Surging crude shipments are setting the stage for what could be blockbuster mergers among North American railroads to relieve chokepoints that are especially bad and getting worse in Chicago and Minneapolis.
But the top executives of Canada’s two dominant rail companies have two different perspectives, with one enviously peering over the fence and the other happily tending to its pasture.
Canadian Pacific CEO Hunter Harrison said the threat of gridlock is at the point where he wouldn’t even rule out CP as a takeover candidate, although for now the company has its sights on mergers after discovering Jacksonville, Florida-based CSX Corp. was unwilling to participate in merger or takeover negotiations.
If a deal had been worked out with CSX it would have given CP badly needed rail lines to major oil refineries in the United States, he said.
Harrison told analysts in a third-quarter conference call that the North American network is headed for trouble as freight volumes soar at a time of growing regulation and public resistance to new rail infrastructure after a series of derailments, fires and explosions involving crude trains.
“There’s a desire to put more tonnage on the rail at the same time governments are saying they want to slow you down because of (hazardous materials) and crude,” Harrison said. “There’s no more infrastructure being built. No one wants railroads to run through their backyard or their city.”
He said mergers would increase network fluidity and ease bottlenecks in major rail hubs.
Canadian National
During his discussion of quarterly earnings, Canadian National’s Claude Mongeau suggested that any mergers would likely take place in the United States, where four major railroads could be cut in half.
Both CP and CN are under Canadian government orders to move a minimum quantity of grain each week in Western Canada, while facing restricted speeds and other regulations on trains carrying hazardous materials after the fatal derailment in Lac-Megantic, Quebec.
The United States regulator, the Surface Transportation Board, is seen as a major obstacle to consolidation among North America’s six major railroads, having previously blocked a merger of CN and Burlington Northern Santa Fe a decade ago.
The board has toughened its conditions for proposed mergers, requiring that any deals must enhance competition and not simply protect it.
Chicago gridlock
All the talk brings smiles to CN, with Mongeau declaring that his company’s supply chains are in sync and revenue is climbing.
Mongeau said CN’s ability to bypass Chicago altogether - which one analyst calls a “jewel” for the company - as it heads to the U.S. Gulf Coast refinery region is “just huge, it’s a great asset,” while his chief marketing officer Jean-Jacques Ruest could barely disguise his glee when he said CN’s way around Chicago is preferable to a “mega-merger root canal.”
Harrison shared the same view as his rivals, conceding that mergers and takeovers are “difficult at best” because they involve egos, fights for jobs and culture clashes.
But CP has every reason to look enviously at CN’s workaround at Chicago, which is the center of North America’s greatest rail headaches.
One quarter of all U.S. rail traffic passes through the Midwestern hub, with CP, Union Pacific and BNSF all needing to coordinate rail car movements and crew and locomotive changes through a complicated and slow process.
Because CN owns the Elgin, Joliet and Eastern Railway it can interchange with other railroads in Chicago, or skirt the congestion altogether.
Third quarter financials
The impact of soaring crude volumes on the rail system was evident in the third quarter reports.
CN said its shipments of petroleum and chemicals, including refined petroleum products, natural gas liquids and crude oil, posted a 21 percent, or C$105 million increase in year-over-year revenues to C$594 million.
For the first nine months of 2014, revenues for the commodity group were C$1.726 billion, up 21 percent from the same period of 2013.
Revenue ton miles to the end of September were 39.23 million, again an increase of 21 percent, while carloads for the nine months recorded an 8 percent gain to 489,000, with the third quarter up 11 percent to 168,000.
CN said the increases were largely due to higher crude and natural gas liquids shipments, a weaker Canadian dollar and higher freight rates.
CP, which breaks out its crude business, said freight revenues rose 74 percent in the third quarter to C$136 million and were up 33 percent in the nine months to C$354 million.
Carloads grew by 63 percent to 31,000 in the third quarter and 23 percent to 80,000 for the year-to-date.
Revenue ton-miles were 4.6 million, up 60 percent from a year earlier, in the July-September quarter and 11.8 million for the nine months.
