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    CP   CA13645T1003

CANADIAN PACIFIC RAILWAY LIMITED

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Once Canada's oil relief valve, rail shipping grinds to near halt

07/28/2020 | 10:34am EDT
FILE PHOTO: Irving Oil workers inspect rail cars carrying crude oil at the Irving Oil rail yard terminal in Saint John, New Brunswick

WINNIPEG, Manitoba (Reuters) - After moving record-large Canadian oil volumes by rail just five months ago, shippers have hit the brakes, idling thousands of cars and tens of millions of dollars' worth of infrastructure.

Rail was Canada's oil lifeline in recent years when cheaper pipelines ran full and crude had no other exit from landlocked Alberta. But oil production cuts this year opened pipeline space and eliminated demand for trains, leaving producers like Cenovus Energy Inc with high fixed expenses and monthly payments still owing to railways.

Cenovus said last week it was spending as much as C$20 million (11.57 million pounds) per month for its suspended rail program, one-quarter of the costs when it is fully active, but now generating no revenue to offset expenses.

Prospects of a longer-term rail recovery also look dim as long-planned pipeline expansions enter service in each of the next two years.

Canadian crude by rail volumes in May fell to 58,048 barrels per day (bpd), the lowest in four years, the Canada Energy Regulator said. In February, they had peaked at nearly 412,000 bpd.


Graphic:https://tmsnrt.rs/3hyqYuW

Cenovus has idled several thousand tank cars, said Chief Executive Alex Pourbaix. He said they will stay parked pending several shifts - rebounding Canadian oil production, pipelines filling again, and a wider gap between Canadian and U.S. crude prices to justify rail shipments' higher cost than pipelines.

It looks doubtful that will happen soon.

"I wouldn't be surprised to see (price) differentials widen. (But) I don't know if they're going to widen enough in the second half to incent rail," Pourbaix said in an interview.

Canadian heavy crude in Alberta traded this week for around $10 per barrel below the U.S. benchmark for September delivery, according to NE2 Group, well below the $15-$20 industry estimate for economic rail shipments. Trades for later delivery show the differential widening to just $13 in the fourth quarter.

Even so, Pourbaix expects Canadian oil production to grow to fill expanded pipelines in coming years, reviving the need for rail.

Greater availability of pipeline space has helped keep differentials narrow.

Demand exceeded supply by 7% on two Enbridge Inc heavy oil lines in August, a fraction of the 53% rationing in February that prompted shippers to move a record-large number of barrels by rail.

Investment bank Tudor Pickering Holt & Co forecasts "next to no rail requirements" in Canada into 2021, said analyst Matt Murphy, adding that oil production looks slow to return.

All of that could change suddenly, depending on how quickly pandemic restrictions lift and fuel demand returns, or if there is a significant pipeline outage.

Some are more optimistic.

Suncor Energy Inc Chief Executive Mark Little said last week he expects several operators to ramp up rail shipments this year.

Consultancy Wood Mackenzie also sees rail volumes rising in the second half as production returns.

But large western terminals, owned by Cenovus as well as partnerships between Imperial Oil and Pembina Pipeline Corp, and USD Group and Gibson Energy, have mostly or completely idled, said John Zahary, chief executive of Altex Energy, which loads crude at four Western Canada terminals.

Altex has slowed loadings but not shut any terminals as its shipments remain economic for shippers because they do not require blending with costly lighter oil, he said.

Imperial and Gibson, which report quarterly results soon, declined to comment. Pembina did not respond.

Railways and independent terminals are better insulated from economic damage than oil shippers, as some continue collecting payments, whether they have crude to move or not.

Such payments contracts allow USD to maintain operating capability as markets fluctuate, said Jim Albertson, senior vice president for USD's Canadian unit.

Canadian National Railway also continues to collect payments, Chief Executive Jean-Jacques Ruest said on a July call.

By Rod Nickel


ę Reuters 2020
Stocks mentioned in the article
ChangeLast1st jan.
CANADIAN NATIONAL RAILWAY COMPANY -0.16% 129.73 Delayed Quote.-7.15%
CANADIAN PACIFIC RAILWAY LIMITED -0.30% 93.86 Delayed Quote.6.61%
CENOVUS ENERGY INC. -0.99% 12.04 Delayed Quote.55.35%
ENBRIDGE INC. -0.43% 49.08 Delayed Quote.20.56%
GIBSON ENERGY INC. -0.08% 24.79 Delayed Quote.20.57%
IMPERIAL OIL LIMITED 0.18% 39.94 Delayed Quote.65.31%
LONDON BRENT OIL 0.12% 75.31 Delayed Quote.44.55%
MARVELL TECHNOLOGY, INC. 0.31% 54.53 Delayed Quote.14.70%
PEMBINA PIPELINE CORPORATION 0.05% 40.62 Delayed Quote.34.95%
SUNCOR ENERGY INC. 0.00% 30.4 Delayed Quote.42.39%
WTI 0.01% 73.157 Delayed Quote.51.13%
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Financials
Sales 2021 8 359 M 6 800 M 6 800 M
Net income 2021 2 763 M 2 247 M 2 247 M
Net Debt 2021 8 656 M 7 041 M 7 041 M
P/E ratio 2021 22,7x
Yield 2021 0,93%
Capitalization 62 567 M 50 899 M 50 895 M
EV / Sales 2021 8,52x
EV / Sales 2022 7,85x
Nbr of Employees 12 398
Free-Float 100,0%
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Technical analysis trends CANADIAN PACIFIC RAILWAY LIMITED
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Mean consensus OUTPERFORM
Number of Analysts 25
Last Close Price 93,86 CAD
Average target price 102,74 CAD
Spread / Average Target 9,46%
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Managers and Directors
NameTitle
Keith Edward Creel President, Chief Executive Officer & Director
Nadeem S. Velani Chief Financial Officer & Executive Vice President
Isabelle Courville Chairman
Michael John Redeker Chief Information Officer & Vice President
Scott MacDonald SVP-Engineering, Mechanical & Procurement
Sector and Competitors
1st jan.Capitalization (M$)
CANADIAN PACIFIC RAILWAY LIMITED6.61%50 899
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CANADIAN NATIONAL RAILWAY COMPANY-7.15%74 716
NORFOLK SOUTHERN CORPORATION11.14%65 863
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XPO LOGISTICS, INC.24.42%16 568