Play the Bakken Oil Boom Like Buffett


"The Bakken oil formation isn't just an investing opportunity; it's transforming the U.S. energy landscape."

Warren Buffett Bakken

Many investors have heard of the Bakken oil field in North Dakota and Montana, but most are unaware of how important this formation is becoming to the U.S. economy.

More germane to investors is the fact that there is still a lot of money to be made from Bakken oil in the months and years ahead.

Just ask Warren Buffett.

He spotted the potential of Bakken oil well ahead of most and bought a non-energy company that would benefit greatly from the boom. Three years ago he bought Burlington Northern Santa Fe (BNSF) Railway Co. for $26 billion.

That railroad is now one of the main beneficiaries of the Bakken oil boom. (And people thought he just had always wanted to own a train set!)

"We're the 1,000-pound gorilla in the oil markets," BNSF CEO Matt Rose told Bloomberg News. "Crude by rail is going to be really strong for us. It's been a real benefit to us to replace some of that lost coal business."

The Bakken oil formation isn't just an investing opportunity; it's transforming the U.S. energy landscape.

The Bakken Oil Boom

U.S. oil production in the first week of January broke through the 7 million barrel a day (7 MMb/d) level for the first time since March 1993, according to the U.S. Energy Department. That's up from a low of 5 MMb/d in 2008.

Data from the department also revealed that the United States met 83% of its energy needs in the first nine months of 2012. That is the highest mark since 1991.

Much of the gain in production (at least 40%) is thanks to Bakken, which is producing shale oil in greater amounts than originally forecast.

Speaking about increased U.S. oil production, Andy Lipow, president of energy consulting firm Lipow Oil Associates LLC, told Bloomberg News, "I don't think anyone expected the magnitude of the change [in oil production] in just one year."

Even the International Energy Agency (IEA) is a believer now. It recently forecast the United States would surpass Saudi Arabia as the world's number one oil producer by 2020.

Bakken Oil and the U.S. Economy

The surge in domestic oil production is of obvious benefit to the U.S. economy.

The U.S. Energy Information Administration (EIA) forecasts that U.S. oil imports will fall to their lowest in over 25 years next year. It says that oil imports would be only about 6 MMb/d in 2014, the lowest level since 1987. That is also less than half the peak for U.S. oil imports hit in 2004–07 period.

The EIA says one benefit of less imports and more domestic oil production include job growth in the oil industry. That can be best seen in the Bakken area of North Dakota, where the unemployment rate is a mere 1.8%!

Another benefit is that increased production acts as a shock absorber against any price increase from geopolitical tensions in the Middle East.

The Bakken can also be a boon for investors—and BNSF isn't the only company profiting from Bakken oil.

How to Play Bakken Oil Like Buffett

The railroad industry has been one of the main beneficiaries of the Bakken oil boom.

That is because there are not enough pipelines to move all of the oil produced to refineries that turn the oil into gasoline or some other product. Oil companies are using railroads and tank cars to transport much of the oil to refining companies such as Phillips 66 (NYSE:PSX) and Tesoro Corp. (NYSE:TSO).

This demand is forcing the industry to triple capacity for carrying crude oil over the next few years.

Buffett's BNSF is probably the best-positioned of the railroads, with capacity to move 1 MMb/d of oil from the Bakken. But it is not the only one. And since BNSF is now part of Berkshire Hathaway (NYSE: BRK.B), it is not a pure play.

Most of the North American railroad companies are benefiting from increasing shale oil production. But there is one railroad that is also benefiting from a sharp new management team in addition to the shale boom.

That railroad lies north of the border in Canada; Canadian Pacific (NYSE:CP). Next to BNSF, it is the best-positioned of the railroads to the Bakken oil fields.

The company says it will boost crude-oil shipments by 40% this year, to 700,000 barrels per day

The company expects to meet its target this year of 70,000 carloads of crude oil annually. That is up from just 13,000 carloads in 2011.

And that will likely increase in the years ahead. Even if and when additional pipelines are built, railroads offer refineries much more flexibility than do pipelines. The company also has great access to specialized sand mined in Minnesota used in fracking the Bakken formation.

CP also is a winner in that it has very little exposure to the rapidly dwindling coal markets in North America, unlike some of its competitors like CSX or Norfolk Southern.

Finally, the new CEO of Canadian Pacific is Hunter Harrison. He turned CP's rival Canadian National Railway (NYSE:CNI) into the success it is today and is expected to do the same for Canadian Pacific.

All of this has caught some analysts' attention. Independent railroad analyst Tony Hatch told the Financial Times the energy markets are "a big win" for Canadian Pacific.

Citigroup analyst Christian Wetherbee stated recently to the Financial Times that CP might be the most interesting story in North American transport.

He may be right. Wonder what Warren Buffett thinks about this "other" Bakken oil play?

Tony Daltorio
Money Morning

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