The plunge in oil prices is expected to dampen the rise in moving crude by rail, a fast-growing segment that sprang up amid a shortage of pipeline capacity and $100 oil.
As oil touched $67.19 (U.S.) a barrel Tuesday, the economics of moving oil to market by train become less appealing to producers, and railways face slower growth in the lucrative segment.
Share prices for Canadian Pacific Railway Ltd. and Canadian National Railway Co. have fallen by 8 per cent and 7 per cent, respectively, over the past five trading days as investors weighed the prospect that rail companies would see a decline in oil volumes as producers either scale back production or balk at paying the $15 to $20 premium to ship a barrel of oil by rail.
Walter Spracklin, a Royal Bank of Canada equities analyst, said CP is more exposed to any drop in oil prices than rival CN, given the Calgary-based company's focus on the high-cost Bakken shale region of North Dakota, Montana and Saskatchewan.
With production costs estimated to be just under $60 a barrel, Bakken-oil output could slow if low prices persist.
According to the North Dakota Pipeline Authority, 59 per cent of the state's oil production moved by rail in September, compared with 35 per cent by pipeline.
CP's $354-million in crude-by-rail revenue for the first three quarters of 2014 accounts for just 7 per cent of total sales, but represents a 33-per-cent rise over the same period a year earlier. CP has said it expects to double the number of oil tank cars it hauls to about 200,000 by next year amid a shortage of pipeline capacity.
Railways say they can help oil producers fetch better prices for their product by reaching more markets than pipelines. And as approvals for major pipeline projects, including TransCanada Corp.'s Keystone XL, remain stuck in political limbo, rail companies have picked up some of the excess production.
CN does not break out its oil revenue, which is believed to be a smaller share of the total than that of CP. Crude shipments are lumped in with chemicals and other petroleum products, to account for 20 per cent of sales. Mr. Spracklin said CN has an edge over CP because the Montreal-based carrier is focused on Western Canadian crude, a heavy variety whose producers are less affected by the plunge due to often lower production costs.
According to RBC's yearly survey of rail shippers, overall freight volumes are expected to rise by up to 5 per cent in 2015, a sign of confidence in the economy even as oil prices plunge. The survey also found more than half of the shippers expected rail rates to increase by 4 per cent to 6 per cent next year, an increase that bodes well for the rail companies as they try to boost revenues and hit higher targets.
Fadi Chamoun, an equities analyst with Bank of Montreal, said he believes Western Canada's production of crude, which has been the main source of growth for railways, will not slow as prices drop. He expects railways will move the expanded output over the next two years, and that pipeline capacity will remain limited "until 2018 or later."
But if drillers in the Bakken region reduce production, Mr. Chamoun said railways should expect a decline in the booming business of hauling frac sand, which is injected into shale rock with fluid to release petroleum. It takes about 100 rail cars of frac sand to drill one well, said Mr. Chamoun, who sees an upside to the reduced demand from the energy sector: reducing the congestion that has choked much of the North American rail network in the past year.