Category Archives: Special Report

Louisiana Goes for BYD’s Pure Electric Buses

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BYD, the largest battery-electric bus manufacturer in North America and the largest electric vehicle company in the world, today announced a new order that will see three American-made BYD K9S electric buses deployed in Baton Rouge, Louisiana, under the authority of the Capital Area Transit System (CATS) later this year. The purchase of these new buses reflects BYD’s continued dominance of the North American battery-electric bus market as well as the continuing growth of the sector across the continent.

“In every corner of the continent, we are witnessing rapid growth in the electrification of bus fleets,” stated Macy Neshati, BYD Senior Vice President. “Whether you are looking at the hot and humid climates of the Deep South, the wet weather of the Northwest or the frigid climates of the North, BYD buses are workhorses that can handle any condition.”

With a range of approximately 150 miles on a single charge and a capacity of up to 32 passengers, depending on configuration, the K9S is ideally suited for the needs of Baton Rouge. BYD buses are projected to cost roughly $1.00 less per mile to operate than the typical diesel-powered bus. The new buses produce zero emissions and make oil changes a thing of the past. The proprietary BYD Iron-Phosphate battery is nontoxic, 100% recyclable, fire-safe and incredibly long-cycled. In fact, BYD is the first and only electric bus manufacturer to offer a full 12-year warranty on batteries.

We are excited to incorporate electric buses into our planned Bus Rapid Transit projects in Baton Rouge,” said Bill Deville, CATS CEO. “These buses will allow us to see how we can use electric buses to reduce the impact of our fleet on our environment and also control costs.”

CATS provides bus service to residents of and visitors to Baton Rouge, Louisiana. They operate 29 bus lines and provides more than 2 million rides each year. To CATS leaders, the new buses constitute an important opportunity to innovate.

“Electric buses are a big step forward for CATS. They represent a chance to pilot new technology in Baton Rouge, and we are very excited about that,” said Jim Brandt, President of the CATS Board of Commissioners.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares. It’s an investment that has paid off handsomely. Berkshire’s original investment of $230 million has grown in value almost ten-fold, and is now worth roughly $1.96 billion.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Opportunities Abound for Berkshire in the Growing EV Market

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Everyone can see it coming, petrol, gas, diesel, whatever you want to call it, will play a diminishing role in fueling cars of the future. It’s already playing a diminishing role right now.

Let’s look at a few numbers.

In 2016, 750,000 EV cars were sold worldwide, with Norway the highest in market share at 29%, and China the largest in total units sold. And, 2016 marked the first time that EVs passed more than 2 million vehicles on the road worldwide.

While those numbers are still tiny when compared to the 2 billion vehicles in service around the world, they confirm that the EV is not only here to stay, but will play an ever larger role in personal and commercial transportation.

Credit Tesla with making the EV fashionable in the U.S., and drawing in other car makers that are now debuting their own models. In fact, Tesla has made the EV so fashionable among high-end buyers that in Europe Tesla’s Model S outsold both the traditional petrol-fueled BMW 7 series and Mercedes-Benz S class.

It’s easy to go down the list of carmakers that are showing off their EV vehicles at this year’s auto shows. Volkswagen, which was committed to diesel cars before its huge emissions scandal, is now touting its EV retro-styled concept bus, the I.D. Buzz. And Jaguar’s heading to market in late-2018 with its I-Pace SUV.

BMW, Hyundai, Nissan, Porsche, Toyota, and Volvo, to name a few, are all announcing new EV models or EV versions of existing models. Even Bentley has an all-electric four-door coupe in the works for 2019, and a goal to have an electric version of each of its models by 2025.

For drivers in China that purchased 600,000 EVs in 2017 at the lower-end of the market, it’s China’s BYD that led the way, with Chery, SAIC Wuling, Hawtai, and BAIC all moving more than 3,000 units in December 2017 alone.

The new energy company BYD, which Berkshire Hathaway has a roughly $1.9 billion stake in, sold almost 14,000 ev cars in February 2018, and is the global sales leader despite not being in the U.S. market except for its pure-electric buses.

Back in the U.S., Tesla’s Model 3 is aimed at bringing the company’s cars to a whole new set of consumers, and it’s not the only one making inroads at making an EV with true extended driving range affordable.

GM’s more mainstream price point Chevy Bolt, which boasts a 238-mile range, is now heading towards the company’s goal of moving 30,000 units a year.

All this EV progress bring up the question of what’s Berkshire Hathaway’s role in it?

It’s likely not as a manufacturer.

Berkshire’s roughly 8 percent stake in BYD, and its stake in GM, which was actually down 10 million shares (-16.7%) as of its most recent 13-F filing, doesn’t indicate Warren Buffett wants to be anything but a passive investor in making cars.

Berkshire will certainly play a role in new and used EV sales, as its Berkshire Hathaway Automotive Group of 78 independently operated dealerships with over 100 franchises in 10 states, gives the company a slice of that market.

However, fueling EVs is also right up Berkshire’s alley.

Not the Cars, the Fuel

Berkshire’s in a number of interesting spaces when it comes to fueling EVs. As the EV market-share grows, so do the number of consumers that will be charging their vehicles at home.

When it comes to home charging, its utilities, including PacifiCorp, MidAmerican Energy and NV Energy generate and supply power in twelve states. And overseas, Berkshire’s Northern Powergrid delivers electricity to 3.9 million homes and businesses in England.

Berkshire also is a big player in the electricity transmission business. Its BHE U.S. Transmission owns over a thousand miles of transmission lines in the southern U.S. and California. In Canada, Berkshire’s AltaLink is the largest regulated transmission company in Alberta, supplying electricity to more than 85% of the population.

Taking the EV on the Road

Even though much of the EV market will be charging its cars overnight at home, there is still a big need to be able to quickly charge your vehicle while traveling.

Out of necessity, Tesla has made a substantial investment in this space, to-date building 1,191 Supercharger Stations with 9,184 Superchargers.

These superchargers already benefit Berkshire in areas that get their power from Berkshire-owned utilities.

And a recent Berkshire acquisition has the potential to greatly boost their own capability in this space.

The New King of the Travel Center

In October 2017, Berkshire took a 38.6 percent equity stake in Pilot Flying J, the largest operator of travel centers in North America. That stake will grow in 2023 when Berkshire will become the majority shareholder by acquiring an additional 41.4 percent equity.

With 750 locations across the U.S. and Canada, and more than $20 billion in revenues, Pilot Flying J already plays a substantial role in fueling cars and commercial trucks. It’s also a natural fit for EV charging stations. And while EV ranges continue to grow, the need to charge your vehicle away from home is also growing.

That’s Not All

The charging station space is so new that there are likely to be multiple opportunities for Berkshire, as the lack of a need for storage tanks, which kept traditional petrol fueling stations centralized, means that charging stations can fit into public parking lots, mall and office building parking, and other spaces that were inconceivable for a gas station.

For example, in Oregon, PacifiCorp just received the greenlight to build seven charging stations as part of a $4.64 million transportation electrification plan.

PacifiCorp plans to install seven “pods” that would include multiple dual-standard direct current fast chargers, which can provide up to 80 miles of driving range in 20 minutes of charging, and at least one level 2 port, which offers up to 20 miles of range in an hour of charging.

Whether utilities will ultimately be allowed to own large networks of charging stations remains to be seen, as some environmental groups and potential competitors in the space are already objecting to that concept.

However, the future looks bright for Berkshire. It’s got the electric power, it’s got the transmission, and it’s even got the car dealerships and travel centers that clearly will make it a player in the growing EV market.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Russell Athletic Gets Out of the Athletic Uniform Business

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In a major move, Fruit of the Loom’s Russell Athletic brand will cease making athletic uniforms. The move marks the end of a long history in a product line that in the last decade has seen skyrocketing marketing costs.

“For over 115 years, Russell Athletic has provided quality apparel for athletes both on and off the field of play,” Scott Greene, Russell Athletic and Activewear Senior Vice-President for Brand Management, said in a statement. “We are proud of our heritage, but to build lasting relationships with a new generation of athletes, we will need to focus our efforts and play to our strengths.

“Today, we will begin to transition away from the team uniform business to allow greater emphasis on the consumer retail market. With this shift, we will continue to offer high quality athletic lifestyle and performance apparel for distribution through multiple retail and wholesale channels, including continued distribution of collegiate licensed products along with non-uniform apparel through the team dealer network.”

The Big Money Business of Uniform Deals

The move by the shoe companies Nike and Adidas to expand their product lines into the team apparel market eroded Russell Athletic’s share of the market. Major universities, including Alabama and Auburn, switched their contracts to the shoe companies, or to brands such as Under Armour.

Georgia Tech, which was one of the last major universities to have a contract with Russell Athletic, announced this summer that it would be changing companies to Adidas.

In the case of Georgia Tech, Russell Athletic signed a ten-year deal in 2008 that had it paying the university $8.4 million to be the exclusive uniform provider for all its teams. It also provided over $1 million a year in uniforms for players, and $100,000 a year in branded apparel per year for coaches and administrators. The company also paid additional money based on incentives tied to conference and national championships.

In exchange, Russell Athletic got a host of marketing opportunities, including signage in stadiums, announcements during games, and coaches participating in promotions.

No End in Sight

As large as those number are, they pale before sponsorships that are truly astronomical. In 2017, the University of Louisville signed a 10-year $160 million sponsorship with extension with Adidas.

In 2016, Business Journal found that the cost of signing a university had increased approximately 33 percent over the past five years, and that Nike, Adidas and Under Armour combined were paying over $300 million a year to university athletic departments.

Russell Athletic’s new strategy is to grow its direct to consumer business.

“Our new business strategy focuses on the growing athletic and lifestyle apparel market and developing products that will open new doors for retail distribution of our iconic brand,” Greene said in his statement. “An example of this will be the introduction of a new heritage-inspired product line available in spring of 2018. The new line will feature carefully crafted fleece, tees and other apparel. We are confident you’ll be seeing Russell Athletic on more and more consumers soon.”

Russell Corporation was acquired by Berkshire Hathaway in 2006 for $600 million and became a division of Fruit of the Loom. Its business had peaked a decade earlier when in 1992 it landed a five-year contract with Major League Baseball as the exclusive provider of uniforms. By 1995, the company was generating $1.25 billion in annual sales, and had 18,000 employees.

For Berkshire, which likes to acquire companies that have a strong moat protecting their market share, the athletic uniform business was increasingly an alligator filled moat with no castle behind it.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Berkshire Still Sitting on 4 trillion Cubic Feet of Natural Gas

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In mid-November 2015, Berkshire Hathaway Energy’s Australian subsidiary, CalEnergy Resources, drilled a test well in Western Australia for what the company called a “significant gas field.”

The gas field, which is located below the Whicher Range, is estimated to contain four trillion cubic feet of gas-in-place.

CalEnergy is the sole titleholder and operator of the exploration permit EP 408 located approximately 280 kilometers south of Perth, and covers both the Whicher Range and Wonnerup gas fields.

The Long, Very Slow History of the Whicher Range Gas Fields

The gas fields were first discovered in 1968 and 1971, respectively, and are located in ancient sandstone reservoirs nearly four kilometers underground.

The big problem since its discovery has been how to get the gas and not lose your shirt doing it.

According to CalEnergy, the field is a candidate for traditional drilling methods, and hydraulic fracking is not considered a viable option.

In 2016, Peter Youngs, the Managing Director of CalEnergy Resources Group, discussed with MazorsEdge the progress on the development of the gas field, noting that “the field represents a large in place gas resource, its characteristics are challenging and there is much work still remaining to move this resource to a commercially developable status.”

As for the initial test well, Youngs said at the time, “we are encouraged by the flow rates, as seen during the test, but that the critical commercial assessment (of the flow rates) is subject to a period of substantial subsurface data integration work (which is ongoing).

Youngs also doubted that the field could be commercialized by 2017, and that has proven true.

As to when the gas field could start to produce meaningful amounts of natural gas, it still looks to be years away.

CalEnergy recently requested and received, a variation to the permit work program from the Department of Mines and Petroleum (DMP) to undertake reservoir pressure monitoring – this involves data gauges being placed in the Whicher Range 1 (WR-1) and Whicher Range 4 (WR-4) wells.

The company is continuing with reservoir pressure monitoring, and is focused on enhancing their understanding of reservoir behavior.

In the interim, CalEnergy has launched a Care and Maintenance Environment Plan (CMEP) to maintain the current well sites and drilling pads.

Tantalizing Fruit, Just Out of Reach?

For fifty years, the gas fields of the Whicher Range have both held out the promise of enormous economic benefit, and the frustration of inaccessibility.

CalEnergy notes that in the past, “feasibility studies have failed to identify an economic technical strategy for the development of commercial gas production.”

The good news is that as a result of its tests, the company now believes that gas recovery is feasible, and it’s just a matter of when.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Nebraska Furniture Mart Celebrates 80th Birthday

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These days when a company lasts a decade everyone pops champagne, but for Berkshire Hathaway’s Nebraska Furniture Mart this August marks the 80th anniversary of the company’s founding in 1937.

Founded in Omaha by Rose Blumkin (affectionately known as Mrs. B.) the company started in the basement of her husband’s pawn shop with $500 borrowed from relatives.

Mrs. B., despite being only 4 feet 10 inches tall, was legendary for her toughness and work ethic.

Her escape from Russian persecution at the dawn of WWI, when as a passport-less, 23-year-old, store clerk from Minsk she crossed the Chinese-Siberian border by promising the guard she would bring back a bottle of fruit brandy, and her six-week voyage on a peanut boat could in itself be a movie.

Unable to speak English, and as an immigrant unable to get a bank loan, she prided herself as over the years she toppled Omaha’s “Big boys.”

As NFM grew to dominate the Omaha furniture market, Warren Buffett took notice and in 1983 Berkshire Hathaway bought the store for $60 million without even doing any formal due diligence. It didn’t stop Mrs. B. from working seven days a week, and she continued to oversee the store until age 103.

Along with NFM, Berkshire owns three other furniture retailers, including Jordan’s Furniture, R. C. Willey Home Furnishings, and the Star Furniture Company.

Today, NFM is the largest home furnishing store in North America selling furniture, flooring, appliances and electronics, doing volumes with only four mega-stores that put furniture retailers to shame. Make that every other furniture retailer to shame.

The chain has four stores in Omaha, Kansas City, Des Moines, and Dallas, and a valuation of well over $1 billion.

Day-to-day operations are overseen by Tony Boldt as the president and chief operating officer, with Ron Blumkin and his brother Irv Blumkin as chairman and CEO respectively.

While all the stores are large, none is larger than the store in the Dallas area, which opened its doors in March 2015.

The newest Nebraska Furniture Mart in The Colony in Dallas, Texas, was an immediate success and adds roughly $600 million a year to the furniture chain’s revenues, which already had the highest per-store volume of any furniture retailer in the United States.

Boasting a 1.9 million-square-foot facility, and featuring a 560,000-square-foot showroom, the new Dallas NFM dwarfs even the chains other megastores.

The Dallas store is the anchor to Berkshire’s $1.5 billion Grandscape development, the first of its kind for Berkshire. The development is a 400+ acres, 3.9 million square-feet mix of retail, entertainment, dining and attractions that won’t be fully built-out for another decade.

The elaborate Grandscape complex will feature a $45 million boardwalk-themed restaurant district, a hotel and spa, a recently announced 16-screen luxury movie theater, and 1.5 million square feet of residential and office space that is billed as the lifestyle center.

It’s all a long way from Mrs. B.’s basement, and the fact that Grandscape will be another decade before its completed just means that it will be done in time for NFM’s 90th anniversary.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

BYD Supplies More Pure Electric Buses to Brisbane Airport

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Making further inroads in its sale of pure electric buses in Australia, Chinese battery and vehicle maker BYD has announced an expansion of its pure electric buses to Brisbane airport. The sale comes just eight months after making its commercial debut at the country’s busiest airport in Sydney.

The fleet of eleven 12-meter BYD electric buses will be fully operational in February 2018 as a shuttle service between the airport’s domestic and international terminals. The vehicles will be run by Carbridge, an Australian based world leader in aviation passenger ground transportation who operates BYD electric buses, the Electric Blu, in the Sydney Airport.

“This signifies a milestone for us in Australia, and we are heartened to have more people in Australia support the state-of-the-art electric public transport that we provide,” said Liu Xueliang, General Manager of BYD Asia Pacific Auto Sales Division.

The 12-meter BYD electric bus has a carrying capacity of 70 passengers; features purpose-designed luggage storage racks, and three full size double doors making boarding and alighting more efficient. In addition the buses have GPS next stop announcements, driver monitoring and real time tracking data, meaning issues can be immediately identified and responded to in real time.

Replacing the current fleet for electric buses will result in a reduction of 250 tons of carbon emissions each year, equivalent to taking 100 cars off the road.

Brisbane airport is the closest airport to Queensland’s Gold Coast, a popular holiday destination for visitors to Australia. Around 22.5 million passengers travelled through the airport in 2016, making the airport the third busiest in Australia by passenger traffic.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares. It’s an investment that has paid off handsomely. Berkshire’s original investment of $230 million is now worth roughly $1.8 billion.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Berkshire’s Acquisition of Auto Group Sparks Soaring Dealership Valuations

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In March of 2015, Berkshire Hathaway acquired the 80-dealership The Van Tuyl Group for $4.1 billion, moving the conglomerate into the auto retailing market. The move also set off a dramatic rise in auto dealership valuations that has rippled throughout the industry.

According to the Kerrigan Advisors’ Blue Sky Report, U.S. dealership buy/sell activity soared to record highs in 2015. The Report also identifies the types of players involved with “activity by new entrants outpacing public company acquisitions by over four to one.”

Kerrigan Advisors is a national dealership buy/sell advisory firm that publishes a quarterly report that tracks the multiples and analysis for each franchise in the luxury and non-luxury segments.

When Berkshire acquired Van Tuyl, Warren Buffett trumpeted the growth potential of the newly renamed Berkshire Hathaway Automotive.

“This is the beginning of a journey that will have no end,” Buffett noted upon completion of the acquisition of The Van Tuyl Group. “Cecil and Larry have given us the ideal platform with which to build an auto dealership business that will be thriving and growing 50 and 100 years from now. The fun has just started.”

The fun may have just started, but since then Berkshire has been relatively quiet in the acquisition market, with the April 2015 purchase of Frank Kent Honda in Fort Worth, Texas, one of the few additions.

The Blue Sky Report reveals that while the competition for auto dealerships was fierce in 2015, it did not favor the public companies, which in addition to Berkshire also includes CarMax and Penske Automotive Group.

“A number of iconic multi-dealership groups came to market in 2015 and were acquired by both established consolidators and new entrants. Faced with this stiffer competition, the publics found it more difficult to compete for larger group transactions, and represented just 7% of the buy/sell market in 2015. Meanwhile new dealership buyers, including family offices, private equity firms, and public conglomerates, acquired 29% of the franchises sold, a stunning accomplishment,” said Erin Kerrigan, Managing Director of Kerrigan Advisors. “We believe new entrants will increasingly shape dealership consolidation and meaningfully impact the future of auto retail.”

The Blue Sky Report goes on to note that while the market for auto dealerships is still very active, the market may be peaking.

“In 2015, dealership valuations rose to historically high levels, new entrants made sizable acquisitions, manufacturers approved numerous multi-dealership transactions, and real estate prices returned to pre-recession levels,” continued Kerrigan. “In summary, it was a year that is hard to beat. While the 2016 buy/sell market is expected to be as active as 2015, we anticipate the proportion of sellers completing a successful sale could decline as industry growth plateaus and dealership earnings come under pressure.”

Buffett Says Subtract a Billion

At Berkshire Hathaway’s 2016 annual meeting, Warren Buffett noted that the price for his Van Tuyl Group acquisition also included a billion dollars in securities. Van Tuyl also had a large extended warranty program that was acquired by Berkshire.

Buffett noted that people should “take a billion off the purchase price,” as the reported price has given other dealership groups an inflated sense of their market value.

Is there still a major auto dealership that’s just ripe for a Berkshire acquisition? Read this Mazor’s Edge Special Report.

(This article has been updated since it was first published.)

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Is Berkshire Hathaway About to Strike it Rich in Natural Gas?

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With natural gas prices tumbling to prices not seen since January of 2002, a big natural gas field would not seem to be the hottest news, but Berkshire Hathaway’s success has often been based on running counter to the herd. They are patient enough to know that energy prices will be higher in the future, and they have the money to drill now when others are strapped for cash.

In mid-November, Berkshire Hathaway Energy’s Australian subsidiary, CalEnergy Resources,  drilled a test well in Western Australia for what could be what the company is calling modestly a “significant gas field.”

How Significant?

Four trillion cubic feet of gas-in-place significant.

Exploration permit EP 408 is located approximately 280 kilometers south of Perth, and covers both the Whicher Range and Wonnerup gas fields.

The gas fields were first discovered in 1968 and 1971, respectively, and are located in ancient sandstone reservoirs nearly four kilometers underground.

The fields contain an estimated four trillion cubic feet gas-in-place, and Berkshire’s share currently stands at approximately 84%. Other partners include Which Range Energy.

CalEnergy Resources is the operator, with Farley Riggs, Australia’s largest well testing and data acquisition service provider, running the testing program.

Currently, down hole gauges are being used on Whicher Range-1 and Whicher Range-4/ST1 to test the interconnectivity of the reservoir before a three-month well test commences, The test will hopefully demonstrate flow rates in excess of four million cubic feet per day.

Not About Fracking

While the excitement in the oil and gas business in recent years has been all about fracking, the tumble in energy prices has hurt the fracking business due to its relatively high cost of energy recovery.

Fortunately, the Whicher Range and Wonnerup gas fields are conventional gas fields, and are neither shale gas nor coal seam gas. The cost of recovery should be much lower than gas produced by fracking.

Natural Gas for Western Australia

The natural gas will support the growing energy needs of Perth’s 1.8 million people. The fields are located on the southern edge of the State’s current gas pipeline network, and are roughly 20 kilometers south of Busselton. The cost of connecting to the pipeline is estimated to be in the range of $10 million Australian dollars.

Berkshire Hathaway and Energy Exploration

While Berkshire has built up one of the largest renewable energy portfolios in the world, with solar and wind power leading the way, it’s not a company people think of when it comes to fossil fuel exploration.

As always, Berkshire is full of surprises.

(This article has been updated since it was first published.)

© 2015-2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Improvements to LA to Chicago Transcon Corridor Key to BNSF’s Future

(BRK.A), (BRK.B)

With BNSF Railway’s coal and crude oil transport business sure to decline, where does BNSF look for future growth?

The answer is the long-distance freight hauling currently provided by the trucking industry.

BNSF is about to complete a new 2,200-mile parallel line to its Transcon Corridor along the Los Angeles to Chicago route that will allow it to greatly increase the amount of intermodal freight it can carry.

The challenge in competing with the trucking industry is improving shipping times, which often suffer from delays as trains sit on sidings in order to allow other trains to pass.

The new second line will eliminate those bottlenecks, and reduce the LA to Chicago run by a total of three hours down to 61 hours from the current 64 hours.

Building for the Future

System-wide, BNSF is working to increase capacity. In 2015 alone, BNSF is spending $1.5 billion on terminal, line and intermodal expansion and efficiency projects, which also includes the completion of more than 65 miles of new second main track on the busiest segments of their Northern Corridor.

Rails Efficiency Over Trucks

According to the Association of American Railroads, trains are four times more fuel efficient than trucks. And that efficiency has been growing over the past three dacades, with railroads now able to move a ton of freight an average of 479 miles per gallon of fuel. This is up more than double from the 235 miles per gallon of fuel in 1980. One of the keys is the efficiency of modern hybrid diesel-electric locomotives that capture braking energy and store it in batteries.

The Association of American Railroads also notes that the average tonnage of freight that a train can haul has been dramatically increasing, due in part to improvements in rail car design. In creased double-stacking of cargo containers has helped the average freight train hauled 3,606 tons of freight in 2014, which was up from just 2,222 tons in 1980.

The Window of Opportunity

While the window of opportunity may be closing for coal and oil, freight hauling of consumer goods offers plenty of opportunities for growth. Of the 71 million trailer loads that travel 550 miles or more, currently only 19-percent are moving by rail. Increased track capacity offers massive growth potential in regards to intermodal shipments.

The total amount of business that railroads could convert to rail from trucking is estimated to be as much as $100 billion.

Rising Intermodal Freight Volumes

Total intermodal shipments were up 2 percent over last year’s first quarter volumes, according to the Intermodal Association of North America, the industry trade association
representing the combined interests of the intermodal freight industry. This was despite port congestion issues that impacted international container traffic. Even stronger were domestic intermodal loads, which grew 4.5 percent, led by domestic containers, which rose 6.5 percent in a quarter-over-quarter comparison.

Corridors of Commerce

BNSF has three “Corridors of Commerce” — TransCon, Great Northern, and Mid Continent (MidCon) — that cover more than 11,000 miles of the nation’s rail network.

The TransCon, which includes the portion that runs from Los Angeles to Chicago, has 4,647 route miles running through 13 states. Much of the international freight that is heading east on TransCon comes in the Port of Long Beach in Long Beach, California, and the Port of Los Angeles in San Pedro, California.

In September, the Port of Long Beach announced its overall cargo volume had jumped 22.8-percent in August 2015, which broke an all-time record for cargo volume in its 104-year history.

The Port of Los Angeles, the number one port in the U.S., saw its imports rise 6.3-percent from a year ago to 407,804 TEUs. A twenty-foot equivalent unit (TEU) is a standard measure of a ship’s or shipping terminal’s cargo handling capacity.

Of benefit to BNSF and other railroads has been larger cargo ships that delivering higher container volumes per call.

Strong Environmental Benefits

With environmental concerns increasingly in the forefront, rail transport has another appeal, as moving freight by trains instead of by trucks lowers greenhouse gas emissions by 75 percent.

A conversion of 50-percent of truck transport to rail would save 8 billion gallons of fuel per year, and greenhouse gas emissions would be reduced approximately 90 million tons. The reduction is the equivalent of taking 18 million cars off the road. It also lowers damage to roadways, which costs billions a year in road repairs, and reduces highway congestion due to construction delays.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Oil Volatility and the NTSB

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Shipments of Bakken Formation crude oil have brought billions in revenues to BNSF Railway, and new opportunities to Berkshire Hathaway’s tank car manufacturer UTLX. It has also put Berkshire and BNSF in the middle of disputes over the safety of these shipments and the source of various hazards.

On one side are environmentalists and communities along rail lines that have cited volatility concerns as to the flash point of Bakken Formation crude oil, claiming it is a special hazard as compared to the transportation of other crude oils. On the other side is the AFPM, a trade association representing 400 refining and petrochemical companies, which is suing over BNSF Railway’s $1,000 per tank car surcharge in a battle to keep costs low in producing crude oil from the Bakken Formation.

BNSF’s surcharge is designed to incentivize shippers to move to tank cars that meet new Department of Transportation standards. Technically, BNSF is not calling its $1,000 per tank car charge a surcharge, rather it says it has raised its rates and is discounting rates for shippers using new DOT 117/TC-117 tank cars. A court will decide whether that holds up and certainly key to that may be whether Bakken crude is more hazardous than other cargo.

The AFPM has disputed that Bakken crude oil is more hazardous a cargo than other crude oil, or other chemicals hauled by railroads. AFPM’s position is that the surcharge on tank cars ignores the root cause of derailments, which they assert is tied to poor track conditions and human error.

Will the Surcharge Stand Up?

In a letter to Transportation Secretary Anthony Foxx, AFPM stated that “Any effort to enhance rail safety must begin with addressing track integrity and human factors, which account for sixty percent of derailments. Investment in accident prevention would result in the greatest reduction in the risk of rail incidents.”

Now, the head of the National Transit Safety Board has weighed in on the issue.

NTSB’s Christopher Hart Dismisses Volatility Concerns

Concerns that the oil from the Bakken Formation are of higher volatility and create a greater risk in the case of accidents were downplayed in recent statements by the National Transportation and Safety Board (NTSB) chairman Christopher Hart.

Hart, in a radio appearance on radio station KFGO-AM in Fargo, North Dakota, stated that the NTSB’s accident investigations of rail accidents found that Bakken crude volatility isn’t a significant issue.

“The biggest contributor to a large explosion or fire is how much product is released, rather than the volatility of the product,” Hart said.

The Department of Transportation is working to reduce the amount of product of all types released in a rail accident by mandating new tank car standards that  require jacketed and thermally insulated shells of 9/16-inch steel, full-height half-inch-thick head shields, and re-closeable pressure relief valves and rollover protection for top fittings.

The Department of Energy Report

A U.S. Department of Energy (DOE) report in March 2015 looked at the volatility of light sweet crude from the Bakken Formation in comparison to other crude oils in the same category. The report was prepared by Sandia National Laboratories with the assistance of a technical team that included the University of North Dakota Energy & Environmental Research Center.

In its report, the DOE found no link between crude oil properties and the chance or severity of a fire caused by a derailment. Instead, the report found that the kinetic energy created by the derailment was a larger factor in the size of a fire than the volatility of the crude being transported, the researchers said.

Is Bakken Crude More Volatile?

As for the volatility of crude oil from the Bakken Formation, Turner, Mason & Company conducted a study in 2014 for the North Dakota Petroleum Council (NDPC) which found that Bakken crude “appears to be generally similar in vapor pressure and light ends content to most light crude oils, and there are certainly crudes, particularly those produced from tight oil formations, which are higher in those parameters.”

Congress Looks at Bakken Crude

The U.S. Congress took up the issue of the safety of transporting crude oil from the Bakken Formation last year.

In September 2014, the House Science, Space, and Technology Committee held an energy and oversight hearing with experts from the Pipeline and Hazardous Materials Safety Administration, the Department of Energy, ND Petroleum Council, Turner, Mason & Company, and the Syracuse Fire Department. The hearing examined the characteristics and behavior of crude oil from the Bakken region.

At the hearing, officials testified that the increased risk of an incident has to do with the increased volume of product being transported and not the volatility characteristics of Bakken crude.

BNSF’s Role as a Common Carrier

As a common carrier, BNSF Railway can’t refuse under most circumstances to carry cargo, despite the potential loss or damage presented by the cargo.

And, while BNSF’s growing role as a mobile crude oil pipeline has meant billions in new revenue, it also has presented new risks in regards to fire in the event of derailment, collision, or other accidents.

BNSF has responded by pushing for safer tank cars, and has boosted training for both its crews and emergency responders in communities along its routes.

New Tank Cars and Retrofitting Existing Fleets

Under Enhanced Standards for New and Existing Tank Cars for use in an HHFT—New tank cars constructed after October 1, 2015, are required to meet the new DOT Specification 117 design or performance criteria.

The standards will require replacing the entire fleet of DOT-111 tank cars for Packing Group I, which covers most crude shipped by rail, within three years and all non-jacketed CPC-1232s, in the same service, within approximately five years.

An HHFT (high-hazard flammable trains) is defined as a train carrying 20 or more tank carloads of flammable liquids, including crude oil and ethanol.

The need for replacement and retrofitted tank cars impacts a wide-range of shippers that transport by rail. Those shippers include shippers of LPG, oil producers and refiners, and ethanol producers that own their own tank cars or lease them from leasing companies. It also impacts BNSF Railway’s own fleet of tank cars.

Retrofitting existing tank cars is an important bridge to safer shipping of flammable liquids, as the current backlog of new tank car orders sits at a record 52,000 units.

A Significant Portion of BNSF’s Revenue

One thing that’s not in dispute is how significant the transportation of volatile liquids is to BNSF. Petroleum, Ethanol and LPG make up roughly 7-percent of BNSF’s freight hauling. In 2014, BNSF moved enough petroleum to fill the gas tanks of 350 million vehicles.

Another thing that’s not in dispute is that the move for safer tank cars benefits Berkshire’s UTLX, a manufacturer and retrofitter of tank cars that has been hiring and opening new facilities due to the unprecedented demand.

Berkshire has also been expanding the number of tank cars that it owns.

Berkshire’s Marmon Holdings, Inc., the unit of Berkshire Hathaway that owns UTLX, acquired substantially all of GE Railcar Services’ owned fleet of railroad tank cars as of September 30, 2015. Roughly 25,000 full-service and net-leased tank cars are covered by the transaction.

Still One More Dispute in the Wings

With NTSB’s Christopher Hart dismissing the volatility issue of Bakken crude as an extraordinary hazard, BNSF’s dispute with the AFPM may mean it is now in a weaker position to justify its tank car surcharge, which is something that could potentially cost Berkshire and BNSF millions down the road.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.