Railroad sees better volumes in energy and other bulk freight, with road-to-rail opportunities coming next year.
Canadian Pacific Railway Limited (NYSE: CP) reported its highest quarterly revenue ever thanks to growth in energy and potash freight volumes. Third-quarter net income was the second highest its reported, as the railroad credits the business model set up by late chief executive Hunter Harrison.
The sixth largest North American railroad by revenue, Canadian Pacific saw revenue rise 19 percent to $1.9 billion Canadian ($1.45 billion U.S.), with net income up 22 percent to $622 million for the third quarter.
Chief executive Keith Creel says the results speak to precision scheduled railroading "producing a very, very compelling value in the marketplace for customers at the same time producing a very compelling financial outcome for shareholders."
Creel says CP has been more efficient in terms of revenue per ton mile growing faster than total train miles, "which is the result of running fewer, longer trains, which is all part of the PSR model." The company's operating ratio also reached a record low of 58.3 percent.
CP saw its OR reach 67.5 percent and 64.2 percent in the first and second quarter, respectively, due to a harsh winter and a strike in spring. But chief financial officer Nadeem Velani says with those issues behind CP, "we should see the OR continue to improve. There's no reason we can't be industry best."
The quarter's strongest growth came from energy-related freight thanks to resurgent North American energy production. Energy revenue was up 63 percent to $339 million and carloads up 24 percent to 89,000 during the quarter.
Earlier this year, CP started up a deal with Smart Sand for bringing frac sand to a facility serving the Bakken shale formation in North Dakota. In addition, CP says it's hauling higher amounts of LPG, fuel oil and other refined products
Other bulk commodities also provided uplift with potash-related revenue up 27 percent to $130 million. Intermodal revenue was up 19 percent to $406 million with carloads up 9 percent to 262,000.
With a large amount of the intermodal volume coming from Asia, some analysts have posited that CP might be expose to any slowdown due to U.S. tariffs on Chinese goods.
But Creel pushed back on that, saying most of the company's railcars originate and terminate in Canada, which is not in a trade war with China. He says China-U.S. carloads account for less than 5 percent of the company's revenue.
"For anyone to suggest this railway is heavily weighted to China is just ill-advised," Creel said.
Chief marketing officer John Brooks says the rise in intermodal volumes could stem from shippers deciding to pull forward their shipments ahead of tariffs, but "it's a little hard to tell."
But Brooks is optimistic that Canada's evenutal requirement for trucks to use electronic logging devices will mean more freight will shift away from the road and rail.
"The tightness is coming as a result of that mandate," Brooks said. "As we get into back half of 2019 and it becomes more real, we believe there are road-to-rail opportunities that exist," Brooks said.
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