Penn Wealth Publishing

2017.10.04 Penn Wealth Report Vol 5 Issue 02

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12 PENN WEALTH REPORT VOLUME 5 ISSUE 02 04 OCT 2017 PENN WEALTH REPORT Copyright 2017. All Rights Reserved. INVESTMENT INTELLIGENCE The Keystone XL and Dakota Access are back on track... It is amazing how the law of unintended consequences so easily sneaks up on many well-educated academics. Take the case of cross country delivery of crude. When climate change activists "forced" Obama to abandon the Keystone XL pipeline (he never really intended to allow it) because of perceived threats to the environment, railroads were standing by to pick up the slack. In the energy-rich Bakken Shale region of North Dakota, Canadian Pacific CP and Warren Buffet's Burlington Northern Santa Fe did most of the heavy lifting. So, instead of traveling safely through steel tubes deep underground, hundreds of thousands of rail cars delivered the oil through the endless number of small towns dotting the landscape. Now that President Trump has reversed the previous administration's decisions and has authorized construction of the Keystone XL and Dakota Access pipelines, what is the out- look for the major rail carriers? It all depends on the railroad. The various railroads may exist in the same industry, but their strategic profiles can look very different from one another. A railroad is only as good as the assets surrounding its track, as evidenced by Kansas City Southern KSU . While other carriers traverse the country, KSU controls a north-south corridor running between Kansas City and New Orleans, and then into Mexico City and both coasts of Mexico via special concessions. Instead of crude, KSU's main cargo consists of indus- trial and forest products, agriculture and So what does that mean for the rails which have been transporting the crude? chemicals, and autos. While new pipelines or oil prices won't have much of an impact on this carrier, a threatened 35% tariff on goods coming north certainly would. While we don't see this coming to fruition (it is in both coun- tries' best interest to formulate a strong, new trade agreement), we see KSU as being fairly valued, despite its stagnate one-year returns. CSX CSX controls a wide swath of the east coast. Headquartered in Jacksonville, its lines run from Florida, through the Marcellus Shale play in the Appalachian Mountains, into Quebec and Ontario. Not only won't this rail be affected by the new pipelines, it is in an excellent position to take advantage of President Trump's campaign promise of a reinvigorated coal industry. The coal com- panies have been a major source of revenue for CSX in the past, but Obama's war on coal has decimated that industry. That is about to change. Our major challenge with CSX right now is the recent run-up in share price due to rumors of a potential management shakeup. These rumors may end up being just that, but we sold our stake when shares jumped 20% in one day. Like CSX, Norfolk Southern NSC also operates in the eastern US, but extends as far west as Kansas City. With 21,000 miles of track, the company is primarily engaged in the transport of raw materials, finished products (think autos and other consumer goods), and coal. Also like CSX, crude transport accounts for a very small percentage of the firm's overall rev- enue. CSX has risen 30% over the past year, and should have plenty of growth ahead as economic activity picks up steam. Our one current rail holding, after selling CSX, is Union Pacific UNP , the largest railroad in the US as measured by track (32,000 miles) and revenues ($20 billion last year). Unlike CSX and NSC, Union Pacific serves the western two-thirds of the US. Its revenue mix, how- ever, looks extremely similar to its eastern peers. With recent record crop sizes out west, the grain business has made up for the soft oil and gas markets. With a share price floating around $100, we are up 26% in our position. The real rail losers as more oil flows through pipelines, therefore, will be the initial- ly-mentioned CP and Buffet's BNSF. However, there is one other big concern in a related industry. Trinity Resources TRN has been one of our shining stars (up 85% since purchase) in the Intrepid Trading Platform. We bought this railcar builder following the spate of accidents which led, ultimately, to increased orders for reinforced cars. Now, as the focus shifts away from crude shipments via rail, we are taking our profits off the table. Road & Rail

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