The shale gas and oil revolution is paving the way for the great American railroad revival

The great steam engines will not return, but the American  railroad  revival is in full bloom.

The American shale gas and oil revolution is spreading its beneficial influence on a great number of industrial activities. The great American railroad revival is a case in point: 

According to data from Union Pacific (UP), the shale industry accounted for 133,000 extra UP carloads in 2012 – that’s an 84% increase from 2011. Indeed, even in the face of a coal shipment fallout, the rail industry is doing better than ever.

And the US Today reports that the railroad oil sector grew from 10,000 shipments a year to an estimated 200,000 a year in 2012.

The future for the once beleaguered U.S. and Canadian railroads is looking good:

Plus, another added benefit from America’s booming energy industry is that new manufacturing and chemical plants will also need to get their goods from landlocked states to the coast – I’m looking at you Ohio.

From a market standpoint all of the big names in rail are up double digits year over year. – Union Pacific (UNP) up 29%, Norfolk Southern (NSC) up 15% and CSX (CSX) up 10%. Each also pays near a 2% dividend.

Feeding off the same trends, the smaller U.S. rail players have done even better.

Kansas City Southern (KSU) is up 48% year over year. And one company that falls short of the top-5 by revenue, Genessee & Wyoming Inc (GWR), jumped 64% year over year.

Importantly for today’s discussion, the gains for these rail companies are just the beginning…

According to a recent report from the U.S. Department of Transportation, by 2040 demand for rail hauling is expected to increase 50% — to $27.5 billion. Indeed, rising demand for a low-cost industry like rail can lead to some solid long-term gains.

And the rail industry will benefit from the shale boom also in another way: 

Speaking of low-cost, the costs for rail providers may be getting even lower with the advent of natural gas-powered locomotives. Recently Buffett’s BNSF along with other major railways (including CSX and our neighbor to the north, Canadian National Railway) have begun testing natural gas powered locomotives.

These engines can run on liquefied natural gas (LNG), which provides an amazing cost break. In particular, while a gallon of diesel will run you about $4 the equivalent of natural gas costs about 50 cents.

So while it’s costing more and more to ship via truck or plane, the rail industry could be set for even more cost breaks. That’s a solid long-term trend if I ever saw one.

Read the entire article here

A map of the US railroad network in 1922.