Tags: Railroad | Stocks | Crude | Shipments

Railroad Stocks Fall on Worries about Lower Crude Shipments

Monday, 01 December 2014 05:20 PM

North American railroad stocks tumbled for a second day Monday on growing concern that falling oil prices will curtail surging shipments of crude by train.

CSX Corp. slid 3.9 percent in U.S. trading, extending a two-day decline in the Standard & Poor’s 500 Railroads Index to the biggest since September 2011. Canadian National Railway Co. Monday dropped the most since July 2009.

Oil has collapsed into a bear market as the U.S. pumps crude at the fastest rate in three decades while growth in global demand slows. Last week, the Organization of Petroleum Exporting Countries resisted calls from members including Venezuela and Iran to reduce its production target of 30 million barrels a day.

“If you start thinking about marginal producers in the oil space, at these price levels, we’re definitely going to see pressure, supply cutbacks and production cutbacks,” Andrew Pyle, a fund manager at ScotiaMcLeod Inc., said by telephone from Peterborough, Ontario. “You’ll see some operators not able to survive in this price environment. To the extent those suppliers are providing the crude that is shipped by these rails, that’s key.”

Pyle manages about C$300 million ($265 million), including shares of Canadian Pacific Railway Ltd. and Canadian National.

Railcar Shares

CSX’s decline, the biggest since Jan. 16, pushed the stock to $35.06 at the close in New York. Kansas City Southern dropped 2.9 percent to $115.47 while Union Pacific Corp. declined 1.8 percent to $114.63. In Toronto, Canadian National slipped 5.1 percent to C$77.09 while Canadian Pacific shed 3.6 percent to C$212.68.

Railcar equipment manufacturers also fell. Tank-car maker Greenbrier Cos. plunged 14 percent, FreightCar America Inc. dipped 8.4 percent and American Railcar Industries Inc. dropped 7.1 percent.

“With oil prices down sharply, anything related to energy is taking a hit,” Jim Corridore, an analyst at Standard & Poor’s Capital IQ, said in a telephone interview from New York.

Oil averaged more than $100 a barrel in 2012 and 2013, helping buoy railroad stocks as carriers stepped in to move crude from regions with limited pipeline access such as the Bakken shale formation in the U.S. Midwest. The S&P 500 railroads gauge of four carriers surged 39 percent last year.

Crude Volumes

North American carriers moved 24,784 carloads of crude in the week ended Nov. 22, data from the Association of American Railroads show.

While that’s about twice as much as three years earlier, Corridore said crude volumes remain “a very small part of their business.”

“It’s really an overreaction if you’re going to sell off a group of rails on that,” Corridore said.

Petroleum and chemicals accounted for C$594 million, or about 20 percent of Canadian National’s third-quarter freight revenue. Sales in the segment jumped 21 percent in the period, exceeding the 16 percent advance in freight revenue for the Montreal-based carrier.

Crude was the fastest-growing line of business at Calgary- based Canadian Pacific, rising 33 percent in the third quarter and outpacing a 7.5 percent increase in freight revenue. The railroad said in October it plans to carry about 200,000 carloads of the commodity in 2015, more than double last year’s 90,000.

Optimistic forecasts such as this are part of the reason Canadian rail stocks outperformed the benchmark Standard & Poor’s/TSX Composite Index until recently. This year through Oct. 30, Canadian Pacific and Canadian National led all Canadian industrial stocks with increases of 43 percent and 29 percent respectively.

“Rails are coming off very elevated levels,” ScotiaMcLeod’s Pyle said.

Concern over “regulatory pressures” such as requirements to use stronger tank cars “will increase costs, decrease profit margins and factor into valuations,” Pyle said. “The big run is done. The big money is made, and it will be a lot more challenging going forward.”

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North American railroad stocks tumbled for a second day Monday on growing concern that falling oil prices will curtail surging shipments of crude by train.
Railroad, Stocks, Crude, Shipments
Monday, 01 December 2014 05:20 PM
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