Copyright of the Daily Oil Bulletin 2018
CP Moves 17K Crude Carloads In Q1; Company Readies For Possible Strike
Canadian Pacific Railway Limited moved 17,000 carloads of crude in Q1 2017, and management is discussing with existing customers and terminals about the opportunities for CP to grow that business segment later this year.
“Could the run rate grow, say, 15 to 30 trains per month as we move to the back half of this year? Yes, it certainly could,” John Brooks, chief marketing officer, told this week’s first quarter conference call. “But as we’ve been diligent in saying, those deals aren’t done, and those deals must be supportive of the resources, the equipment, the people and the locomotives to bring that on.”
He added: “The positive piece is the shippers we are working with, and for the opportunities out there we are definitely active in discussions. I do think there is a realistic opportunity that we get stuff done.”
Only a very small number of those 17,000 crude-by-rail carloads are on annual contracts, noted Brooks, and the rest are on two or three year contracts. “Right now, typically, the terms we are discussing with the shippers are three years, and I would say we are close in agreements, but we’ll work through that over the next few weeks to see how those ultimately materialize.”
Keith Creel, president and chief executive officer, said CP will ramp up its crude-by-rail business responsibly, and the company knows that ultimately this business segment has its limitations.
“We’re not a railroad that has a view that pipelines might not come to fruition. They will. It’s not really a matter of ‘if.’ It’s really just the ‘when’ piece that we don’t know. I do think that long term there will be some level of business left, a ‘niche market’ so to speak, from a diversification standpoint, and from a quality and optionality standpoint, where the oil companies will partner with railway.
“However, we are under no false impression that railways are ultimately going to replace the pipelines that are going to be built.”
During the first quarter of 2018, CP moved 74,200 carloads of energy, chemicals and plastics (the category that includes crude-by-rail), which is 11 per cent more than in Q1 2017. Freight revenue for this category in Q1 2018 was $257 million, which is up 13 per cent from the same period last year. Management primarily attributes this increase to higher volumes of crude and liquefied petroleum gas, as well as higher fuel surcharge revenue due to higher fuel prices.
The company’s total revenue and net income for the three months ended March 31, 2017 was $1.662 billion and $348 million, respectively, which is up four per cent and down 19 per cent from the comparative 2017 timeframe.
“This was a challenging quarter as we battled extreme weather and unprecedented demand, significantly in the northern reaches of our network,” Creel said, adding with the “extraordinary winter weather behind us” CP saw tremendous March momentum, which positions the company for the rest of the year.
“We continue to produce results using the foundations of precision railroading and remain confident in our ability to deliver sustainable, profitable growth in 2018 and beyond.”
Just where do the spreads need to be to keep crude-by-rail viable? According to Brooks, where the spreads are right now seem to be sufficient. “The last I saw we seemed to be around $17 to $18. That and north of that is where I expect it to be. Does it sustain itself down to $13 or $12? We’ll see. But at least with the producers and folks we’re talking to, the terminals, [they] really believe the levels we’re at right now, and above, are really where things are going to be.”
He added: “We remain in active discussions with a variety of crude-by-rail shippers, and we continue to take a very disciplined approach in any new agreement.”
Job action issues
Unfortunately for crude-by-rail shippers and anyone else looking to freight commodities on the CP lines, the very real possibility of a strike currently and imminently looms over Canada’s economy (DOB, April 18, 2018).
This week, CP received notice from the Teamsters Canada Rail Conference-Train & Engine (TCRC) and the International Brotherhood of Electrical Workers (IBEW) of plans to strike just after 12 a.m. EDT on Saturday.
“Should this happen by Saturday morning, as far as the term, I really don’t know what to say except I’m hopeful the long-term interests of all parties and stakeholders will bring all parties to a reasonable outcome,” Creel told this week’s Q1 conference call. However, he added, CP would not be “held hostage” by union demands either.
“We can’t take a position that is going to destroy our long-term ability to be on solid financial footing, to be able to run this company, to be able to reinvest in this company, to invest for growth with our customers, invest in growth for our shareholders, and to provide reliable transportation service to the Canadian economy.”
In its letter to the company and minister regarding the notice, TCRC noted it is continuing to meet with CP’s bargaining committee, with plans to keep doing so through to the deadline.
According to CP, the company has worked closely with both TCRC and IBEW to reach a negotiated settlement in everyone’s best interests. This week, the railroader separately presented Teamsters and IBEW with three- and- five-year agreement options for consideration.
Creel said CP would remain focused on the long-term impacts on the company through the bargaining process, which might mean making a right decision that is tough, rather than an easy decision that is wrong. Admittedly, he is concerned about the impacts of a work stoppage on customers, shareholders and the Canadian economy, no matter how long the strike lasts.
He has spoken with the respective federal ministers of labour and transportation on CP’s labour situation as the situation unfolds. The CEO said: “They’ve both expressed their commitment to the collective bargaining process. They’ve expressed their desired commitment to the Canadian economy, and they’re encouraging parties to reach a settlement, and their optimistic that we can.
While Creel also remains open-minded and optimistic, he stressed that CP must also remain realistic and plan with its customers to ensure contingency plans are in place — just in case.