Ackman Like Buffett Buoyed by Fracking in Bakken: Freight
Ackman’s Pershing Square Capital Management LP, which bought most of its shares in late 2011 as the stock rebounded from a two-year low, stands to benefit as CP expands operations in the Bakken.
The railway is one of only two with tracks in the North Dakota part of the region, which also includes Montana and the Canadian provinces of Saskatchewan and Manitoba. Buffett’s Berkshire Hathaway Inc. (BRK/B) spent $26.5 billion in 2010 to take over Burlington Northern Santa Fe LLC, the other railway with lines running directly into the Bakken.
“Ackman was smart,” said Tony Hatch, an independent rail analyst in New York. “When he bought his shares he knew that an aggressive management could take advantage of opportunities in the Bakken shale.”
Canadian Pacific shares have gained 26 percent in the past 12 months in Toronto trading, compared with a 13 percent gain for domestic rival Canadian National Railway Co. (CNR), and a 3.3 percent gain for the S&P 500 Railroads Index, which tracks the three largest U.S. railroads by market capitalization.
Ackman is bolstered by his success in forcing new management at what was North America’s least efficient railroad. Ackman cited access to the Bakken region among potential advantages for the company in a proxy fight he led that pushed out Chief Executive Officer Fred Green in May. CP today named Hunter Harrison, the former chief executive of CN, as president and CEO.
CP announced an agreement June 22 with U.S. Silica, the second largest U.S. producer of sand for hydraulic fracturing -- known as fracking -- to bring sand from a facility in Sparta, Wisconsin to the Bakken.
While Tracy Robinson, Canadian Pacific’s vice president of energy and marketing and U.S. Silica spokeswoman Anita Willis declined to comment on the volume involved, Fadi Chamoun, an analyst at Bank of Montreal (BMO), said the railway told him the deal will see CP ship 1 million metric tons of sand a year starting in 2013.
Bakken output grew with the arrival of fracking, which releases oil and natural gas trapped beneath shale rock by blasting it with a mixture of specialized sand, chemicals and water. CP has benefited not only by shipping raw materials to service the growing number of drills in the area, but also by exploiting a lack of pipeline capacity to bring oil out of the largest contiguous oil deposit in the continental U.S.
In 2009 CP was running 500 railcars of crude oil out of North Dakota. By 2011 that number reached 13,000, and by 2014 the Calgary-based company predicts it will be carrying 70,000 carloads of crude out of the Bakken.
Energy shipments are driving the company’s expansion and the Bakken is “the key growth engine of our energy portfolio,” Canadian Pacific’s Robinson said by telephone from Calgary.
Drilling in the region has created demand for materials such as pipes, tubing, cement and the lumber needed to build new worker camps. Each drill requires roughly 23 railcars of inbound materials, according to data compiled by Bloomberg.
The number of producing oil wells in the Bakken reached 3,794 in the second quarter of 2012, data compiled by Bloomberg show, compared with 1,083 three years earlier. At a conference in Toronto in November, CP’s chief financial officer Kathryn B. McQuade said the company estimates the Bakken will see 1,800 new wells annually for the next 10 to 20 years.
Railways carried 23 percent of Bakken crude to refineries in November, up from 18 percent the month before. Pipelines accounted for 62 percent of shipments in November, while trucks carried 5 percent and 10 percent was processed by a local refinery in North Dakota, according to data compiled by the North Dakota Pipeline Commission.
“They’re going to bring rolling pipelines, we call them, to bring unit trains of oil out,” said Hatch. The crude is shipped to refineries in Oklahoma, California, Louisiana, New Mexico and Texas, according to data compiled by Bloomberg.
Having access to the region means CP doesn’t have to share its shipments, or revenue, with other railways. The ability to haul in both directions bodes well for CP’s bottom line, said John Anderson, advisory director at Greenbriar Equity Group LLC in Rye, New York.
“If you have the access to the supply as well as the destination you have a 100 percent advantage over your competitor,” Anderson said. “It translates into maximum allowable profits.”
While Canadian Pacific declined to say how much of its business comes from the Bakken, Chamoun at Bank of Montreal said the energy play will boost revenue by C$400 million annually. He forecasts C$5.6 billion total revenue for CP in 2012.
“The C$400 million opportunity is in the cards in the next two to three years, and that’s meaningful growth,” Chamoun said by telephone from Toronto. He said that while CP’s exposure to Bakken is not by itself a reason to buy the stock, the company can increase profits by operating more efficiently. Chamoun has a market perform rating on the company and a target price of C$81. CP rose 1.6 percent to C$74.72 in Toronto today.
Montreal-based Canadian National also ships sand destined for the Bakken from Wisconsin after it bought Wisconsin Central Transportation Corp. in 2001. Still, without tracks running into North Dakota, it must either transfer its loads to BNSF for the final part of the trip, or have them trucked from Saskatchewan, CN spokesman Mark Hallman said by phone from Toronto.
CP is working with partners such as U.S. Silica to build facilities along CP’s system, Robinson said, creating more direct lines between producers and customers.
“These guys need to get these products to the wellhead in a timely, reliable, consistent, cost-effective manner,” she said. “Being a single line provider we can control the supply chain.”
Until more pipeline capacity comes online, rail will be needed to ship crude out of the formation. BNSF is predicting growth in the Bakken for the next five years, according to Denis Smith, the company’s vice president for industrial product markets. Bakken drilling operations are coming online faster than the pipelines needed to serve them, said Smith, creating an opportunity for railways that can start shipping much faster.
“Most of these guys get up and running in about a year while everyone sits around for the permitting of pipelines,” Smith said by telephone from Fort Worth, Texas.
Drilling in the Bakken formation, a 360-million-year-old shale bed two miles underground that geologists believe holds a 15,000 square-mile region of oil in North Dakota alone, helped that state record the fastest growth in personal income, jobs and home prices, according to Bloomberg Economic Evaluation of States, or BEES, index (S5RAIL) data.
Anderson at Greenbriar said Ackman may have built his position in CP at “the perfect time.”
“He probably was in before the value of the Bakken was reflected in the public stock price,” he said. “That’s a terrific way to make money.”
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