Copyright of the Daily Oil Bulletin 2018
CN Invests To Increase Crude-By-Rail Business In H2 2018
Having curtailed its crude-by-rail business over the last six months, Canadian National Railway Company will ramp up crude volumes in the back half of 2018 as construction work this summer replenishes network capacity.
“We really no longer do any spot business,” Jean-Jacques Ruest, interim president and chief executive officer, told the company’s first quarter conference call on Monday. “We have a signed contract business that will start up a little bit in the second quarter, but most of it [will start up] in the third and fourth quarters, and into 2019.”
For the three months ended March 31, 2018, CN moved 153,000 carloads of petroleum and chemical products — the segment that includes crude-by-rail. By comparison, in Q1 2017 the company moved 157,000 carloads in this segment. “In light of our capacity challenge, we’ve reduced our crude-by-rail business in the last two quarters,” Ruest said. “Crude carloads were reduced 25 per cent versus last year in Q1.”
So as to build capacity and improve resiliency, though, CN has increased this year’s capital program to $3.4 billion, with roughly $400 million directed to new track infrastructure — particularly in Western Canada.
How much crude-by-rail capacity is CN willing to take in light of this work? For now, Ruest said, that information is confidential. However, the answer obviously links back to the company’s capital program. “[This] is one of the reasons we are confident our capital program will have a return on investment — because there are ways to actually tie some of these developments with very specific take-or-pay volumes in some segments.”
During the first quarter of this year, petroleum and chemicals brought $564 million in revenue to CN, which is three-per-cent less than during the comparative timeframe one year prior.
Management attributes the decrease mainly to lower crude volumes and the negative translation impact of a stronger Canadian dollar, partly offset by freight rate increases, higher applicable fuel surcharge rates and higher volumes of refined petroleum products.
In Q1 2018, CN’s total revenue across all segments totalled $3.194 billion, compared to $3.206 billion in Q1 2017. Meanwhile, the company’s net income was $741 million during the first three months of this year, which is 16-per-cent less than during the same prior-year period.
Due to weaker-than-expected revenue ton-miles in the quarter and a longer-than-anticipated required construction period for significant infrastructure capacity projects this year, CN has revised its financial outlook, calling for adjusted diluted earnings per share of $5.10 to $5.25, which is down from the company’s previous target of $5.25 to $5.40. By comparison, last year’s earnings per share totalled $4.99.
Ruest said: “With our entire team focused on restoring operational and service excellence for our customers, CN has turned the corner on a difficult quarter and winter. Our metrics are showing sustained, sequential improvement, and that momentum will build as we continue to expand track capacity, add crews and bring on new locomotives.”
Last month, CN’s board replaced Luc Jobin with Ruest in the CEO role, suggesting in an increasingly competitive marketplace the company must respond with speed and innovation to retain its leadership position. The board said it recognizes the “immediate operational and customer service challenges the company has been facing” since fall 2017, led by high demand and insufficient network resiliency, coupled with a severe winter (DOB, March 5, 2018).
Ruest told this week’s Q1 conference call that the search to find a permanent new president and CEO has begun, obviously. However, the board has no specific timing for when CN will fill this position.
For 2018, CN anticipates growth across a range of commodities, particularly regarding frac sand, refined petroleum products, Canadian coal exports, Canadian grain, intermodal traffic, and lumber and panels. The company also expects higher volumes of U.S. coal exports and crude.
Meanwhile, at Canadian Pacific Railway Limited the company last week reported that in the first quarter of 2018 its crews moved 17,000 crude carloads, and management is continuing with discussions involving existing customers and terminals in regards to opportunities for CP to grow that business segment later this year (DOB, April 20, 2018).
CN’s labour status
As the company’s main Canadian competitor grapples with union contract issues, CN management is confident it will soon have a ratified agreement for some 1,700 locomotive engineers, having reached a tentative agreement to renew the labour contract last month.
“It is being voted on right now, and we expect to get the results, I believe around the end of May,” noted Mike Cory, executive vice-president and chief operating officer. “Really, we have a very constructive labour environment we are working within.”
While making the contract announcement last month, Cory said CN is pleased to reach this tentative agreement with the Teamsters Canada Rail Conference, and doing so without any work disruption.
At CP, by comparison, following Canadian Labour Minister Patty Hajdu agreeing with the railroader’s request to order a vote on a final offer regarding union agreements renewals, the Teamsters and the International Brotherhood of Electrical Workers agreed to postpone a strike at CP over the weekend, although both unions also had asked their members to reject the company’s offers (DOB, April 23, 2018).
KCS enjoys Q1 crude-by-rail increases
South of the49th Parallel, Kansas City Southern Railway Company saw an 89-per-cent increase in its crude carload numbers for Q1 2018, when compared to Q1 2017, with the company moving 7,000 carloads in the first three months of this year. Crude-by-rail revenue totalled $10.7 million for KCS in Q1 2018, which is up 138 per cent from the comparative timeframe one year prior.
Brian Hancock, executive vice-president and chief marketing officer, told the KCS Q1 conference call that while his company expects its energy business to be down year-over-year in 2018, due to impacts of a coal-fired power-plant closure in Texas, crude-by-rail growth out of Canada should benefit the railway business.
“The crude business saw a slight resurgence due to the increased production in Canada, with decreased pipeline capacity paired with the increasing Brent and Maya spreads.”
According to Hancock, KCS is attached to many North American partners, including CP, in delivering crude-by-rail shipments into the southeastern U.S. and to some of the larger Gulf Coast facilities.
“We are very confident in our ability to move the freight” he said, adding the company is working with terminals, monitoring spreads, and making sure KCS has the right capacity and fluidity to able to handle the necessary crude-by-rail train lengths. “Given the pipeline capacity, and given the amount of crude available up in Canada and in some of the northern facilities, we feel pretty comfortable [crude-by-rail] is going to continue to grow.”
As for Union Pacific Corp., the largest American railway company, its management will release Q1 2018 financial and operational results on Thursday.