Tags: Union | Pacific | shale | UNP

Union Pacific Positioned to Capture Growth from Shale Boom

By    |   Thursday, 26 July 2012 05:36 PM

Union Pacific (UNP) is one of the largest railways in the country, one that happens to be well positioned to capture growing demand for energy transport related to the shale oil and gas boom. That has analysts perked up about the company’s growth prospects, despite the weakened state of the overall economy.

Union Pacific has as its principal operating company the Union Pacific Railroad Company, which links 23 states in the Western two-thirds of the country. Union Pacific Rail has a diversified business mix, one which includes agricultural products, automotive, chemicals, energy, industrial products and intermodal.

Union Pacific offers routes from all major West Coast and Gulf Coast ports to Eastern gateways, connects with Canada’s rail systems, and is the only railroad serving all six major gateways to Mexico, management said in a recent filing.

The railway has 31,898 route miles, linking the Pacific Coast and Gulf Coast ports with the Midwest and Eastern U.S. gateways and providing several corridors to key Mexican gateways. Its freight traffic consists of bulk, manifest, and premium business. Bulk traffic is primarily coal, grain, rock, or soda ash in unit trains, which are trains transporting a single commodity from one source to one destination.

Manifest traffic is individual carload or less-than-train-load business, including commodities such as lumber, steel, paper, food and chemicals. The transportation of finished vehicles, intermodal containers and truck trailers is part of the premium business. In 2011, UNP generated freight revenues totaling $18.5 billion.

“Our diverse franchise gives us a wide range of opportunities to offset the challenges and drive growth. The biggest of those opportunities is continued strength in shale energy, delivering inbound materials as well as outbound crude oil,” UNP Executive VP of Marketing and Sales Eric L. Butler told analysts in a recent call.

“While the slowdown in natural gas drilling and the slower-than-expected ramp-up of customer facilities has shale energy-related carloads a little off their expected pace, we still expect it to contribute about 2 points to overall growth for the year.”

Union Pacific has a market cap of $55.6 billion in a sector, road and rail, where the average company size is $3.23 billion. Its trailing 12-month P/E ratio is 15.19 and its five-year projected price-to-earnings-growth (PEG) ratio is 1.02, same as its sector average.

Its projected earnings per share growth for the coming year is 14.06 percent, compared to a sector average of 15.12 percent.

Higher prices

Analysts are positive on UNP, with buy or outperform calls from Raymond James, Citigroup Investment Research, UBS, Deutsche Bank, Jefferies, and Goldman Sachs.

Standard and Poor’s Equity Research recently reiterated its hold rating while raising its target price. “We are increasing our target price by $9 to $127, reflecting our updated DCF and relative metrics.We believe UNP's new traffic, especially shale-oil related, is coming on at higher prices than we had previously anticipated,” they wrote on July 19.

“On this, and slightly improved coal volumes, we are boosting our EPS estimate for '12 by $0.24 to $8.19 and '13's by $0.22 to $9.02.”

Union Pacific next reports on Oct. 18.

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Thursday, 26 July 2012 05:36 PM
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