The Ratings Game: Using railroad tank cars to store excess oil: It’s ‘possible but improbable’ for now

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There is a chance that using empty railroad tank cars could solve the problem of too much oil and not enough storage, but that doesn’t mean it will happen anytime soon.

In a research note titled, “Tank cars for oil storage: Possible but improbable, for now,” Cowen analyst Matt Elkott pointed out a number of reasons why he thought it was unlikely. But if it does happen, he said Trinity Industries Inc. could be one of the publicly traded equipment suppliers that stands to benefit the most.

Trinity’s stock TRN, +0.63% rose 0.6% on Tuesday, amid a selloff in the broader stock market and the energy sector. Elkott rates Trinity outperform, with a $21 stock price target.

Among other railroad operators he’s bullish on, shares of Kansas City Southern KSU, -0.16% eases 0.2%, Norfolk Southern Corp. NSC, -2.40% fell 2.4% and the U.S.-listed stock of Canadian Pacific Railway Ltd. CP, -1.37% CP, -1.02% slipped 1.4%.

“Based on our channel checks on Monday, there is no evidence of oil being deployed to tank cars for storage yet; and equipment suppliers do not appear to have had many promising customer inquiries in this regard,” Elkott wrote in a note to clients.

Meanwhile, crude oil prices continued to sell off. After the May futures contract CLK20, -9.49% for West Texas Intermediate plunged Monday into negative territory for the first time ever, the June contract CLM20, -4.92% plummeted 35% on Tuesday. See Futures Movers.

The SPDR Energy Select Sector exchange-traded fund XLE, -1.76% lost 1.8% and the S&P 500 index SPX, -3.06% declined 3.1%.

Also read: Why oil prices just crashed into negative territory — 4 things investors need to know.

See related: Avoid oil stocks, as historic divergence with oil prices suggests too much volatility to risk buying, analyst says.

Why it’s possible

Elkott estimates that there is tank car storage capacity that is readily available for at least 25 million barrels of crude oil, and that can be ramped up in the coming weeks.

There are at least 30,000 Class 3 flammable liquid tank cars, each with capacity for over 30,000 gallons of crude in North America, that could be deployed to hold more oil, according to his estimates. Even more cars could become available in the coming weeks, as some cars that come off leases have limited renewal prospects, while others are rolling off manufacturing lines into a “depressed-demand” market.

Elkott noted that U.S. railroad companies have been “somewhat quiet” on the question of using tank cars to store oil, “something that could signal higher willingness to entertain the idea.” And the Railroad Commission of Texas (TRRC), which regulates the state’s oil-and-gas industry, has formed a task force with an aim to research what can be done to “aid the industry” in these difficult times for oil, TRRC Chairman Wayne Christian said during a commission meeting Tuesday.

There are regulatory standards that need to be met to transport crude, but the purpose would be to store rather than transport, so the vast number of older non-compliant tank cars could theoretically be considered.

Why it’s improbable

Although regulatory standards may not be an issue, it’s still “unlikely” that the tank cars would be used for storage, “because oil would still have to be received from the source in compliant equipment and then transloaded,” Elkott said. So even if regulators provided a temporary exception for storage, “the railroads were most likely be opposed to the idea,” as execution would be difficult.

Storing oil in tank cars would accelerate their corrosion, which would make it less profitable.

While U.S. railroad companies may be examining the prospects of entering the oil storage business, the Canadian counterparts do not appear to want that business. “This is likely as they do not see a compelling economic case in which revenue generated would compensate for the liability risk of doing something unfamiliar, as storing oil in tank cars for indefinite periods, as well as for the potential disruptions to other traffic on rail networks,” Elkott wrote.

He said it can’t be ruled out, however, that the Canadian government may intervene to make the economic case more compelling, in an effort to help out the oil industry.

–Myra P. Saefong contributed to this article.

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