Canadian Pacific Railway Limited (CP) recently announced its new fracturing sand business. The company entered into a multi-year agreement with Unimin Corporation for shipping fracturing sand from Wisconsin, where Unimin’s facility will begin operations by next year.
Unimin Corporation is one of the leading producers of industrial minerals in the U.S. and is a subsidiary of Sibelco Group, a Belgium based multinational involved in the production of industrial minerals.
Upon completion of the new facility, Canadian Pacific will be benefited from the two million tons of fracturing sand that it will ship every year to markets like North Dakota, Texas and Colorado.
The second largest railroad company, Canadian Pacific continues to benefit from its strong foothold in the Canadian rail freight transportation market. Given its extensive rail networks and potential business strategies, the company covers the majority of freight businesses in key industrial areas like Alberta Industrial Heartland, the U.S. gulf coast and mineral-rich regions like Bakken Shale oil field and Marcellus Shale natural gas field.
We believe that the alongside the Bakken and Alberta oil sands transport business, Canadian Pacific will also benefit from Marcellus Shale natural gas production unit and Alberta's Industrial Heartland area, Canada's largest hydrocarbon processing unit, driving revenue and market share gains in the upcoming years.
Additionally, the company’s plan on improving train lengths and network expansion in 2012–2013 will also support its new business opportunities. This year, the company intends to upgrade and install new sidetracks in key areas to support increased train length.
Further, in 2013, Canadian Pacific plans to increase train length by 11% on the trans-Canada rail routes. Enhancement of network capabilities over the next couple of years remain concurrent with its goal of enhancing capacity, safety and service metrics as well as increasing fuel efficiency of 1–2% over the long term.
Since 2008, the company’s intermodal trains have grown by 40% to a length of approximately 12,000 feet. The longer trains have resulted in increased efficiency in terms of capital inputs and have enabled the company to tap potential opportunities in the rapidly growing rail freight market.
Further, we believe that the company’s decision to improve train length remains a key strategy given the emergence of new markets for rail intermodal services due to uncertainties surrounding truck freight. Additionally, the growth in export coal and potash shipments along with the recent development in crude shipment has propelled the company to expand its capacity via longer trains.
To support these growth plans, Canadian Pacific projects long-term capital expenditures of nearly C$2.3 billion for 2011–2028, with approximately $1.0 billion for the current year. Although these initiatives look attractive for long-term growth and provide competitive advantage to the company over railroads like Canadian National (CNI), which operates on almost similar tracks, we believe heavy investments in new locomotives, technology and fuel recovery initiatives overlooks the current economic outlook and stressed operating metric due to soaring fuel prices, paving the way for distressed margin performance in the near term.
We maintain our long-term Neutral recommendation on Canadian Pacific supported by a short-term Zacks #3 Rank (Hold).
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