Canadian railways in a catch-22 dilemma over crude shipment
Canadian railway operators see a lucrative opportunity to transport more crude oil to the United States as a rise in output force producers to find new routes to its southern neighbor.
However, their need for long-term contracts and the pressure to move a surplus of grains in the country is making it hard to cash-in on the prospect.
Canada moves about 95 percent of its oil by pipelines, which are currently full. A 20 percent rise in crude production in the past five years has increased pressure to find new ways to haul the commodity, with rail being the second cheapest alternative.
Analysts expect railway operator Canadian Pacific Railway to see a more than 60 percent rise in the volumes of crude it ships this year, but the company and its rival Canadian National Railway (CN) are being cautious about going all-in.
With oil prices volatile and three pipeline expansions due to come on line at the end of decade, railways worry that any investment will be at risk in two or three years and could undercut their money-making base – moving grains.
"Rails don't view crude by rail as a sustainable business, but rather, one that is driven by short-term dislocations in crude prices," said Stifel analyst Michael Baudendistel.
Moreover, profits from transporting Canada's huge grain output are dependable and come with substantial government subsidies.
In 2017, 23 percent of Canadian Pacific's revenue came from grains and only 3 percent from crude, according to data by Desjardins analyst Benoit Poirier. Canadian National saw 13 percent of its revenue from grains and 2 percent from crude, in the same period.
"We understand crude is only going to be here for a certain period of time," Canadian Pacific's Chief Executive Officer Keith Creel said in a fourth-quarter results call with analysts.
"We're looking for strategic partners with long-term objectives that align with ours. We're not going to allow ourselves to be commoditized."
Still, RBC analyst Walter Spracklin says Canadian National and Canadian Pacific could see, respectively, 5 and 11 percent upside in earnings this year helped by crude shipments, if oil sands production increases by 315,000 barrels per day. Other analysts expect even more of an impact to their bottom lines.
Rail companies are reluctant when it comes to monthly, spot deliveries and the inherent volatility of the oil markets make it hard for them to get long-term commitments from vendors. (Reuters)