Right-of-Way

A Right-of-Way is a legal right, established through an agreement or grant, that allows a person or entity to travel across or use a piece of property owned by someone else for a specific purpose. Think of it as a permanent permission slip to use land you don't own. This isn't just about a friendly neighbor letting you cut across their lawn; in the world of investing, it refers to massive, strategic corridors of land used for critical infrastructure. Companies operating railroads, oil and gas pipelines, and electric transmission lines depend on these rights. A right-of-way is a type of easement, a powerful legal tool that allows the development of networks that are essential to a modern economy. For a company, securing a right-of-way means it can build and maintain its infrastructure without having to buy every single parcel of land outright, creating a continuous path over potentially vast distances.

For a value investor, a company that owns an extensive and exclusive right-of-way network is like finding a map to a hidden treasure. These legal rights are often far more valuable than the physical assets built upon them, creating durable competitive advantages that can last for generations.

The true power of a right-of-way lies in its ability to create a formidable economic moat. This moat acts as a massive barrier to entry, protecting the company from competitors. Imagine you wanted to compete with a major railroad company like Union Pacific. You wouldn't just need billions for trains and tracks; you'd first have to acquire the legal right to lay those tracks across thousands of miles of private and public land. The political, legal, and financial hurdles would be practically insurmountable. This gives the existing company a near-monopoly on its route. The same logic applies to a pipeline operator with a cross-country network or a utility company with transmission lines powering a major city. A competitor simply can't build a rival network next door.

A right-of-way is a classic example of an intangible asset whose true economic value is often poorly reflected on the balance sheet. The accounting value might be based on the historical cost of acquiring the rights decades ago, which could be laughably low compared to its value today. Legendary investor Warren Buffett understood this perfectly when his company, Berkshire Hathaway, acquired the BNSF Railway. He wasn't just buying trains and tracks; he was buying an irreplaceable, continent-spanning network of rights-of-way that generates predictable revenue year after year. As an investor, your job is to look past the reported book value and recognize the immense strategic value of these exclusive corridors.

When you find a company whose business is built on such a network, it's time to dig deeper. Not all rights-of-way are created equal.

Ask yourself these critical questions to gauge the quality of the company's moat:

• Exclusivity and Permanence: Are the rights perpetual and exclusive? Rights that don't expire and prevent others from building alongside are the most valuable.
• Strategic Location: Does the network connect key economic centers, resource-rich areas, or major population hubs? A pipeline connecting a prolific shale field to a coastal refinery is more valuable than one in a declining region.
• Cost to Replicate: What would it cost a competitor to build a similar network today? In most cases, the answer is “nearly infinite,” which is exactly what a value investor wants to hear.
• Expansion Potential: Does the company have the ability to expand its capacity along its existing right-of-way? For example, adding another pipeline or fiber-optic cable is far cheaper than acquiring a new route.

While powerful, these assets are not without risks.

• Regulatory Scrutiny: Governments can regulate the prices these companies charge (e.g., freight rates, electricity transmission fees), potentially capping profitability.
• Maintenance Costs: The physical infrastructure sitting on the right-of-way—tracks, pipes, towers—requires constant and expensive maintenance.
• Public Opposition: Acquiring new rights-of-way for expansion can be incredibly difficult due to public opposition and the use of controversial legal tools like eminent domain.

A company that controls a strategic, irreplaceable right-of-way network possesses one of the most durable competitive advantages in the business world. This legal privilege creates a powerful barrier to entry, protecting the company's long-term cash flows and rewarding patient, insightful investors. When you see a business built on this foundation, you may be on the right track to a fantastic investment.