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Fort Mac wildfires take a bite out of CP Rail earnings

Fort Mac wildfires take a bite out of CP Rail earnings

CP Rail surprised investors today and reported second quarter results that were dreadful but not nearly as bad as expected. 

The company reported a 9% drop in earnings per share for the second quarter on a 12% decline in revenues. CP had previously warned investors that Q2 results would be significantly impacted by the Fort McMurray wildfires. 

Among the key quarterly highlights:

  • Q2 revenues fell 12% to $1.45 billion from $1.65 billion for the second quarter of 2015
  • operating income decreased 15% to $551 million from $646 million
  • operating costs ratio rose to 62% from 60.9%
  • net income declined 16% to $328 million
  • adjusted income fell 23% to $312 million.

The Alberta wildfires reduced crude carloads to just 7,000 in the second quarter, down from 17,000 in Q1 and much lower than the 19,000 carloads transported in the second quarter of 2015.

Crude-by-rail revenues declined 57% year/year to just $24 million, down from $81 million from the same time last year. Revenues from crude oil transport was $71 million in the first quarter of 2016 and has been on a downward trajectory since the highs of 2014.

CP's crude-by-rail business now represents just 1.7% of the company's total revenues, down from 5% in Q1. Oil transport represented over 8% of CP's revenues in 2014.

The sharp pullback in crude-by-rail volumes, coupled with big declines in potash and grain volumes pulled CP's total freight revenues lower by $204 million (or 13%).

Superstar CEO Hunter Harrison will be retiring in July of 2017 but has committed to hanging around as a consultant for a 3 year period. Harrison is the former CEO of CN Rail and spearheaded significant operating efficiencies at CP which included 7,000 job cuts and 2 failed merger attempts - CSX in 2014 and Norfolk Southern in 2015.

Results were slightly better than expected causing the stock to rally on the news. CP expects a significant improvement in grain, potash and crude volumes into the second half of the year.

A majority of Canada's oil exports are by pipeline, funnelling crude primarily to the US Midwest region centred in Chicago. However, crude-by-rail deliveries have grown to become an important mode of transportation to refineries outside of the US Midwest which lack sufficient pipeline capacity. 

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While crude transport volumes by rail remain at record highs in the US, Canadian crude-by-rail volumes have been declining since the highs of 2014 due to additional pipeline capacity from Alberta to Ontario, Quebec and the US Midwest.

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