Quebec disaster fallout will squeeze railways: Moody’s
Increased scrutiny and higher costs inevitable, credit rating agency says
The fallout from the derailment in Lac- Mégantic, Que., will likely have a detrimental impact on the nearterm growth of moving petroleum by freight, and also likely raise costs and tighten restrictions for North American oil producers that rely on railways to ship oil across the continent, according to Moody’s Investors Service.
“The Quebec derailment — likely North America’s worst rail accident since 1918 — will inevitably lead to increased U. S. and Canadian government scrutiny and permitting delays, along with higher costs for shippers,” the credit rating agency said in a note Wednesday.
This will also be credit negative for North American railways, which have relied on the boo n in moving crude by rail to offset declines in coal shipments, it added.
In particular, any slowdown would be felt by oil producers focused on the Bakken shale oil formation, which depend far more on rail than on pipelines, Moody’s said.
Those names include Whiting Petroleum Corp., Continental Resources Inc., Oasis Petroleum Inc. and Kodiak Oil & Gas, which all are focused on the Bakken.
Moody’s notes roughly twothirds of the Bakken’s North Dakota oil production, or roughly 727,000 barrels a day in April, reaches its customers by rail.
“Bakken oil production, largely centred in North Dakota, has expanded far beyond what the region’s pipelines can handle,” the agency said.
Not surprisingly, this would also have a trickle- down impact on rail companies, with roughly six per cent of Class I North American carloads stemming from crude, natural gas and other petroleum products, Moody’s said.
Petroleum shipments for railroads grew 40 per cent year over year in June, offsetting declines in coal, it added.
“Past rail accidents and catastrophic oil spills have led to strong and costly new regulations,” the agency said.
“Any increase in rail freight costs will slow the growth of crude shipments and potentially widen the Bakken discount.”
“Higher regulatory costs will also strain the railroads, but not as much,” it added.
Moody’s said the names likely to be the most affected included Burlington Northern Santa Fe LLC and Union Pacific Railroad Co., which have the greatest exposure to the Bakken.
Canadian National Railway Co. and Canadian Pacific Railway Ltd. have also invested resources in developing their crude- by- rail model in recent years in Western Canada.
“Their strong liquidity profiles will help them cope with any new costly regulatory mandates. Even though crude carloads offer good yield, prices and margins, petroleum products will remain only a small portion of the goods and commodities that these companies haul,” Moody’s said.
It also expects the accident in Quebec will put pressure on the Obama administration to approve the Keystone XL pipeline as an alternative to moving crude by rail.