Railways expect higher profits in 2015

by By Ross Marowits THE CANADIAN PRESS

After enjoying strong starts to the year, Canada’s two large railways are hoping that volatility in crude and grain shipments doesn’t dampen their optimistic outlook for 2015.

Canadian Pacific Railway and Canadian National foresee higher profits and improved operating efficiency this year but are weary of negative surprises.

CP chief executive Hunter Harrison said crude prices and the size of the grain crop are the two biggest unknowns.

“If Canadian grain is a ‘normal crop’…and we’re close in our estimate on crude, I think that it’s all pretty well upside,” he said Tuesday during a conference call.

The Calgary-based railway is maintaining its forecast to ship 140,000 crude carloads this year even though crude revenues decreased six per cent in the first quarter on an eight per cent decrease in carloads.

On Monday, rival Canadian National trimmed its carload forecasts, saying they will grow by three per cent instead of as much as four per cent on lower energy-related shipments. The carrier now expects crude and frac sand carloads will increase by 40,000 to reach 247,000, down from its prior forecast of 292,000.

Benoit Poirier of Desjardins Capital Markets downgraded his outlook for CN and reduced his target price for CN shares on his estimate that it will carry 155,000 crude carloads in 2015 instead of 165,000, and that grain volumes will slip in the second and third quarters.

Canadian Pacific said its strength in bulk, forest products, chemicals and plastics will offset weakness in energy and automotive.

Chief operating officer Keith Creel said the railway’s revenues are diversified beyond just crude.

“We’re going to face headwinds but we have an ability to pick up in other areas,” he told analysts.

The railway posted a record low operating ratio, which tracks operating expenses as a percentage of revenue, of 63.2 per cent in the first quarter, better than CN’s own record low of 65.7 per cent.

CP has seen its full-year ratio fall each year after peaking at 90.6 per cent in 2011 to reach 72 per cent in 2014. Harrison anticipates it dipping below 60 per cent, but wouldn’t say how quickly that will happen.

Canadian Pacific said its revenue for the first three months of 2015 was up 10 per cent from last year, hitting $1.67 billion, while its profit hit an all-time quarterly high of $320 million.

After proposing a merger last year with U.S. peer CSX Corp., Harrison said CP is no longer interested in any deals in the short term.

“There’s a lot of things that have to work to make these happen to make them accretive, to make them smart for your shareholders and those things aren’t happening,” he said.

Meanwhile, CN chief executive Claude Mongeau told shareholders on Tuesday that the Montreal-based railway is off to a good start as adjusted profits surged 28 per cent to $704 million in the first quarter on a 15 per cent increase in revenues.

“The environment is uncertain but we are adjusting, we are adapting. Our strategy is working and we have confidence in our future,” he said from Memphis, Tenn.

Canadian Pacific shares closed down $5.14 or 2.17 per cent to $232.12 in Tuesday trading on the Toronto Stock Exchange. CN’s shares were off $2.57 or 3.08 per cent to $80.78.