Buffett & Icahn: The New Rail Barons

In 2014, the US is going to produce more oil than it has ever produced. This oil needs to go somewhere.

Pipelines to handle all of this demand are still in the process of being built. But in the meantime, many millions of barrels of crude oil are being shipped around the continent by railroad.

Each year, around 150,000,000 tons of hazardous material is transported by tanker cars over thousands of miles. These tankers are designed specifically as freight carriers that can handle the liquid crude oil.

By 2008, roughly 9500 carloads of this oil were being transported by railway. As of 2013, according to the Association of American Railroads, the number has jumped up to 400,000 carloads.

There are only a few companies that manufacture them, and they have the pleasure of reaping all of the benefits. Record backlogs in revenues mean that there is interest by investors, but billionaires like Carl Icahn and Warren Buffett have already made their bets.

“The boom for building tank cars for crude oil started in 2011,” said Rail Theory Forecasts’ Toby Kolstad. He also added that some of the oldest and longest running companies in the United States have had high stakes in this industry for many years.

The Union Tank Car Company, a privately owned business, was formed in the late 1800s. It was originally part of John D Rockefeller’s Standard Oil, and it was divested in the early 1900s.

Back in 2007, Warren Buffett and Berkshire Hathaway purchased 60% of Marmon Holdings. It is Union Tank’s parent company. As of today, Berkshire Hathaway now owns 90% of the company. In his annual letter to shareholders, Buffett mentions that people should look for the companies UTLX logo on whatever tank cars they happen to see passing by.

Buffett writes, “As a Berkshire shareholder, you own the cars with that insignia.”

“When you spot a UTLX car, puff out your chest a bit and enjoy the same satisfaction that John D. Rockefeller undoubtedly experienced when he viewed his fleet a century ago.”

Carl Icahn was voted in as the chairman of American Railcar Industries Inc. in 1994.

This company was founded back in the late 1980s, and it began expanding into leasing tank cars as the boom began in 2011.

By September 2013, the company backlog reached 6300 railcars. This is worth about $814.5 million.

Gross sales increased by 9.8% in 2013 for American Railcar. The company also achieved an increase in operating income in the double digits. During the fourth quarter alone, they leased 3780 railcars. This is up from the same quarter in 2012, where they leased just 2190 railcars.

Greenbrier Companies Inc. is quite new to making tank cars, but it has taken it upon itself to adapt to the changing market. They started making the specialized cars between the years 2004 and 2008, when ethanol reached its peak in popularity.

The company currently has a backlog of 14,400 units worth an estimated $1.52 billion as of August 2013. During the same period last year, it only had roughly 3400 units of backlog.

“As an industry, we’re pretty good at putting our foot on the brakes and then putting our foot on the accelerator when we need to respond to increased demand,” said the Chief Commercial Officer of the company, William Glenn. In 2014’s first-quarter, the company saw revenue of $490 million and $0.56 earnings per share. In the past two years, the company stock has risen by about 30%.

The country’s biggest railcar manufacturer is known as Trinity Industries Inc. The railcar sector for the company grew from $522 million to $2.6 billion since 2010. Over the last 12 months, the corporation has actually received over 30,735 Railcar orders. Plus, it already has an order backlog of over 40,000 railcars. This is roughly worth $5.1 billion.

In a presentation to its investors, the executives of the company attributed the growth to “strong demand from the oil, gas and chemical industries.”

Back in October 2013, Trinity Industries announced its quarterly earnings per share of $1.26. This is a 58% rise from the year prior. Over the past four weeks, Trinity stock has risen by nearly 11%.

The US Energy Information Administration told us on Tuesday that the output for American oil is expected to rise by 9% next year. This equates to reaching 9.3 million barrels per day. This is the highest US output in 43 years.

Even though there have been five crude oil train derailments over the last few months, the crude by rail industry is still moving along nicely and will even pick up speed during 2014.