Zacks Industry Outlook Highlights: Union Pacific, CSX, Canadian Pacific
Railway, Kansas City Southern and Norfolk Southern
CHICAGO, May 14, 2013
CHICAGO, May 14, 2013 /PRNewswire/ --Today, Zacks Equity Research discusses
the U.S. Railroads, including Union Pacific Corp. (NYSE:UNP), CSX Corp.
(NYSE:CSX), Canadian Pacific Railway Ltd. (NYSE:CP), Kansas City Southern
(NYSE:KSU) and Norfolk Southern Corp. (NYSE:NSC).
A synopsis of today's Industry Outlook is presented below. The full article
can be read at
Consistent with the current macroeconomic trends, railroads started the year
on a mixed note. Going by the rail traffic report for the first quarter 2013,
growth in automotive and petroleum products' shipments was steady while coal
and grain shipments continued to cast a shadow over the rail freight industry.
According to the Association of American Railroads' (AAR) rail traffic report,
cumulative performance of the North American railroads (including U.S.,
Canadian and Mexican railroads) have fallen 1.5% year over year in the first
quarter of the year. The biggest contributor to this decline was grain, which
dropped 11%. Coal volumes followed closely, falling around 7%.
Going by the quarterly performance of the class 1 railroad, we see continued
lower volumes from most of these carriers. One of the largest class 1
railroads in North America -- Union Pacific Corp. (NYSE:UNP) -- registered
first quarter volume decline of 2% year over year. Another major railroad CSX
Corp. (NYSE:CSX) also reported a similar level of decline in its volumes.
Going forward, Canadian counterpart, Canadian Pacific Railway Ltd. (NYSE:CP)
also experienced lackluster growth trend with flat volume growth on a
However, railroad operators like Kansas City Southern (NYSE:KSU), Norfolk
Southern Corp. (NYSE:NSC) others have shown modest volume growth, mainly
driven by the emerging automotive business and rising petrochemical shipments.
Notably, despite mixed carload results, these carriers have mostly generated
positive earnings in the reported quarter. The primary catalyst to this
bottom-line performance was operational efficiency even in times of low market
demand. Rising employee productivity, deploying fuel-efficient locomotives and
undertaking railroad safety measures are some of the key drivers of
profitability even in adverse market conditions.
Rail carriers like Canadian Pacific recorded operating ratio improvement of
430 basis points year over year. Continued focus on maintaining asset
efficiencies, safety measures and increased productivity have been the prime
contributors to Canadian Pacific's success in the first quarter. There are
several other near-term growth catalysts in the railroad industry.
Rising Contribution of Petroleum Product Shipment
According to the AAR report, rail traffic from petroleum products has seen a
whopping 46% growth in the three-month period ended Mar 30. According to the
Energy Information Administration's (EIA) reports, U.S. crude oil exceeded 7
million barrels per day production, representing record growth since the last
two decades. Further, in 2013, long-term projections of EIA suggest that this
growth may also go up to 10 million barrels per day over a period of 2020 to
As a result, this surge represents a potential opportunity for revenue
accretion, which the railroads are trying to tap with infrastructural
development. According to industry sources, the role of crude oil as a revenue
contributor has grown by leaps and bounds in a four-year span from a mere 3%
to 30% of the oil and petroleum products shipment by railroads.
Despite the fact that rail-based crude transportation costs five times more
($10–$15 per barrel), crude shippers are compelled to rely on rail-based
transport. This is due to the lack of pipeline infrastructural support in key
oil and gas fields like Bakken Shale Formation in North Dakota and Montana,
Eagle Ford Shale, Barnett Shale and Permian basin in Texas, the Gulf of Mexico
and Alberta oil sand fields in Canada.
In 2012, Canadian National Railway, which operates along the Western Canada
(Alberta region) to the Gulf Coast, has shipped approximately 30,000 tank cars
of volumes of crude oil, while its counterpart Canadian Pacific shipped 53,000
tank cars of crude during the same period. Another giant railroader, BNSF
Railroad of Berkshire Hathaway Inc. (BRK-B), which serves the North Dakota
region reportedly earned $272 million from crude shipments last year by
shipping approximately 100 million barrels of oil.
In the coming days, we expect railroads to accelerate their investment in
order to create adequate service capacity for the oil and gas markets.
Canadian Pacific projects crude shipment to reach up to 70,000 oil-tank cars
by the year-end and move to 140,000 by the end of 2015. This kind of
exponential growth in crude oil shipments is taking place across the rail
industry. Consequently, we expect petroleum shipments to remain favorable and
emerge as a significant revenue contributor in the long term.
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