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Canadian railways temper 2015 outlook on tough market conditions

A sluggish economy and lower volumes of coal, grain and energy products could undermine the lofty 2015 earnings goals, analysts say.


July 14, 2015
by The Canadian Press

MONTREAL — Canada’s sluggish economy and lower volumes of coal, grain and energy-related products could undermine the lofty 2015 earnings goals for the country’s two largest railways, say industry analysts.

Canadian National and Canadian Pacific are expected to temper their earnings outlook when they report results next week.

Calgary-based CP had anticipated at least 25% earnings per share growth for the year, while Montreal’s CN had suggested nearly 10% growth.

But lower freight volumes in recent months prompted several analysts to trim their earnings forecasts for the second quarter and raise concerns about the current quarter that began July 1.

BMO Capital Markets analyst Fadi Chamoun warns of a “tough earnings season ahead,” adding that a turnaround in volumes may not come until later this year or early 2016.

CN’s volumes were down 7.3% in the second quarter, led by double-digit decreases for coal and grain. CP volumes decreased 5.8%, hurt by US grain, crude and domestic intermodal.

Although WTI oil prices surged about 25% in the quarter, the railways are being hurt by a delayed recovery in crude volumes as heavy oil producers like Cenovus and Canadian Natural Resources were forced to shut down production in northern Alberta for about two weeks due to wildfires.

Benoit Poirier of Desjardins Capital Markets says the outlook for crude-by-rail remains uncertain for both railways even though the Canadian Association of Petroleum Producers expects shipments will rise eight per cent this year to 200,000 barrels per day before accelerating to 600,000 barrels in 2018.

Poirier has lowered his forecast for crude carload growth at both railways. He expects CN’s shipments will increase 5%5 to 135,000 carloads this year, while CP volumes will slip 10% to 99,000.

Offsetting the railway’s challenges is growth in international intermodal for both railways.

Analysts expect the prospects are especially strong for CN, which is working on a partnership one of the largest US truck lines (JB Hunt) and is exclusive railway for the Port of Prince Rupert, whose volume is expected to expand almost 60% by 2017 under new ownership by DP World (Dubai Ports.)

© 2015 The Canadian Press

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