Canadian National is in talks to build more oil terminals after an agreement last month to construct a facility serving Manitoba and Saskatchewan, Chief Executive Officer Claude Mongeau said in an interview. “Rapid-deployment terminals” as little as a tenth of that size also are in the works, he said.
The shares of Canadian Pacific gained 35 percent this year through yesterday on optimism that changes under new CEO Hunter Harrison would increase profit as urged by William Ackman, the activist investor who championed his hiring in June. Photographer: Ariana Lindquist/Bloomberg
Cargo from Alberta’s oil sands is buoying Canadian National while Canadian Pacific (CP) benefits from tracks serving North Dakota’s Bakken Shale formation. Canadian Pacific opened a rail hub in the state this year and is investing C$90 million ($90.4 million) to upgrade a Saskatchewan-to-Minnesota line.
“Crude by rail is becoming a reality,” said Walter Spracklin, a transportation analyst at RBC Capital Markets in Toronto. “Before, it was a theory.”
Rail transport of crude in North America has jumped by about 360,000 barrels a day in the past year -- the equivalent of adding a “major” pipeline, according to Steven Paget, an analyst at FirstEnergy Capital Corp. in Calgary. Those shipments have soared as community protests slow new pipelines and oil finds occur outside the current pipe network.
New BusinessAs recently as two years ago, Canadian National didn’t haul any crude. Now it projects moving about 30,000 oil carloads in 2012. Petroleum and chemicals produced 16 percent of the Montreal-based railroad’s C$7.4 billion in revenue in 2012’s first nine months.
Canadian Pacific predicts reaching an annual rate of 70,000 oil-tank cars by early 2013, after running only about 500 such loads in North Dakota in 2009. Through three quarters this year, the Calgary-based carrier got 22 percent of its C$4.2 billion in sales from the industrial and consumer products category, which includes oil and gas.
The shares of Canadian Pacific have gained 35 percent this year on optimism that changes under new CEO Hunter Harrison would increase profit as urged by William Ackman, the activist investor who championed his hiring in June. That outstripped Canadian National’s 8.6 percent advance. Canadian Pacific slid 0.5 percent to C$92.87 at the close in Toronto, while Canadian National fell 0.6 percent to C$87.04.
Neither carrier will disclose how much it’s spending on the infrastructure that crude shipments require. An oil terminal may cost “a few tens of millions” to build, said David Tyerman, a Canaccord Genuity Inc. analyst in Toronto.
Capital SpendingWhile that pales next to the 20 percent of sales devoted to capital expenditures at each railroad, based on data compiled by Bloomberg, the companies must weigh how much to invest in oil- hauling operations against the risk that future pipelines will move that crude.
“It’s really hard to gauge the long-term prospects of demand because a lot of this is being driven by lack of pipeline capacity,” Tyerman said in a telephone interview. “Even the rail industry is trying to temper its expectations because it doesn’t want to build its business plans around something and then have that not happen.”
Access to the Bakken shale formation and Pennsylvania’s Marcellus shale gives Canadian Pacific an advantage over Canadian National in pursuing more oil and gas shipments, said RBC’s Spracklin, who rates both railroads as sector perform.
“All CN really has is the Canadian oil sands,” he said. “CN doesn’t have the same scope of access to the number of shale plays that CP does.”
Bakken’s ReachThe Bakken, a 360-million-year-old shale bed two miles underground that geologists believe holds a 15,000-square-mile region of oil in North Dakota alone, extends into Montana, Manitoba and Saskatchewan.
Canadian Pacific’s so-called logistics hub in Van Hook, North Dakota with U.S. Development Group LLC, can handle 15 to 17 crude trains a month, with the potential to almost double that capacity, the companies said. The railroad opened a crude loading terminal in Estevan, Saskatchewan, last year.
“I hear so many stories about the opportunities, it scares me,” Harrison told analysts on an Oct. 24 conference call. “If you put it all together, it’ll make people forget the Gold Rush in 1849.”
Canadian National has the only rail line into Fort McMurray, the hub of Alberta’s oil sands region, as well as the Montney gas fields. The terminal being built with Tundra Energy Marketing Ltd. near Cromer, Manitoba, will be able to load 30,000 barrels of crude, the equivalent of about 50 tank cars, daily starting in the second quarter of 2013.
More Partners“To get to something like 60,000 carloads of crude next year, we need to have more origin points going to more destinations,” Mongeau said. “That will take place with partnerships like the one we just announced with Tundra.”
Talks are under way with “many” potential partners, he said, while declining to identify them. The smaller, pop-up terminals can handle five to 15 tank cars daily and be ready “within a couple of months,” he said in the interview.
“They are here today, and two years from now they will be somewhere else,” Mongeau said. “These shale-drilling plays are fast-depleting plays, so you have to keep moving to capture the production at origin.”
Canadian National’s newest project was announced yesterday, a terminal in Mobile, Alabama, to unload crude bound for Gulf Coast refineries. The carrier’s partner is Arc Terminals LP.
Rising OutputRising oil output will boost both railroads. Crude production in Canada, most of which comes from Alberta, will probably more than double to 6.2 million barrels a day by 2030 from last year, according to the Canadian Association of Petroleum Producers.
“One of the advantages with rail is that it can go anywhere,” said Tyerman, the Canaccord analyst. “Speed to market is also an advantage for rail, so there would probably be a market even if there was more pipeline capacity.”
Producers also can earn more by shipping crude by rail to markets where pipelines don’t go.
Gross profits for producers shipping bitumen -- the feedstock for heavy oil refineries -- by rail are about $18 a barrel higher than by pipeline, FirstEnergy’s Paget said in his Aug. 16 report. A new transcontinental pipeline would cost about $5 billion to build, Paget said.
Brandon Snow, manager of the C$1.3 billion Cambridge Canadian Equity Corporate Class fund in Toronto, which owns Canadian National shares, said the question for railroads would be how long those advantages remain in place.
“The crude where it’s being produced now is not where it was produced historically,” he said. “It’s not where refineries are set up to accept it. So you have this situation where rail is the quickest and cheapest way to rectify the situation, but it doesn’t mean that in the long term, rail is the answer.”