Will Warren Buffett's Newest Move Challenge the Competition?

Union Pacific (NYSE: UNP  ) has the type of one-year stock chart that dreams are made of, marching steadily higher with very little volatility. Moving stuff around the country is a great business, and one that appears to produce the type of steady returns we'd all like to see in our portfolios. Unfortunately for holders of Union Pacific stock, Warren Buffett may be angling to spoil all of that.

A few weeks ago, Berkshire Hathaway's (NYSE: BRK-A  ) BNSF Railway Co. announced that it would be launching a pilot program to test the viability of transitioning locomotives from burning diesel to running on liquefied natural gas, or LNG. Despite the significant cost of retrofitting BNSF's 6900 engines to accept the alternate fuel source, the comparable amount of energy available from LNG to a gallon of diesel is dramatically less expensive. Such a change would completely upend the rail industry and force holders of Union Pacific stock to evaluate how such a change might impact their shares.

The week ahead
The company is scheduled to release earnings on Thursday and the street is expecting a 9.5% rise in first quarter EPS to $1.96 per share, and a 2% uptick in revenues to $5.22 billion. Both statistics should keep Union Pacific stock moving higher an "on track," but the industry shakeup is not likely to occur in the near-term.

Kansas Southern (NYSE: KSU  ) is reporting on Friday. The street expects Kansas Southern to report EPS of $0.88, a 17% bump on a revenue increase of 4.4% to $571.3 million. One of the primary catalysts for the increase is the shale oil boom that is most likely to shake up the industry. Where Union Pacific is benefiting from increased coal shipments, largely on the West Coast, Kansas Southern transports oil.

The shale boom in North Dakota and other places – a significant source of the oil for Kansas Southern to transport – has produced the supply of LNG to make it an increasingly viable fuel source. At some point soon, Union Pacific stock will be deeply affected by LNG.

The LNG highway
LNG is not only impacting rail, but trucking as well. Clean Energy Fuels (NASDAQ: CLNE  ) is championing America's Natural Gas Highway to build LNG fueling stations across the country to allow truck freight to move solely on the alternate fuel. While Union Pacific stock is not heavily reliant on intermodal – shipping containers that can move by ship, rail, or truck – the appeal for intermodal is obvious. As companies become less reliant of diesel and more reliant on LNG, Clean Energy may be able to expand to supply major railroads as well. The interconnectedness between rail and trucking is long-established and should not be overlooked.

The Buffett effect
The fact that Buffett is behind the push to move rail power from diesel to LNG is significant because of the effect he has on anything he touches. BNSF is the second-largest consumer of diesel behind the U.S. Navy, so a shift here is significant. Furthermore, Buffett has significant political juice, so you should not be surprised to see a push from him and Berkshire to support LNG-powered rail if the transition is successful. Even without any regulatory pressure, the cost savings have big potential, so owners of Union Pacific stock are well-advised to follow these developments as they unfold.

The movement toward alternative energy is gaining momentum. One potential opportunity in this field is Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Learn everything you need to know about Clean Energy Fuels in The Motley Fool's premium research report on the company. Just click here now to claim your copy today.


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  • Report this Comment On April 16, 2013, at 3:12 PM, Rfhokie wrote:

    Stupid premise of this newsletter. UP is exploiting and developing the same technology. Their just not tooting their horn about it like Warren.

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