Oil shipments buoy industry: analysts
TORONTO Canadian rail companies have had a good run this year but they will need a boost from Alberta oil in 2019 to keep the momentum going, according to analysts.
Both Canadian National Railway Co. and Canadian Pacific Railway Ltd. stand to benefit if the Alberta government follows through with its plan to buy 7,000 rail cars to ship crude, National Bank of Canada analyst Cameron Doerksen wrote in a research note this week.
National Bank lowered its price targets for both CN and CP to account for wavering investor sentiment that has U.S. and Canadian railroads trading at valuations well below the five-year trend.
“While economic indicators are not pointing to an imminent recession, there is nevertheless prevalent concern about the state of the North American economy as 2018 draws to a close,” Doerksen wrote.
Oil producers shipped a record 327,229 barrels of crude per day that month, the first time shipments surpassed the 300,000 mark, according to the National Energy Board’s monthly report on crude oil exports moved by rail.
That’s more than double the 137,178 barrels per day shipped in October the previous year.
In the absence of new pipeline capacity to carry Alberta’s oil to international markets, demand for rail transportation has boomed, benefiting railways that stepped in to fill the gap.
But predictions that crude-byrail shipments will continue to grow in the New Year won’t necessarily mean a windfall for Canada’s railways thanks to economic uncertainty deflating valuations, Doerksen noted.
The pace of growth is slowing for several important indicators of demand, including spot trucking rates and freight shipments, Doerksen noted. As such, National Bank lowered CN Rail’s price target to $110 from $119 and decreased CP Rail’s to $287 from $303. CN closed Friday down $1.50 at $98.08 and CP at $234.09, down $1.47 on the Toronto Stock Exchange.
Still, these economic concerns are tempered by the fact that railways are increasingly needed to move Alberta crude, and will be until, or if, another pipeline is built.
“While crude-by-rail volumes will not be sustained longer-term if new pipeline capacity comes on line, this timing of the current surge in demand will act as an offset in the event that an economic slowdown impacts other rail volumes next year,” Doerksen noted.
The railways look set to finish 2018 with a solid increased in traffic. Canadian railroad traffic increased 4.8 per cent in November and 3.8 per cent year-to-date, according to statistics from the Association of American Railroads.
The big gains came from petroleum products thanks to an increase in crude-by-rail shipments, which Doerksen noted were up 38.7 per cent in November. Coal volumes also increased 29.8 per cent last month thanks to new mines opening.
Desjardins Capital Market’s annual outlook report was more optimistic about railways’ prospects in 2019 despite uncertainties around rising interest rates and slower growth.
“We remain positive on transportation entering 2019 as we continue to see solid growth opportunities across a diversified range of segments,” analysts wrote this week.