The Energy Information Administration has reported that refinery receipts of crude oil delivered by rail, truck, and barge increased 57% in 2012 year over year, so that the nation's refineries were receiving more than 1 million barrels per day via these transportation methods.
Before we get into what this means for investors, it's important to place this trend in context. Pipelines still delivered more than half of all refinery receipts. Total deliveries to refineries were more than 15 million bpd in 2012, so that 1 million bpd delivered by alternative methods is just a drop in the bucket. It's a rapidly growing drop, so let's take a look.
Behind the trend
Much of the growth is driven by increased production from U.S. oil plays, which seems obvious enough, but some of it is also being driven by market fundamentals and the fact that truck, barge, and train transportation can hit markets that are not served by pipeline. When they do that, producers fetch a higher price.
For example, East Coast refiners like PBF Energy (NYSE:PBF) did not see the astronomical margins that mid-continent refiners experienced last year, because they were still importing foreign oil, while midcontinent refiners had access to cheap Bakken crude. PBF has built out its rail infrastructure, and it can now receive cheaper domestic crude from North Dakota and Canada by rail -- provided that domestic crude remains cheaper than foreign crude.
Buckeye's Albany assets help highlight another point, which is that the simultaneous growth of truck, rail, and barge is no coincidence. Typically when one of these alternative methods takes off, so do the others. For example, a pipeline may bring oil from the field to the refinery, while a train will go from the field to a river, where a barge awaits to haul the crude up or down stream to a refinery.
The role of the barge can't be underestimated. Barge receipts increased more than two percentage points year over year, and this is a great place for investors to look for opportunity. Companies with maritime resources benefit from this trend, as well as growth in exports. Three such companies that are worth a look are:
- Kirby Corporation (NYSE:KEX), which operates 30% of the coastal tank barges in the U.S.
- Oiltanking Partners (NYSE: OILT), which has storage capacity of 12.1 million barrels and six deepwater docks on the Houston Ship Channel
- Martin Midstream Partners (NASDAQ:MMLP), which operates a large fleet of inland barges and controls 31 marine terminals
These companies won't be the only winners, but they are a good place to start your research.
Going forward, domestic oil production will continue to increase in the near future, though the long term outlook is much more uncertain. It's important to note, however, that the WTI/Brent spread is an important factor in transportation dynamics. If the spread shrinks, it will erode some of the benefits that these alternative transportation methods provide.