What do Warren Buffett, Johnny Cash, and truck drivers all across America have in common? You’ll be surprised by this week’s connecting the dots.

I’ve played the guitar for years and really got into the blues during my early years of university. In fact, I cut a deal with one bar to play for beer. I figured with that the amount I’d be paid to play vs. the amount my buddies and I would drink, we’d be better off and have more fun if I bartered my services for booze—and we did. It was a great time; my buddies and I would drink all night, I’d hop on stage and play some blues and rock ’n’ roll… the girls seemed to like it, and the owners of the bar loved it because we’d pack the room on a Wednesday night.

Probably because of the way I looked at the time, the number-one question I would get from the girls in the crowd was: “Elvis or the Beatles?”

My response was always, “Johnny Cash.”

Don’t get me wrong—I love Elvis and really like the Beatles, but Johnny Cash defined cool to me during my formative years.

My favorite Johnny Cash song? Folsom Prison Blues.

I hear the train a comin’
It’s rolling round the bend
And I ain’t seen the sunshine since I don’t know when,
I’m stuck in Folsom prison, and time keeps draggin’ on
But that train keeps a rollin’ on down to San Antone….

It’s a great song.

But I’d be remiss if I didn’t mention songs such as One Piece at a Time, Walk the Line, Ring of Fire, and his version of Hurt, which are all great songs in my opinion.

Not to mention—and let’s be honest—growing up on the blue-collar side of east Vancouver with a name like Marin, Cash’s song A Boy Named Sue always had a special place in my heart, as it would with any immigrant’s child who bears a name foreign to the new world.

But Folsom Prison Blues is my favorite.

Every time I hear Folsom Prison Blues, I get the bold image of a long, big, hustling train pulling miles of coal and oil railcars.

This will be my last Tuesday Energy Dispatch. We’ll take a break next week while we switch the system over, and we hope you’ll like what you see when we come back online.

Warren Buffett, Rail, and Oil

Reading Warren Buffett’s annual shareholder letter this past weekend (probably the most-read annual shareholder letter in the world) which marked his 50th anniversary running Berkshire, many items stood out, but one I want to focus on in today’s missive is his comments on his railway, Burlington Northern Santa Fe (BNSF).

So when I refer to BNSF, you can think Buffett.

On page four of the annual letter, Buffett wrote:

BNSF is, by far, Berkshire’s most important non-insurance subsidiary and, to improve its performance, we will spend $6 billion on plant and equipment in 2015. That sum is nearly 50% more than any other railroad has spent in a single year and is a truly extraordinary amount, whether compared to revenues, earnings or depreciation charges.

I’ll admit it: when I read his statement, in my mind I heard Johnny’s deep voice singing the words:

I hear the train a comin’
It’s rolling round the bend

That’s a lot of money Buffett is putting up to upgrade BNSF.

Guess whom Warren Buffett is referring to when he stated nearly 50% more than any other railroad has spent in a single year” in the above quote?

If you said, “Himself,” you got it.

BNSF spent $4 billion last year. So by next year, he would have invested over $10 billion into upgrading his rail lines.

I’m sure some of that will be going toward preventing any further derailments, such as the one on May 5, 2015, when a long line of 103 oil rail cars (oil rail cars carry about 680-720 barrels of oil) derailed on Buffett’s rail. Over 70,000 barrels of oil were involved, and a fire resulted.

And yet again, Cash’s lyrics ring true to Buffett today:

I bet there’s rich folks eatin’
In a fancy dining car
They’re probably drinkin’ coffee
And smokin’ big cigars ….

If that railroad train was mine
I bet I’d move it on a little
Farther down the line

Buffett is a brilliant investor, so naturally we want to understand why he’s investing, as Cash put it, “farther down the line.”

Connecting the Dots… Or Rails in This Case

Recent news headlines quoted Buffett  as saying the Keystone pipeline delay is akin to the US government thumbing its nose at Canada.

Buffett usually avoids making negative political calls, unless, of course, something affects his investments.

Let’s see why the brilliant Buffett decided to pipe up and make that comment about the US “thumbing its nose” at Canada.

Did you know that over 25% of the oil produced in the Bakken is moved on BNSF rail?

I’m also willing to bet that you didn’t know that BNSF has captured over 50% of all the recent growth in shipping oil by rail in the US.

Interestingly enough, Buffett really promotes the potential for American companies and American growth in his letter, but his investments in the oil patch contradict his public statements. Damn, the truth hurts: I’ll share what I think is a significant but completely overlooked move by Buffett.

Buffett has recently sold all his ExxonMobil shares and interestingly enough, increased his position in a Canadian oil sands producer, Suncor. The last part is what the mainstream media in the US have ignored.

Why sell his shares in America’s largest oil company, you may ask.

Well, in his deep-toned voice, Johnny Cash has an answer for you…

I hear the train a comin’
It’s rolling round the bend

That’s right: it’s all about BNSF, Buffett’s rail company.

Rockefeller would be impressed with what Buffett has pulled off with BNSF. And I salute Buffett, an investing legend, for his brilliance regarding the company.

What’s the next big growth industry for rail in the US?

Buffett’s on that trend way ahead of anyone else—and without a peep from any environmentalists or protestors—yet his option is so much riskier for the environment and citizens of America.

The biggest growth over the next decade for moving oil in the US will be transporting heavy oil produced in Canada, and Buffett is more than happy to deliver that “dirty oil,” as President Obama labels it, to the Gulf Coast refineries on his BNSF rail line.

Don’t forget that the Canadian oil sands have hundreds of billions of barrels in reserves, and America couldn’t get a safer, more politically stable supply of friendly crude to feed its refineries for the next 50 years.

Buffett is making these strategic investments now during this period of low oil prices, without any complaints, while Keystone XL is on Obama’s most-wanted list.

But there’s something that Buffett doesn’t want the investment world talking about regarding the risks in rail. It’s not the horrible track record of oil derailments, such as the rail car derailment which caught fire in Quebec, Canada in 2013, and 47 people died in the town of Lac-Mégantic.

It’s something nobody is talking about… an underdog in the oil logistics world.

The New Transport Underdog

In today’s interconnected world, it’s amazing how the heroic crashes and bankruptcies in one industry lead to glorious bull markets and higher profits in another sector… known as sector rotation. Recently a Casey Research subscriber sent the Casey energy team some pictures from Texas of how bad it is—and boy, is it bad. Rumor has it that rigs that are normally laid down in pieces during down time now have to be kept vertical because they can’t fit all the rigs in the stockyard. What happens when rigs are stacked in the yard? It means wells aren’t being drilled and people aren’t working. No one likes to pay a rig hand to sit around all day, and as such, job cuts have been massive in the energy sector.

Job cuts mean profits are at risk, and as an investor, that means “stay away.” However, turning your eyes to the bottom section of the chart, things look a lot better. Minimal job cuts means growth potential, and that’s what we at Casey energy look for. The transportation sector may not sound like it has much to do with the energy market, but in fact it’s quite the opposite.

Aside from causing the majority of motorists to curse as they drive behind them slowly uphill, what does every 18-wheeler have in common? Each tractor trailer consumes hundreds of gallons of diesel fuel every day. And what is diesel fuel derived from? You guessed it: oil.

The trucking industry becomes more competitive against rail for moving freight with every day that the price of oil remains low. The chart below shows that the cost per mile of trucking versus rail continues to narrow the cheaper the price of oil becomes.

Even though the above data still demonstrate that rail is a better long-haul option, there’s still significant rotation away from rail into trucking. For the first time in five years, multiple US shipping companies during the third quarter of 2014 decided to shift freight from intermodal trains to trucks to capitalize on this short-term windfall. Some of the shift was due to rail congestion caused by surging traffic in 2014, but lower diesel prices accelerated the shift, especially among the more frustrated shippers. Further shifts toward trucks occurred in Q4 of 2014 and Q1 of 2015, and they’re highly likely to continue as diesel prices continue to plummet.

The American Trucking Association calculates that each one-cent drop in the price of diesel results in fuel savings of $350 million. Roughly a year ago, the price of diesel was $4.00 per gallon; diesel for sale on March 2, 2015 fetched only $2.94 per gallon. This $1.06 difference translates to $37.1 billion in savings for the industry.

Entry-level rig-hand employment, along with truck driving, has a tendency to fall into the unskilled labor category; and labor rotates freely between whichever industry demands it. Rig hands who were once working in the oil fields are signing up left and right for truck-driving school.

When American Trucking Association Chief Economist Bob Costello talks, I listen; and when he tells me fleets are raising pay and offering serious benefits packages in order to attract and retain truckers, this shows the industry is turning a big corner. Likewise, Bob expects the momentum that built up in 2014 to continue and accelerate throughout 2015. The American Trucking Association Tonnage Index, which measures the gross tonnage of freight carried by motor carriers, further indicates a strong trend moving forward.

An added bonus is the concept of fuel surcharges. Like the airline industry, which charges you that sneaky fee just before you pay for your ticket, the trucking industry also has a similar levy. These programs typically involve a specified computation based on the change in the national, regional, and/or local fuel price. The bonus for the trucking industry is the time lag between when fuel costs change and when the next fuel surcharge is set. An excerpt from one of the major trucking company’s annual financials reads, “Due to these programs, this lag negatively impacts operating income in times of rapidly increasing fuel costs and positively impacts operating income when fuel costs decrease rapidly.”

The trucking industry is a margin game, and the margins between the players vary considerably. This means that whoever will be most the efficient will attract the most demand for its services, which means higher revenues for the company and higher returns for shareholders.

Trucking companies will seek to further exploit this trend of low gasoline and diesel prices in 2015 by highlighting the stronger speed to cost trade-off available to customers today. This is especially true on the East Coast, as distances are shorter and track delays have been occurring on a daily basis, causing havoc to East Coast manufacturers trying to receive product.

Warning to Railroad Investors

Warren Buffett is well aware of the competition to rail on the East Coast of the US—that’s why he’s investing $6 billion into BNSF this year: to capture the flood of Canadian oil that needs to be transported to the Gulf refineries.

If the rail company you’re invested is on the East Coast and has seen big increases in short-distance crude transport, you may want to double-check your rail routes. The gap continues to narrow between the rail and truck cost differential due to higher mileage per gallon of diesel coupled with the drop in price of fuel. An additional perk to the lower fuel cost is that it will allow trucking companies to keep older, less fuel-efficient vehicles on the road. More trucks on the road once again means more profits for companies, which means more dividends and higher returns for shareholders.

Rich Like Buffett?

The current energy markets are volatile, but a speculator must use volatility to his own advantage to build positions in companies that have suffered as a result of the current market correction. Investing isn’t easy, so you want to follow someone who isn’t playing poker with toothpicks or frankly, a talking head with no skin in the game. Those flakes annoy me and are an embarrassment to our industry.

I make big bets, and they won’t always be right, but I walk the talk (or as Johnny Cash would say, “I walk the line”) with my own checkbook, and nobody in the industry can deny that. I also have a huge network of industry professionals and have backroom access.

Want to know the truth about investing? Industry insiders do have an edge, as whom you know matters in this business.

Access to new deal flow, changing market trends, new corporate mandates—these shifts can happen so fast that by the time the news hits the front page, the profits on the trade are made. Do you really think Goldman Sachs doesn’t leverage every relationship it has to make money?

Of course it does.

So why shouldn’t you?

Don’t you want access to the inner circle?

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I can’t make the trade for you, but I can help you help yourself. I’m making big bets—are you ready to step up and join me?

P.S. Regarding to the question at the beginning of this missive: What do Warren Buffett, Johnny Cash, and truck drivers all across America have in common?

Answer: They all heard the train a comin’.