Canadian Manufacturing

Despite price volatility, crude-by-rail volumes expected to grow

Volatility in energy prices expected to be "wild card" long-term, but crude-by-rail volumes should continue to grow



MONTREAL—Volatility in energy prices is expected to be a “wild card” for Canadian railways in the long term, but crude-by-rail volumes should continue to grow, albeit more slowly, in 2015, an industry analyst said.

Walter Spracklin of RBC Capital Markets said in the short-term he believes shipments of oil by rail are secured by contracts through 2015.

“Crude-by-rail momentum will be sustained by infrastructure investments and contractual commitments in the near-term, however, longer-term prospects are less certain if (West Texas Intermediate) WTI (pricing) stays at current levels,” he wrote in a report.

The price of WTI crude oil, the American benchmark, fell to US$48.96 a barrel Jan. 6, the fourth straight day of declines and the lowest level since April 2009.

Crude-by-rail shipments have grown rapidly in recent years amid growing concerns about rail safety.

Canadian National Railway Co. (CN) and Canadian Pacific Railway Ltd. (CP) posted strong double-digit growth in petroleum products in 2014.

Frac sand shipments were also up.

They were the bright spots on the year for CP, whose total volumes fell 0.6 per cent on decreases in six of 10 commodity groups due to contract losses and lower coal traffic.

CN led the North American industry last year, with total carloads increasing 8.2 per cent for the 52 weeks ending Dec. 27, according to data from the Association of American Railroads (AAR).

Spracklin expects overall volume growth will slow for most North American railways aside from CP.

He estimates the Calgary-based railway’s revenue ton miles (RTM)—a key measure determining profit based on revenue to transport one ton of goods for one mile—will grow 5.1 per cent in 2015, up from 3.8 per cent in 2014.

The outlook assumes a pickup in intermodal growth and slower crude traffic than previously implied by CP.

Spracklin expects CN’s RTMs will grow 4.4 per cent, down from about 11 per cent in 2014.

Congestion hurt the North American rail network last year as all railways posted slower train speeds and more time in terminals due to unanticipated volume growth, capacity constraints and a stormy winter in the first quarter.

Analyst Fadi Chamoun of BMO Capital Markets has said he anticipates CN will generate 14 per cent compounded annual earnings per share growth over the next five years.

He expects CN’s crude volumes will increase to 200,000 carloads a year by 2015 from about 130,000 currently, and could reach 300,000 over the next two years.

Shipments of frac sand used to extract underground oil and gas in the process known as fracking are forecast to grow by 25 per cent annually over the next several years.

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