, and some other technologies.
SPEAKER 1: Don’t have enough pipelines.
NEIL: We’ve had limited pipelines; and more importantly, the way our pipeline network is structured, much of the oil goes into the major hub which is in Cushing, Oklahoma. As a result there has been this huge glut and that’s sort of been locked there. The refineries that are using it really don’t have enough capacity and as a result prices for a while had basically plummeted. There was trading at a significant discount to what the international price for oil was. As a result, a lot of producers were saying rather than piping it down and getting a lower price for it, let’s get some old tanker cars, put them on the rail, and we can then put those trains to the refineries in the east coast that would normally be using the more expensive oil coming off of the ships from the middle east, north sea etc.
SPEAKER 1: Sounds good in theory.
NEIL: It sounds good in theory. That’s really what started to turn some of the train companies around because they were having a tough time. The container ships from the east weren’t coming as much with the recession and coal really came out of favor, so the coal trains were kind of put out of business; and then on top of that automobile manufacturers with their other customers were shipping a lot of cars. Trains were not where you wanted to be.
SPEAKER 1: Right.
NEIL: Therefore, more recently because of the dusting off these old tanker cars and putting them on the rail, there was a little bit of a resurgence; but Nancy, I really want to warn people the time is now to take your money off the table as quickly as you can. There are a couple key reasons for why that is. The first is that terrible accident we had in Quebec, and _____, small town in rural Quebec, in which a series of rail cars carrying oil from North Dakota to Canada port in New Brunswick where there are some big refineries. This train was parked overnight. There were a lot of problems this train company was running. It’s a U. S. based company called Rail World. It’s a private company that will be no more very shortly. The train basically was parked. The conductor left. The train started moving. The brakes didn’t work. It just careened down the hill and it basically leveled the town in an inferno that lasted for a few days and 47 people were dead and most of the city went up into a cinder.
SPEAKER 1: Right.
NEIL: The idea – this was not the only example. In fact, if you look at the U. S. Department of Transportation there has been a surge of accidents in these new tanker cars. Moreover, Nancy, because of the tanker cars that make up the fleet of the U. S. and the Canadians has this old DOT standard, the Department of Transportation says 80% of these tanker cars are single hulled and they were made to an old standard which is still in effect. The DOT says once these things leave the track they are pretty much guaranteed to burst and when the oil bursts one little spark, which you know think metal…
SPEAKER 1: Right.
NEIL: On metal leaving, sparks pretty easy, they’re going to catch fire and they’re going to explode.
SPEAKER 1: That’s frightening.
NEIL: Therefore, that’s a bad idea. The idea that there is now the huge liability risk which is now being sort of placed on this. Rail companies should be very frightened and should be rethinking how they’re doing it.
SPEAKER 1: What’s the alternative then?
NEIL: The alternative, Nancy, is what has started to happen down in Cushing, Oklahoma. The idea that there was this big discount and therefore that discount was making the more expensive transportation by train more viable, but now we basically have seen that the price of Texas crude is now up to matching what we’re getting from the international standard, otherwise known as Brent crude. What made that happen was the idea that we were able to unlock all the spoil that was there. Because most of the pipelines were going into Cushing and not out, because before we would be pumping it into from the fields in the U. S. and from the tankers coming up from the Gulf. Well, Nancy, there are two companies that decided there was a better way. Two of them I would very strongly recommend for investors. Both are dividend payers. One is Enterprise Product Partners, which many people I think already own. It pays about 5%, maybe 4.5, depends on where you’re buying it on a particular day. It’s good. It has been a long time good performer. They have a partner in Enbridge, which is another big pipeline company, EEP. That one pays about 7.5%. It’s had a little more of a struggle from a pricing standpoint.
SPEAKER 1: Sure.
NEIL: Again, I think a lot is going to be changing because the two of these companies have a 50/50 ownership in the so-called Seaway pipeline, which goes from Cushing down to the Gulf. Traditionally that pipeline would take it from the Gulf and send it to Cushing. They got approval and they figured out how they could switch the thing around.
SPEAKER 1: Go the other way.
NEIL: And now the oil is just running down to the Gulf; and therefore, while we can’t export it by law yet – that might change –
SPEAKER 1: Right.
NEIL: What we can do is we can store it down on the Gulf with Enterprise’s storage facilities and now they are connecting that to the refineries over in Port Arthur, Texas. That’s really why we’ve seen west Texas intermediate pricing start to match up and come up. Now, the producers are saying it costs us so much more to put it on a train to send it to the east. Instead, we can hook it up in the pipes, send it down to Cushing like we used to and get paid almost double where it was about a year or so ago. Therefore, the idea that Enterprise and Enbridge now, I think are basically going to put the trains out of business and for the investors that want a little income, they want to be able to cash in on this continued oil boom. Those are the companies that are the safe way to play the transportation of oil.
SPEAKER 1: Great. That sounds like two good recommendations, Neil.
NEIL: Thanks, Nancy.
SPEAKER 1: Thanks for being with us on the moneyshow.com video network.