Canadian Pacific Railway Ltd. has slashed its forecast for crude-by-rail volumes amid the rout in oil prices that prompted drillers to cut budgets and production.
The Calgary-based freight carrier said it moved less oil in the final three months of 2014 and it expected to haul about 140,000 tank cars this year, down from an earlier estimate of 200,000.
The 50-per-cent plunge in oil prices since the summer has spurred a widespread revision of economic and financial outlooks from central banks, governments and the oil industry. CP on Thursday confirmed the lower prices would affect what has been a fast-growing source of new revenues for railroads – hauling oil to places pipelines can’t or won’t reach.
“We have obviously seen commodity price declines that we had not expected,” said Keith Creel, chief operating officer of CP.
Hunter Harrison, CP’s chief executive officer, said the decline in crude prices should give the economy a boost and the railway will see a rise in demand for other commodities as a result. “If you think the economy’s going to pick up as a result of the consumer’s disposable income going up, then you can certainly make a case that the other commodities pick up and effectively it’s a wash, and that there is no negative impact at these [oil] prices to the bottom line.”
The profit margins for moving crude are lower than those of the other commodities hauled by CP, including grain, potash, coal and lumber. This limits the negative effect of a slowdown in the oil business, Mr. Harrison said in an interview.
“Do we make money at it? Clearly, or we wouldn’t be doing it. But the loss of crude is less damaging than other commodities. The whole book of business represents around 10 per cent [of CP’s revenue]. We’re certainly not going to lose it all. Probably no more than half,” he said.
CP has set ambitious growth targets of doubling per-share earnings and boosting annual revenue to $10-billion by 2018. One-third of this growth is expected to come from moving oil as new terminals are built to overcome scarce pipeline capacity in Western Canada and the Bakken region of North Dakota. Earnings per share should rise by more than 25 per cent this year, as revenue rises by 7 per cent to 8 per cent, which is lower than CP’s four-year average guidance of 10 per cent a year.
Mr. Harrison said he is sticking by those estimates. “Look, when I got here crude was at $22 (U.S.) and I saw it go to $140. We can deal with $45 oil,” he said.
Amid the slowdown in energy, CP posted record fourth-quarter financial results as net income rose to $451-million (Canadian), or $2.68 a diluted share, from $82-million, or 47 cents, in the year-earlier quarter. Revenue for the quarter increased by 10 per cent to $1.76-billion.
Analysts had been expecting a quarterly profit of $2.56 a share, with revenue of $1.73-billion.
For the full year, the railway said Thursday that adjusted per-share earnings increased by 32 per cent to $8.50, from the year earlier. Revenue for 2014 rose by 8 per cent to $6.62-billion, a company record.
The operating ratio, a closely watched measure of expenses versus sales, improved to 59.8 per cent from 62.8, narrowing the gap with industry leader Canadian National Railway Co.’s 58.8 per cent.
Since joining CP in 2012 as CEO, Mr. Harrison has slashed costs and boosted efficiencies by, among other things, retiring 10,000 railcars, increasing train weights and streamlining operations.
National Bank analyst Cameron Doerkson said the results reaffirmed his belief in CP’s long-term growth, pointing to the potential for share buybacks, asset sales and the benefit of a lower Canadian dollar.
Walter Spracklin, an analyst with Royal Bank of Canada, called the company’s operating ratio “impressive” but said the reduced outlook is a sign the company expects slower growth in its energy business.
Mr. Harrison said the slower growth in crude shipments is a result of lower production, not a decline in railways’ share of oil shipments.
“If what you read is correct, we’re getting to a point where supply is more than demand, which I thought was a good place to be, but it doesn’t appear that way. Clearly I think it’s the price and the world situation. It’s no shift in rail market share. Everybody is getting the same type of squeeze,” said Mr. Harrison, who is slated to leave CP in mid-2017.
Mr. Harrison, who is in his early 70s, has signed on to stay with CP for another two years and is showing no signs of slowing down.
“I’m travelling as much as I ever have, or more,” he said by phone. “I have an obligation to July of 2017, and then what happens then, we’ll take it under advisement.”Report Typo/Error