CP said it had no immediate response Thursday to what it called a 'private shareholder matter.'Canadian Pacific Railway/The Canadian Press
Railways are one of the few old businesses that can adapt very well to change. Just take a look at what's going on in the oil sands: There, rail has become a popular alternative among a number of companies for shipping bitumen to refineries in Texas, California and Pennsylvania, bypassing pipelines.
The investing implications are potentially large. Railways are already essential for transporting all sorts of commodities, making them strongly linked to the performance of the global economy. Add one more essential commodity into the mix – oil – and railway stocks look downright tantalizing.
This might explain why Bill Ackman's Pershing Square is keen to hold onto its 14 per cent stake in Canadian Pacific Railway Ltd. , even after the stock's big gains over the past six months. But while the role of railways in the energy industry is certainly fascinating, railway stocks are not table-pounding buying opportunities right now.
My colleague Nathan VanderKlippe has written an excellent article pointing out some of the advantages rail has over pipelines. While pipelines face opposition to constructing to new projects, rail gets a pass. Railways can also switch destinations far more easily, making them far more flexible. And while bitumen flowing through pipelines needs to be mixed with an expensive thinner, railways can transport the thick goo as is.
No wonder this is such a growth area for railways. According to New York-based Atlantic Systems Inc., the number of carloads of petroleum products moved by rail each week in North America has been surging since the start of 2011. The five-week moving average (which smoothes out some of the bumps in the data) is at a record high of 15,382 – up about 40 per cent in less than 18 months.
"It's a somewhat large business – it's not a huge business, like coal – that's getting bigger for the railroads," Drew Robertson, president of Atlantic Systems, told me.
By one estimate, 10 per cent of oil produced by oil sands projects could one day be moved by rail. CP, in particular, has big plans. By 2014, it hopes to move 70,000 car loads of oil annually, up from 500 car loads in 2009.
These sound like the most bullish reasons to own railway stocks since the last spike completed the Canadian Pacific Railway in 1885. But allow me to temper some of this enthusiasm.
One problem is cost. As Mr. VanderKlippe's article points out, it costs about twice as much to move oil on rails than through a pipe. That raises the question of whether rail is seen as a short-term bridge to transport oil where pipeline capacity is not yet established. And it certainly puts a drag on rail's growth potential, especially if oil prices suffer.
The other problem is that the current boom in oil traffic for trains merely replaces part of what's being lost in coal traffic. Certainly, North American coal traffic for trains has seen better days, even as it remains a huge part of the railway business. According to Atlantic Systems, the number of coal carloads moved by rail each week in North America (again, using a five-week moving average) has declined to 116,778, down 12 per cent since the start of 2011. Put another way, while petroleum shipments have risen by less than 5,000 carloads per week over this period, coal shipments have fallen by more than 16,000 carloads, leaving a sizable gap.
To be sure, these are early days for oil-chugging trains. But pipelines aren't exactly scared of the threat, if share prices are any indication. The combined average gains of TransCanada Corp. and Enbridge Inc. since the start of 2011 top the average gains of CP and Canadian National Railway Co. by about 8 percentage points.
Is that about to shift? As an oil sands play, railways are going to be a fascinating story to watch. But like many fascinating stories, the view from the sidelines might be the best angle for investors.
David Berman