Knocked Off Their Rails—-Energy Slump Slams Big Railroads

By Laura Stevens & Betsy Morris at The Wall Street Journal

The dismal energy market slammed two of North America’s biggest freight railroads in the fourth quarter, prompting them to slash jobs and driving profits below Wall Street’s expectations.

Union Pacific Corp. said it furloughed 3,900 employees last year amid steep declines in shipments of coal, crude oil and fracking sand. These, plus a sharp drop in fuel-surcharge revenue, pressured fourth-quarter profit down 22% to $1.12 billion.

Meanwhile, Canadian Pacific Railway Ltd., which has so far been stymied in an effort to take over U.S. rival Norfolk Southern Corp., said it would cut up to 1,000 jobs this year and posted a nearly 30% drop in earnings to 319 million Canadian dollars ($220 million).

The reports come a week after executives at CSX Corp. said the current pressures on rail volumes were at levels not seen outside of a recession.

The effects of the oil-market bust on the rail industry’s crude-related businesses were especially evident in the latest quarter.

At CP, whose network stretches across Canada and into the U.S., total carloads fell about 6% during the quarter, with declines in all but three categories of cargo. Some of the greatest declines were in CP’s crude-oil shipments, which fell 17%, and its metals, minerals and consumer-products shipments which plunged 24%.

“We’ve seen [in] the last three quarters of 2015 the economic headwinds across all business segments except for a couple of bright spots in forest products and Canadian grain,” said CP Chief Operating Officer Keith Creel. He said the strong U.S. dollar and low commodity prices weighed on business in the company’s bulk, energy and metals segments.

At Union Pacific, which is most active in the Western U.S., shipments of crude oil plunged 42% and loads of fracking sand used to drill oil and natural-gas wells fell by more than half in the quarter. Shipments of coal, one of Union Pacific’s largest businesses, fell by a fifth as temperatures were warmer than average and power plants used more natural gas.

“Another quarter of solid pricing gains were not enough to offset the 9% decrease in total volumes,” Chief Executive Lance Fritz said on an earnings call with analysts.

The net impact of lower fuel prices, including the decline in fuel-surcharge revenues, was estimated to have reduced Union Pacific’s earnings per share by 11 cents from a year before. It earned $1.31 a share, coming in below the $1.42 forecast by analysts polled by Thomson Reuters. Adjusted to exclude items such as foreign exchange fluctuations, Canadian Pacific earned C$2.72 a share, below the C$2.78 a share analysts expected.

Energy will continue to weigh on earnings in the first quarter, Union Pacific executives said.

Coal volume is expected to decline by about 20% in the quarter and full-year total volumes are expected to be slightly down, depending on the overall economy.

CP’s Mr. Creel said he expects total volumes to be “modestly down” this year: “We see again modest single-digit reduction in carloads,” he told analysts. Crude oil is going to be a headwind. “I don’t see any shining stars out there in the economy.”

Union Pacific executives said they were getting mixed economic signals from U.S. consumers. It appears that consumer spending is shifting away from goods, like retail, and more toward services, they said. While auto shipments rose 8% in the quarter, executives cautioned that auto sales might not be sustainable at current record levels.

Both railroads fielded questions about Canadian Pacific’s contentious, roughly $30 billion bid for Norfolk Southern.

Though not commenting on CP’s bid directly, Union Pacific’s Mr. Fritz echoed the fierce rail-industry opposition to a deal that has developed in the U.S. He said he doesn’t think a big rail merger would improve rail safety or efficiency and that it would be a “disincentive to capital investment.”

The opposition has spread beyond the rail industry to manufacturing and other trade associations. And CP’s effort will be scrutinized not only by the U.S. Surface Transportation Board, which approves rail mergers, but other regulators and lawmakers.

CP’s chief executive, Hunter Harrison, said he might need to change his strategy as a result of these developments. “Things have changed, and so will that change potentially some of our strategy? Absolutely,” he said.

“Understand that when you’re playing the game and somebody changes the rules on you, you have to review your strategy as far as going forward, and the rules are moving on us as we speak,” he said.

He specifically cited the concern, raised by the Federal Railroad Administrator in The Wall Street Journal last week, that combining two corporate safety cultures can result in problems. “I’ve never heard that argument in my life,” Mr. Harrison said.

Mr. Harrison said he has personally spoken to more than half of all Norfolk Southern shareholders or their representatives, and they have indicated “they would be in support of [it], but they don’t call all the shots,” he added.

Union Pacific’s stock closed 3.6% lower at $71.00, which is down 43% from the 52-week high hit in February. U.S.-traded shares of Canadian Pacific, which fell more than 5% in early morning trading, closed up 0.5% higher at $104.67.

Source: Energy-Market Slump Weighs on Big Railroads – The Wall Street Journal