More energy producers are seeking alternatives to pipelines as a means of transporting crude oil to U.S. refining markets and grabbing the highest price for their product. Railways have become especially viable as evidenced by recent deals and joint ventures. But while strategic buyers and private equity firms benefit from the resulting M&A, they may have to fend against intense scrutiny as well, following a string of explosive train accidents.
The volume of oil moving by rail rose 31 percent in 2013 while overall traffic rose 1.8 percent, according to the Association of American Railroads. Kinder Morgan Energy Partners LP (NYSE:KMP) is one of those companies moving away from pipelines. After the Houston-based company bought two marine transporters for $962 million in December, it teamed with Imperial Oil Ltd. (TSE: IMO) to build a rail-loading facility near Edmonton, Alberta.
In 2013, Plains All American Pipeline LP (NYSE: PAA) sold roughly 800 miles of petroleum pipeline to Magellan Midstream Partners LP (NYSE: MMP) for $190 million and later announced plans to expand new rail facilities in Colorado and Virginia for 2014.
On the PE front is KKR & Co. LP (NYSE: KKR), which closed a deal in January for rail terminal operator Torq Energy Logistics Ltd. for $235 million. Torq manages six terminals across Canada, transporting crude oil from well sites to the rail cars.
But now more than ever, shippers are being warned about the high volatility of light crude oil. In early January, the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration said it is reinforcing requirements to test oil before it's transported. The group says that recent explosions "indicate that the type of crude oil being transported from the Bakken region may be more flammable than traditional heavy crude oil."
The warning comes on the heels of an oil train derailment on Dec. 30 near Casselton, N.D. No one was injured, but toxic fumes prompted the evacuation of hundreds of the town's residents. Another oil train exploded in Alabama in November, causing no deaths but released an estimated 749,000 gallons of oil from 26 tanker cars. An accident in July, on the other hand, proved to be deadly. Forty-seven people were killed in Lac-Megantic, Quebec, when a train carrying crude from the Bakken oil shale derailed.
"The reality is this is not a one off," says Anthony Swift, an attorney working on oil-transport issues at the Natural Resources Defense Council, an environmental action group, in Washington. "We're seeing it happen again and again, and federal regulators have to ensure that the appropriate safety precautions are put in place."
Deals centered on trains bringing oil to lucrative coastal markets will continue, but public safety concerns in cities bisected by rail lines could cool M&A, says Jason Seidl, a rail analyst at Cowen & Co.
"I think people might want to take a breather and see what the regulations will mean for the industry," Seidl says.