The amount of oil hauled by Canadian Pacific Railway Ltd. plunged 26 per cent in the first three months of the year, as producers slashed budgets and output amid the rout in crude prices.
The railway's leaders played down the drop in oil revenue on Tuesday as the Calgary-based company posted record first-quarter profit of $320-million and a 10-per-cent rise in overall sales to $1.67-billion.
"Our revenue story at CP is not about crude," said CP chief operating officer Keith Creel, adding the company moves a diverse range of cargo. "Yes, we're going to face headwinds, but we're going to pick up in other areas."
Still, the slowing flow of crude moving by rail has dampened what has been a fast-growing business for North American rail carriers. Oil shipments to the U.S. from Canada rose to more than four million barrels in January, 2015, from 13,000 barrels in January, 2011, as oil production rose amid a lack of pipeline capacity.
But the flow of crude moving by rail has slowed since autumn, after oil prices plunged to less than $50 (U.S.) from $100.
At CP, crude shipments now account for 6 per cent of total revenue. Montreal-based Canadian National Railway Co. does not break out oil sales, but it is believed crude represents a similar share of company revenue.
CP said it hauled 22,000 carloads of oil in the first three months of 2015, down from the previous quarter's 30,000 and an 8-per-cent drop from the year-earlier period's 24,000. Quarterly revenue from moving oil fell to $98-million from $104-million in the first quarter of 2014.
Overall revenue rose 10 per cent to $1.67-billion, driven by double-digit gains in shipments of grain, potash, fertilizer and chemicals. Automotive revenue fell 7 per cent.
Hunter Harrison, CP's chief executive officer, said on a conference call with analysts that hauling crude is not a big money maker, and comes with a long list of risks, including crash liability, high insurance costs and legislation from governments in Canada and the United States. "If we lose crude, we don't lose as much on the bottom line," he said.
Since the 2013 oil train explosion in Lac-Mégantic, Que., governments in Canada and the U.S. have imposed speed restrictions on trains carrying flammable goods and have begun phasing out older tank cars. The new rules have driven up costs for producers, compounding the effects of a 50-per-cent plunge in oil prices since the summer.
"When I got here, crude was $22 and we saw it go to $140. We've done pretty well between $22 and $140, so we can deal with $45 oil," said Mr. Harrison, who recently portrayed the company as a reluctant oil handler. Without providing details, he revealed the company's board looked at its ability to refuse to move oil, but was advised that common carrier rules prevented the company from choosing which goods it can haul.
CP in January slashed its expected crude-by-rail volumes for 2015 to 140,000 cars from an earlier estimate of 200,000 and halted plans to build lines that serve the energy sector. On Tuesday, Mr Creel said the company is sticking with the 140,000-car estimate "for now." The company also maintained its guidance that it expects to reach compounded annual growth of 10 per cent over the next four years.
Cameron Doerksen, an analyst with NBF Financial, said the company is off to a strong start for 2015. He said train speeds are up by 22 per cent while times spent at terminals are down14 per cent, signs that changes made by Mr. Harrison since he took charge in 2012 are boosting efficiency.
"A testament to CP's remarkable productivity improvement is its metallurgical coal business with Teck. Prior to the new regime, CP was using 28 trainsets to support Teck volumes. Today, CP is moving the same or even more volume with just 18 trainsets with obvious benefits for profitability," Mr. Doerksen said in a note to clients.