Canadian Pacific sees volume opportunities

A photograph of a train with fields in the background.

Canadian Pacific (NYSE: CP) is eyeing an anticipated new intermodal offering in eastern Canada and crude-by-rail opportunities in western Canada.

The railway said its acquisition of the Central Maine & Quebec (CMQ) short line railroad would not only expand CP’s presence in the Maritimes but also would enable it to compete with trucks in eastern Canada.

The acquisition, which was finalized in December, will enable CP to offer routes from the Maritmes to Montreal, Toronto, Chicago and western Canada, according to CP CEO Keith Creel. The routes will be “truck-like reliable and truck-like compatible,” Creel told investors during CP’s fourth-quarter earnings call on Wednesday.

“After spending time on the [CMQ] railroad the last few weeks, I feel even more compelled and convicted about the addition to our CP family franchise and the value it represents. The value proposition is simply compelling,” Creel said.

CP will spend much of 2020 getting CMQ’s physical plant up to CP’s standards, Creel said. Portions of the CMQ’s infrastructure were previously cited for safety violations, according to local news reports, and CMQ’s network includes a portion that was involved in the deadly July 2013 train derailment at Lac Mégantic, Quebec.

“There has been a reduction in available shipments in eastern Canada. But at the same time, the strategic value of that port in St. John has not been unlocked,” Creel said. 

While the time frame for how CP will take advantage of the CMQ is still being developed, CP executives cited growth opportunities for the short line to include expanding service for domestic and international intermodal, automotive parts, lumber and refined fuels.  

“One thing … I’m super excited about is all the new gateway access to the short line partners that we’ve never reached before as part of the CMQ and to the eastern carriers creating new routes and new markets,” said John Brooks, CP’s chief marketing officer.

“The level of interest from that part of the northeast U.S. and eastern Canada has frankly been overwhelming in the last 60 days. And I can tell you, my team and our leadership has been out on that property and talking to these folks. … We’ll see if it’s a 2020 story, but it sure makes us excited about what 2021 should look like,” he said.

Beyond CMQ, Brooks cited other opportunities to develop CP’s intermodal franchise, including two long-term agreements it signed with Bison and Consolidated Fastfrate in the fourth quarter. The partnerships will provide opportunities for over-the-road conversion. 

“[They are] two leaders in the trucking industry, two leaders in the wholesale industry and we’re creating solutions with them without needing to purchase them. We’re providing solutions in the marketplace that will drive new first-mile, last-mile innovation that the industry hasn’t seen,” Brooks said.

Meanwhile, in western Canada, two companies, Gibson and U.S. Development, are developing a diluent recovery unit (DRU) near CP’s rail-served terminal in Hardisty, Alberta. It will become operational in 2021.

The unit will enable a more sustainable and safer crude-by-rail shipping model to the U.S. Gulf since the DRU process removes the diluent prior to loading the rail car, Brooks said. Removing the diluent returns the crude to a more concentrated state and the end product is no longer classified as a hazardous commodity, he said. 

This process will also allow 30% more crude to be loaded in each tank car, thus making the rail costs more competitive with the pipeline. The capacity for this facility equates to two trains per day and a key set creates a long-term revenue stream for crude by rail, Brooks said.

“This is a game changer for crude [oil] and what is a unique and innovative development that will enable our franchise to enjoy sustainable crude by rail revenues that are safer and more efficient to move for the long term, which is unique to CP’s franchise in Canada,” Creel said.

As for crude-by-rail in 2020, CP said it has the people and assets to handle increased crude-by-rail volumes from Alberta. CP has previously said it has a quarterly capacity of about 36,000 carloads for crude-by-rail. 

On Wednesday, CP announced that net profits for the fourth quarter of 2019 rose nearly 22% amid a quarterly record for overall revenue.

Fourth-quarter net income for 2019 totaled C$664 million, or C$4.82 diluted earnings/share, compared with C$545 million, or C$3.83 diluted earnings/share, in the fourth quarter of 2018.