Buffett uses BNSF to bet on coal

November 3, 2009

John Kemp(John Kemp is a Reuters columnist. The views expressed are his own)

Warren Buffett’s acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe (BNSF) railroad his Berkshire Hathaway does not already own looks like a strategic bet that America’s future energy needs will be met, in large part, through a massive expansion in coal-fired power generation coupled with carbon capture and storage (CCS).

Coal is the most important item moved on BNSF’s railroads. It accounted for almost half the tonnage moved by BNSF in the first nine months of the 2009 (214 billion revenue ton miles out of a total of 444 billion) and a quarter of the company’s revenues ($2.7 billion out of a total of $10.4 billion).

BNSF’s track and rights of way are perfectly positioned to benefit from a massive expansion of the country’s coal-fired output in the next 20 years, coupled with CCS technology to curb the carbon-dioxide emissions.

BNSF controls the crucial rails linking the massive domestic reserves of the Powder River Basin, the Northern Great Plains, the Western Interior Basin and the Illinois Basin east to the main industrial centres of the Midwest and west to the major electricity demand centres in southern California.

* http://pubs.usgs.gov/of/1996/of96-092/Comp/main.gif
* http://www.eia.doe.gov/cneaf/coal/reserves/chapter1.html#fig1
* http://www.bnsf.com/tools/reference/division_maps/?menu=5&submenu=0
* http://graphics.thomsonreuters.com/109/US_ENRGY1009.gif

25 comments

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I think I read an article entitled “President McKinley ushers in bold new “coal age,”" about five years ago, IN THE ONION.

Posted by Adam S | Report as abusive

Did coal stocks move today? You must be smarter than the market.

Posted by Reza | Report as abusive

And maybe he’s also betting on the need for more passenger rail service as oil prices continue to climb.

Posted by j dale | Report as abusive

Beginning if end of warren buffet. Wrong decision to buy this company.

Posted by Shrihas | Report as abusive

When Warren was talking about the collapse of the market we all should have been buying, however I’m going to have to say that history will say that this purchase should have been an interim sell indicator.

Warren, despite his historic success, has become emotional about the market. He is becoming less of a student of the market and more of a teacher and anyone who thinks they can ‘teach the market’ is about to learn a lesson. No matter how you are, the market is bigger.

Warren’s ‘All in’ on the recovery is a bad bet.

The macro trade has been to fade Warren.

I think his recent purchase by Berkshire is a good indicator that the market is overbought and investors should raise cash.

In short, Sell.

You’re over-thinking this. Buffett bought BNSF probably because he likes trains and wants to drive a locomotive!

Posted by Merrill Grinch | Report as abusive

Mr. Buffett’s investing acumen is not to be questioned, but his crystal ball may need some polishing. Coal is climate enemy number one, and carbon capture and sequestration is not yet developed enough for the energy shift that is already underway. Recent sluggishness in oil prices suggests that consumers can and do change their energy use pattern relatively quickly. Just as they reduced demand in response to price peaks and a bad economy, Americans will certainly find energy efficiency and conservation to be an integral part of dealing with the costs, legal obligations, and realities of climate change. This, coupled with an explosion of renewable energy technologies in recent years, suggests coal demand can only soften. Unless Mr. Buffett’s trains find a new cargo, his was a poor bet.

Posted by Joe Gorman | Report as abusive

I think the idea is to move coal to ports for export, not domestic consumption. BNSF can move coal to western US ports for shipment to Asia. Likewise for grains, which is a significant portion of the railroad’s cargo.

Railroads like BNSF and UP consume enormous amounts of diesel fuel. Buffet should be considering how to manage the risk of fluctuating diesel prices.

Posted by Merrill Grinch | Report as abusive

The U.S. is going to be dependent on fossil fuels for energy for decades to come and there is enough coal to supply its energy needs for 400 years. We need to use the coal to reduce our dangerous dependence on imported oil. We should commend Mr Buffet for seeing the future and for having the confidence to put his money where he thinks it will yield good returns.

Posted by Steve Numero Uno | Report as abusive

Wow, Must be some rich naysayers . I saw coal as 25 percent of the rail . whats the other 75 percent. Chopped liver. Emotional, Hah.

eop

Posted by e.o. phillips | Report as abusive

When Warren Buffet makes a sizable investment move, there is almost always more to it than it initially seems to be. It sometimes takes quite a while for his full purposes to become evidenced.
In the meantime it is interesting to read the surmises, both for and against, of this particular move.
Suffice it say that although he is not infallible in these regards, he didn’t get to where he is in the investment world, often its pinacle, by being foolish with multi-billion dollar investments. Be a bit patient with judgements.

Posted by Dean Stewart | Report as abusive

Warren Buffet believes that coal is the future, because the belief that “global-climate-change” is “man-made” is losing ground in this country if not the world.

Posted by John W. Fort Wayne, IN USA | Report as abusive

I think Warren Buffet is simply acting on what we all know but perhaps do not want to acknowledge: we have become immersed in an energy crisis that demands radical change in every facet of our lives. Not $100 but $300 a barrel oil is on the horizon. Auto makers will only survive with the production of drastically lighter and smaller vehicles. The Chinese plan to only have electric vehicles on their roads within 10 years. They hope to discard the internal combustion engine altogether. Ford and General Motors are both staking their very existence on hybids and all electric vehicles.

Unfortunately, we cannot downsize our cross-country semi-trucks which deliver all of the goods and produce we consume and ship abroad. It seems the only way to lower the steadily rising cost of transportation due to the steadily rising cost of energy is to make a better use of our rail system. Multi billion dollar distribution centers or hubs are being constructed throughout the country to transfer cargo between trucks and railroads and in some cases water transportation. In the Chicago region there will be 6 distribution terminals in a ring centered about 60 miles from downtown Chicago. There will no longer be freight trains within this ring to help alleviate traffic congestion. Only trucks will operate within this ring. These hubs operate 24 hours a day 7 days a week and employ approximately 5000 people, not counting the personnel of the trucking, rail and water transportation companies.

So I think Warren is simply taking advantage of a rapidly accelerating movement that has been underway for several years now to become more energy efficient. It really is not about coal but about everything we move from one point to another.

Posted by Douglas Gary | Report as abusive

Indeed, Warren Buffet is buying BNSF when the market is over bought. However, one thing to remember is that this is a part stock deal. If he were to made a deal during the March low, the result would have been similar as Berkshire Hathaway’s stock price was depressed as well (note: he would have paid less in cash and debt though).

He is known for buy and hold for the long term. Coal will be the future if gasoline and distillates to be replaced by electricity (ex. electric cars becomes the norm).

What I’m surprised is that he is planning on stock split on Class B shares in order to do this deal. I don’t see what the rush is if heavy coal usage becomes reality in 10 to 20 years from now.

All in all, I don’t see that this has anything to do with market direction for the next 6 months or so.

Posted by Joe Ghim | Report as abusive

He should sent me a email a day before whith his decision I could made a fortune in the call option ahhhhhhhhhh

Posted by jorge | Report as abusive

The rail lines are worth quite a bit themselves

One day, not to far off, water will have to be transported and rail will be the most economical method of transportation

The Bubba Factor

Posted by SuperBubba | Report as abusive

nvesting in a well-positioned railroad system? Bad bet?

It seems to me that the price of oil-originated energy is going to to through the roof within 5 years when the world recovers from this situation we’re in. If, indeed, this does happen, railroads will come into their own again because they can transport goods much more cheaply than trucks.

It doesn’t take a genius to figure out that the railroads will increase their profits considerably when this happens.

Jim Vaughan, Sacramento Ca.

Posted by Jim Vaughan | Report as abusive

I think Mr Buffet probably has heard what is becoming quite obvious. The AGW science (particularly climate modeling) is full of errors. Temperatures are dropping and the problem is really unknown, and certainly not very immediate (Warren will probably be gone before we know for sure).

Posted by John Klug | Report as abusive

Agree with reporter that BNSF sale is historic, but don’t agree with the rationale that significance of BNSF is based on past or current freight mix, including and especially transporting coal, given cap n’ trade or carbon tax likely to heavily penalize coal. BNSF most likely not a mandate on ‘America’s economic future’ as defined by historic freight carry; rather more so on right of ways for new energy complex, much of which is in the form of electrons or gas.

Posted by J. Karr | Report as abusive

For all the “thinkers” here. Maybe he has in-tell, that you are not privy to. Naw couldn’t be. You know everything.

Posted by Jim | Report as abusive

[...] columnist John Kemp argues that Warren Buffett’s big bet on Burlington is a gamble on the future of coal – and, by [...]

I was reading 10 years ago that Buffett was “washed up”. I don’t believe it. Respect the man. He bet on Goldman. He bet on Wells. He bet on U.S. Bank. He’s good.

Posted by fazsha | Report as abusive

Its also pretty notable what Buffett is selling …. Berkshire stock is being used to fund the purchase, so there is an effective dilution of the existing businesses.

This is interesting in part because the last time this occurred in size (the Gen Re acquisition in the late 90′s) Buffett was essentially trading overpriced Coke stock (and other equities) for a bond portfolio. Ie in addition to being an insurance acquisition, it also had the effect of a big re-weighting out of stocks at quite a good time.

Its not quite so clear to me what specifically is being diluted/diversified away here.

Posted by peter xyz | Report as abusive

[...] Reuters’ John Kemp says much the same. [...]

The problem with oracles, as Julius Caesar discovered, is that they’re awfully vague.
I don’t think that you have much evidence to go on with this argument about coal. There are plenty of other reasons that don’t involve speculating on the fate of two bills in congress to invest in BNSF.
I wrote an expanded post on it here.
http://www.greenenergyreporter.com/2009/ 11/warren-buffett-goes-long-coal-no-wait  /

Unfortunately, CCS is a technological fantasy with no grounding in scientific reality – basically, all attempts have ended in failure for the following reasons:

1) The coal combustion stream is just too dirty – it takes way too much energy to remove all the various metals, sulfur, arsenic, partially burned fuel residues – and that’s before you remove the CO2. Many people are now pointing this out.

2) The energy return for CO2 capture looks negative, meaning it takes all the energy produced by coal combustion to capture all the emissions. This is why so-called “prototypes” that only capture 1% of the emissions are frauds – if they use 1% of the plant’s output to capture 1% of the carbon, then they” use 100% of the output to capture 100% of the carbon. No energy efficiency numbers have ever been released, to my knowledge.

The proprietary wraps placed upon “carbon capture technology” are probably only there to hide these facts from the public. Even though this is a federally funded DOE program, the public doesn’t get to see the details. Someone needs to do an outside scientific analysis of the issue – but who? The National Academy of Sciences is probably the best choice.

So, if the gamble is based on CCS, it’s a very bad bet. Investments in large-scale solar, wind and grid connectivity would be much wiser.

Posted by Ike Solem | Report as abusive

[...] will look a lot different with carbon taxes than the rail looks alone. This point is also made by John Kemp at Reuters: the marginal boost to rail freight could be easily offset by a marginal hit down on coal. Does [...]

Maybe it’s not about coal, but about “right of ways” The BNSF network maps run right through areas where solar and wind power can be generated, to areas that need power (cities), and because of coal, to power plants, so you have sources of green power, transformer capabilities, and users all connected by transmission right of ways.
docdonn

Posted by docdonn | Report as abusive

[...] be that he is understating is expectations. After the 2008 energy shock, it makes sense to grab a near monopoly on coal delivery because America will use coal (not overpriced Middle East oil) to power all of [...]

[...] about climate change was entirely clear, moves more coal than anything else. As business reporters noted when he purchased the company in 2009, “BNSF controls the crucial rails linking the massive [...]