Railroad CEO sees boom-time oil loads as pipeline pinch roils Canada

MONTREAL (Bloomberg) -- Boom times are back for at least one company in Canada’s oil heartland.

Canadian Pacific Railway may match or exceed its record 2014 pace of 110,000 crude carloads next year as a pipeline crunch stokes demand for shipping by train, CEO Keith Creel said late Thursday in an interview from Calgary, where the company is based.

“The demand is there,” Creel said. “Maybe a 100,000 run-rate goes to 110 or 120. There’s a bit of a range between 100,000 and 120,000, but I wouldn’t expect anything above that.”

The run-up to oil-shipment levels last seen four years ago, when Canada’s benchmark crude price reached almost $90/bbl, comes as producers endure record discounts for their crude because of a dramatic lack of pipeline space.

Western Canada Select crude is trading in the $20s now, with the discount to the U.S. benchmark widening to $50/bbl last week, the most on record in Bloomberg data stretching back to 2008. Producers are being forced to sell their oil for less largely because of the higher costs of shipping it by train to U.S. fuel producers, but also because an abundance of American supplies and the start of refinery maintenance season on the Gulf Coast are undercutting demand for the imports.

Canadian Pacific, the country’s second-largest railroad, handled about 23,000 carloads of crude in the third quarter, executives told analysts Thursday, almost tripling the tally from the same period a year ago. That fueled a 63% quarterly climb in revenue from energy, chemicals and plastics -- the fastest increase among major commodities at the railroad.

Rival Canadian National Railway is on pace to carry about 70,000 carloads of crude annually, CFO Ghislain Houle told an investor conference last month.

An average North American tank car holds about 700 bbl of crude, according to Bloomberg Intelligence railroad analyst Lee Klaskow. That would put Creel’s most optimistic outlook for next year at a rate of about 230,000 bpd, the equivalent of 8.5% of last year’s daily average production from the oil sands and more than OPEC member Gabon can produce.

Hopes for a quick fix to Canada’s pipeline bottleneck dimmed in August, when a Canadian federal appeals court quashed the permit for the Trans Mountain pipeline expansion project, potentially delaying its start for another year.

The Trans Mountain ruling was “definitely material in the discussion” with oil producers, Creel said Thursday.

At least one Canadian oil producer already has struck a significant deal to ship more crude by rail. Last month, Cenovus Energy Inc. announced arrangements with Canadian National and Canadian Pacific to transport about 100,000 bpd from Alberta to the U.S. Gulf Coast.

Revenue Surge

Creel made the comments after Canadian Pacific reported record adjusted profit of C$4.12 a share for the third quarter, in line with the C$4.10 forecast provided Oct. 4. Revenue surged 19% to C$1.9 billion ($1.4 billion).

Canadian Pacific rose about 1% to C$263.04 at 1:43 p.m. in Toronto on Friday, taking its advance this year to about 14% -- compared with a 4.1% decline for Canada’s benchmark stock index. The shares reached a record high earlier this month, propelled by strong sales performance in multiple commodities.

Grain and Coal

Like Montreal-based Canadian National, Canadian Pacific is pledging not to neglect longtime customers such as grain or coal producers. Additional pipelines will eventually be built, which will make demand for crude-by-rail virtually disappear, Creel said.

“We have to be very strategic in what we bring on the railroad because we have a responsibility to our existing customers that were here before crude and will be here after crude,” the CEO said. “I enjoy the crude business, but we’ve got to make long-term decisions that are best for the company overall.”

Even as it reaches new deals to carry crude by rail, usually for three to five years, Canadian Pacific has been targeting other energy shipments such as liquefied petroleum gas and refined products. That diversification, the CEO said, will strengthen the company’s business in the long run.

“We’re not planning our business around” crude, Creel said. “Pipelines are a competitive threat. It’s the preferred method of moving crude when the capacity becomes available. Once crude goes away, we certainly expect to have other revenue streams to take its place.”