CALGARY – Oil shipments present the single biggest growth opportunity for Canadian Pacific Railway Ltd. as a pipeline squeeze forces energy firms to get their product to market by other means, the company’s chief marketing officer said Tuesday.
If volumes keep up at their current rate, the railway (TSX:CP) is poised to ship more than 70,000 carloads of crude per year, Jane O’Hagan told analysts on a conference call to discuss Canadian Pacific’s fourth-quarter results.
During the last three months of 2012, CP’s industrial products segment saw a 19 per cent rise in revenues, with a big contribution from long-haul crude oil traffic.
The first quarter of 2013 is also expected to see double-digit year-over-year growth, led by energy.
The energy sector has been looking to rail as a short-term alternative to pipelines, which are currently chock-full of oil from areas like the Bakken in North Dakota and the oilsands in Alberta.
There are many pipeline expansions in varying stages of development to the south, east and west, but environmental opposition and political wrangling makes many of their timelines uncertain.
Although most of CP’s rail volumes are currently heading to a major refining hub on the U.S. Gulf Coast, its strategy involves connecting a diverse array of both production regions and end markets, said O’Hagan.
“In terms of planning, this is a rapidly growing, fast-paced market. I will tell you that the customers do act quickly,” she said.
Also Tuesday, CP said a number of restructuring costs led to a big drop in fourth-quarter profits, but stripped of those items, the underlying results met analyst expectations.
Net income was $15 million, or eight cents per share, compared to $221 million, or $1.30 per share. On an adjusted basis, Canadian Pacific earned $1.28 per share, an improvement from $1.11 a year earlier.
The adjusted earnings were in line with estimates compiled by Thomson Reuters and the company’s stock gained $4.49, or four per cent, to $117.26 in afternoon trading on the Toronto Stock Exchange, setting a new 52-week high.
Canadian Pacific’s revenue in the three-month period rose to $1.5 billion, up nearly $100 million from a year earlier and slightly ahead of expectations.
“The results of third and fourth quarter of 2012 have established a platform, or foundation that has positioned us well to be able to have a record-setting 2013 – I think probably even beyond my expectations,” CEO Hunter Harrison told analysts.
Harrison was installed as CEO last summer following a bruising proxy battle that led to the ouster of his predecessor, Fred Green. The former boss of CP rival Canadian National Railway Co. (TSX:CNR), Harrison was hand-picked by activist shareholder Bill Ackman of Pershing Square Capital Management to turn the underperforming railway around.
Harrison’s leadership was evident in a key metric used to measure railway profitability – operating ratio.
The ratio _ which measures the percentage of revenue used to run operations – was 96 per cent in the fourth quarter if all the unusual items are included and 74.8 per cent on an adjusted basis.
A year earlier, the CP’s operating ratio was 78.5 per cent – high by industry standards.
Green’s supporters on the former board of directors warned that Harrison’s goal of getting the operating ratio down to the mid-60s within a few years would result in massive disruption.
CP announced at its investor day in December that its workforce would be cut by some 4,500 positions by 2016.
About 2,300 of those cuts are expected to be made by end of the first quarter, Harrison said.
Most of the reduction is expected to happen through attrition – retiring employees not being replaced – rather than layoffs.
CP took a $53 million before-tax charge during the quarter for labour restructuring that had to happen more quickly, said chief financial officer Brian Grassby.
“This charge covers over 600 positions that have been, or will be eliminated,” he said on the conference call. “These are not easy decisions, but they are the right thing to do.”
Other one-time items included a US$185 million impairment charge related to the disposal of Powder River Basin assets in the U.S. Midwest and an $80-million writedown of the value of certain locomotives.
For all of 2013, CP expects revenue growth to be in the high single digits, its operating ratio to be in the low 70s and diluted earnings per share to be 40 per cent higher than in 2012.
Edward Jones analyst Jeffrey Nelson said the one-time charges made the quarter “messy,” but things are moving in the right direction.
“CP is largely a cost-takeout story at this point. The table’s been set and now management essentially needs to execute the plan and this quarter I think does highlight that they’re doing just that,” he said from St. Louis, Mo.