Buffett Says Gloat Like Rockefeller When Watching Trains

Buffett Says Gloat Like Rockefeller When Watching Trains

Billionaire Warren Buffett said his Berkshire Hathaway Inc. (BRK/A) will benefit from rising U.S. oil production as the company’s trains and tank cars move fuel around the country.

Buffett, 82, highlighted demand for rolling stock made by Berkshire’s Union Tank Car in his annual letter to shareholders March 1. His company acquired the manufacturer, which traces its roots to John D. Rockefeller’s Standard Oil Trust, as part of the 2008 purchase of Marmon Holdings Inc. Buffett told investors to watch for the UTLX logo.

“As a Berkshire shareholder, you own the cars with that insignia,” he wrote to investors in his Omaha, Nebraska-based company. “When you spot a UTLX car, puff out your chest a bit and enjoy the same satisfaction that John D. Rockefeller undoubtedly experienced as he viewed his fleet a century ago.”

U.S. oil output had a record surge last year as new technology made drilling faster, cheaper and better at unleashing crude from rock formations. That’s reducing reliance on imported oil and benefiting railroads and tank car companies.

Berkshire’s railroad, Burlington Northern Santa Fe, is now carrying about 500,000 barrels of oil a day, or roughly 10 percent of what’s produced in the U.S. excluding Alaska and offshore, Buffett said. That’s helped keep volume growing at BNSF as coal shipments decline.

“Fortunately, they discovered oil where our railroad was,” Buffett, Berkshire’s chairman and chief executive officer, said in an interview yesterday on CNBC.

Car leases are generating $1,500 per month for 10-year deals, and more than double that for shorter terms, said Justin Long, an analyst with Stephens Inc. based in Little Rock, Arkansas. Before the recent boom, the cars leased for about $650 per month, Toby Kolstad, president of Rail Theory Forecasts LLC, said in December.

Oil Pipelines

Carrying crude by railroad costs almost twice as much as moving it by pipelines, which are being expanded to handle increased production from fields such as the Bakken in North Dakota and Eagle Ford in Texas, Long said. Even after more pipeline is built, producers may still ship by rail because there’s an ability to add or reduce tank cars quickly on the route, he said.

Tank car makers have orders into 2014, Long said. After next year, pipelines, such as TransCanada Corp.’s proposed Keystone XL conduit connecting Alberta to the U.S. Gulf Coast, may diminish the crude-by-rail boom, he said.

“You have pretty good visibility that 2013 and 2014 will be very strong years,” he said. “The question now is ‘Will you see builds potentially come down in 2015?’ A lot of that is dependent on pipeline capacity coming on.”

Texas, Louisiana

How long the tank car boom lasts also depends on the level of domestic oil production and how many new tank cars are built, Long said. Union Tank Car’s three main competitors — Trinity Industries Inc. (TRN), American Railcar Industries Inc. (ARII) and Greenbrier Cos. — have all announced increased manufacturing capacity.

Union Tank Car, with plants in Louisiana and Texas, built about 4,300 cars in 2012 and plans to produce more this year, Bruce Winslow, a spokesman for the company, said today.

The number of tank cars being built is outpacing the need for replacement cars by as much as three times, Michael Baudendistel, an analyst with Stifel Nicolaus & Co., said in a March 4 report. Supply and demand for tank cars should come into balance by late 2014 or early 2015, he said.

“Historically, when new builds exceed replacement needs by such a wide level in the capital goods sector, a ‘day of reckoning’ is near when the industry overbuilds,” Baudendistel, who has a hold recommendation on Trinity, American Railcar and Greenbrier, said in the report.

‘No Ink’

Buffett often uses his letters and public appearances to promote businesses and investments, including auto insurer Geico and Coca-Cola Co. (KO), the soft-drink maker that counts Berkshire as its largest shareholder. Highlighting Union Tank Car may have been Buffett’s way of advertising a business that receives little attention.

“He wanted to tell you a little about tank cars, which probably get no ink at all,” said Andrew Kilpatrick, who has written a biography of Buffett.

Union Tank Car’s history is tied to the beginnings of the U.S. oil industry and to the Standard Oil monopoly that made Rockefeller the world’s richest person. The tycoon realized he could control the industry through transportation and began buying railcar companies, according to a company history online.

Tank cars were Rockefeller’s “‘secret weapon’ to dominate the industry,” Union Tank Car said on its website.

Standard Oil spun off the tank car business, then known as Union Tank Line, into a separate company in 1891 after “federal and state government began flexing their new regulatory muscle against the monopoly,” according to the website. The railcar company continued to serve only Standard Oil until Rockefeller’s business empire was broken up by the U.S. Supreme Court in 1911.

Marmon bought Union Tank Car in 1981, according to the company history. Buffett took a controlling stake in Marmon, a closely held collection of manufacturing and services business, from the Pritzker family for about $4.5 billion, in a deal announced on Christmas Day of 2007.

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Thomas Black in Dallas at tblack@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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