Union Pacific Sees Coal-Cargo Rebound as Gas Prices Rise

Union Pacific Corp. predicts coal cargoes will rebound in the remainder of the year as rising natural gas prices drive utilities back to a power source they snubbed.

That would bolster Union Pacific, which relied on higher rates to boost first-quarter profit amid falling shipments of coal, its largest single cargo by volume. Carloads of the commodity have dropped at all three of the biggest U.S. railroads as utilities took advantage of cheaper natural gas produced from shale formations.

Natural gas’s edge may be fading now, with prices reaching a 20-month high of $4.42 per million British thermal units today after a report showed U.S. stockpiles grew less than forecast. Some utilities are already shifting back to coal, a trend that may strengthen as energy demand surges during the U.S. summer, said Union Pacific Chief Executive Officer Jack Koraleski.

“Once we get through May and you start to get into the summer air-conditioning season, if we have a normal hot summer across the United States, we will see an increase in coal volumes and the $4 natural gas will be favorable for our volume growth,” Koraleski said in a telephone interview after the Omaha, Nebraska-based railroad reported earnings.

Coal volumes may remain down for the year as a whole, following a 19 percent drop in the first quarter, Eric Butler, Union Pacific’s executive vice president of marketing, said today on a conference call.

Price increases of about 4 percent on average pushed freight revenue up 3.3 percent in the three months through March, even as the drop in coal volumes and a decline in agricultural shipments pulled total carloads lower.

Earnings Growth

Net income rose 11 percent to $957 million, or $2.03 a share, Union Pacific said in a statement. That surpassed the $1.96 average estimate of 28 analysts surveyed by Bloomberg and compares with $863 million, or $1.79 a share, a year earlier.

“A significantly better pricing story for Union Pacific supports a relatively better earnings-per-share outlook,’ Thomas Wadewitz, an analyst at JP Morgan in New York with an overweight rating on the stock, said today in a note to clients. That should support share-price gains, he said.

Union Pacific climbed 4 percent to $142.46 in New York, its highest closing price since at least July 1980. The stock has gained 13 percent this year as the Standard & Poor’s 500 Index has risen 8.1 percent.

The company’s operating ratio, an industry benchmark that compares expenses to sales, improved to 69.1 percent from 70.5 percent in last year’s first quarter. Union Pacific is “committed” to reducing the ratio to less than 65 percent a year by 2017, Koraleski said today.

Crude Shipments

Total revenue at the railroad climbed 3.5 percent to $5.29 billion in the quarter, topping an average analyst estimate of $5.21 billion.

Sales in the chemicals business, which includes crude oil, advanced 14 percent to $873 million. Crude shipments more than doubled in the first quarter compared with the same period a year ago, Koraleski said, and the railroad now carries about five crude trains a day.

The growth rate for crude won’t remain that high, Koraleski said.

“This year there aren’t as many new capacity projects that will be turned over to operations, so what you will see is a continuation of strong volume, but the year-over-year comparisons won’t stay at the same level,” he said. “We will see some nice growth in crude but as the numbers get bigger, the ability to do triple-digit growth becomes smaller.”