A CN locomotive and slug - Date/Photographer unknown.

25 March 2013

Canadian Railways Boosted by
Crude-by-Rail Evolution

Toronto Ontario - Moving crude by rail has dramatically grown in recent years and will likely continue to even if more pipeline capacity is brought on, according to a new report issued Monday by Raymond James Ltd.
 
North American crude-laden carloads have surged by more than 50-fold since 2009 and there appears to be no end to the growth in site, analyst Steve Hansen said.
 
He said both Canadian National Railway Co. and its smaller domestic rival, Canadian Pacific Railway Ltd., will play an important role in the evolution of this business in the years ahead.
 
As a result, Mr. Hansen on Monday raised his price target on CN to $115 a share, from $92 previously, and raised his rating on the stock to outperform.
 
The analyst also raised CP's target to $130 a share, from $120 previously, but held his market perform rating on the stock given its limited upside.
 
"In just three short years, the crude-by-rail business model has evolved from one of relative obscurity into what is now regarded as one of the most dynamic business opportunities for North American Class I railroads," he said.
 
Investors might be tempted to believe crude-by-rail is underpinned by transient short-term fundamentals that will inevitably erode as new pipeline capacity comes on line.
 
But Mr. Hansen said that isn't the case.
 
"We do believe that new pipelines will play an important role in determining future crude-by-rail demand, however, we also believe that crude-by-rail's broader value proposition, most notably its deft ability to capitalize on regional pricing disparities, a phenomenon we expect to persist, has become an equally important arbiter that is gaining value," he said.
 
"Put another way, we believe that crude-by-rail is evolving from strictly a needs-based solution, or one of practical necessity (i.e. no pipe available), to one that is increasingly desire-based, where stakeholders preferentially choose crude-by-rail over pipe given the model's compelling value proposition," he added.
 
Mr. Hansen said CN is "superbly positioned" to leverage the forthcoming wave of Canadian heavy oil seeking passage to U.S.-based refineries. "CN's most notable advantage in this regard is the carrier's robust (largely exclusive) network stretching into northern Alberta, the heart of Canadian oil sands production, and its unique, single-carrier, long haul capability all the way to the US Gulf Coast," he said.
 
Meanwhile, CP boasts the best overall "torque" given its unique ability to capitalize on western Canadian heavy volumes heading south and North Dakota Bakken oil that Mr. Hansen expects will increasingly move eastward.
 
Scott Deveau.

Vancouver Island
British Columbia
Canada