Earnings season rides in on positive CN Rail results
It speaks to the changes in Canada’s oil industry that the first noteworthy results for the second quarter did not come from Calgary but 3,500 kilometres east in Montreal where CN Rail addressed oil-by-rail concerns in its mid-year results.
The huge increase in crude moving by rail has been one of the biggest developments in the recent surge in North American oil production, but the far-reaching implications of the trend were exposed with the deadly crash of 72 oil-laden tanker cars in LacMegantic, Que.
CN, Canada’s largest rail carrier, posted better than expected results Monday as an 18 per cent increase in petroleum and petrochemicals shipments in the quarter helped net income rise to $717 million from $631 million in the same three months last year.
However, those gains came before the crash involving Montreal, Maine & Atlantic Railway that has killed close to 50 people and many of the questions for CN’s executives Monday were about the future prospects for moving oil by rail.
“This accident is an important reminder that safety is paramount,” CN’s chief operating officer JeanJacques Ruest said during a conference call. “The (pace of growth) may not be the same … but there is still a likelihood that crude-byrail will continue to rise in volume.”
The discussion over the economics and safety of moving oil by rail will continue as oil producers begin to release Q2 results later this week — Cenovus Energy is Wednesday and Husky Energy is Thursday — and it will continue well into August.
The second quarter is typically dominated by weather-related issues for oil and gas producers in Canada due to melting snow and spring rains and the historically destructive flooding in June in southern Alberta led to pipeline ruptures that will impact a number of companies.
However, it’s been overshadowed by the concerns raised at Lac-Megantic.
As delays over new oil pipelines in North America have made headlines in recent years, rail transport has grown dramatically. The Railway Association of Canada said up to 140,000 carloads — or 230,000 barrels per day — of crude oil and bitumen from the oilsands will move on trains in Canada in 2013 compared to just 500 carloads in 2009.
It remains to be seen whether rail is more than a stop gap to overcome current pipeline constraints or a significant long-term player in oil transport.
CN moved 30,000 carloads of undiluted bitumen and crude in 2012 and expects to more than double its volume this year. Canadian Pacific Railway will release its results Wednesday as crews continue to repair a damaged bridge over the Bow River in Calgary where one of its trains was carrying petroleum products and derailed during the floods.
Chief executive Hunter Harrison was harshly criticized when he said Canadian Pacific could not wait any longer to send the train over what proved to be the flood-damaged bridge, noting “we’re jeopardizing commerce.” He later apologized.
CN Rail and Canadian Pacific have both said they’ve tightened safety since Lac-Megantic. Transport Canada is also reviewing operating procedures for trains carrying dangerous goods. It seems likely that North America’s worst rail accident in two decades will mean but increased regulatory oversight, greater public backlash and a renewed push for more pipelines.
In the aftermath of LacMegantic, a number of oil producers said they don’t think it will have a lasting an impact on moving oil by rail. Cenovus, for example, has said it expects to boost its rail capacity to 30,000 barrels a day by next year.
Aside from the rail issue, a number of companies have stories to tell that go well beyond their financial and operating results:
Encana CEO Doug Suttles said he would “take the time to do it right” when he was appointed in June, but noted any changes to the 2013 budget would be announced with the Q2 results out Wednesday. It could also provide the first indications of the strategy for Encana under Suttles’ leadership.
PennWest Petroleum cleaned house in the quarter as board chairman Allan Markin resigned just two months into the job and three top executives followed the former vice-chairman out the door. New chairman Rick George, the longtime CEO at Suncor Energy, has said little about the staff changes but will have the chance Aug. 7.
Canadian Natural Resources also reports Aug. 7 and by that time it may have more clarity on the impact on Alberta Energy Regulator’s ruling to halt steaming at its Primrose oilsands operation due to an ongoing oil leak that has killed several animals.
All those issues are playing out against the resurgent price of oil as West Texas Intermediate rose above Brent for the first time since 2010 late last week and brought ended the “double discount” on Canadian heavy oil that Alberta Premier Alison Redford bemoaned as a “bitumen bubble” last winter.
On Monday, Brent edged back above WTI, which closed at $107.06. The light-heavy price differential has also returned to traditional levels with Alberta heavy oil selling at about a $15 per barrel discount to WTI after widening to more than $40 last December.
These days, quarterly results and investor days are often the only time investors and stakeholders get to hear directly from senior executives about their companies and given the questions about the changing dynamics across the industry they should have a lot to say.