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How Did Burlington Northern Santa Fe Perform in 2Q17?

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Part 4
How Did Burlington Northern Santa Fe Perform in 2Q17? PART 4 OF 7

Higher Domestic Drilling for Burlington Northern Santa Fe in 2Q17

BNSF’s Industrial Products revenues in 2Q17

In the previous part of this series, we looked at the change in Burlington Northern Santa Fe’s (or BNSF) (BRK.B) Consumer Products’ revenues. Let’s look now at its Industrial Products’ freight business. In 2Q17, the revenues for Industrial Products rose 7.4% to $1.3 billion compared to $1.2 billion in the same quarter last year.

The segment’s contribution to BNSF’s overall revenues fell to 24.3% in the second quarter 2017 from 25.9% on a year-over-year basis.

Higher Domestic Drilling for Burlington Northern Santa Fe in 2Q17

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Segmental volumes in 2Q17

BNSF’s Industrial Products’ volumes rose 4.1% in the second quarter of 2017. From 434,000 carloads in 2Q16, shipments increased to 452,000 units in 2Q17. The average revenue per car rose 3.3% to $2,845 in the reported quarter. Higher shipments in the Industrial Products segment were due to higher volumes for steel, minerals, and other commodities. These volumes rose due to increased domestic drilling activity and higher taconite.

The rise in this segment’s volumes was negatively affected by reduced petroleum products shipments. Petroleum volumes fell due to the pipeline displacement of US crude oil traffic and reduced plastics shipments.

The effect of crude oil

On a year-over-year basis, drilling activity in the United States has increased. On August 4, 2017, the September WTI (West Texas Intermediate) crude oil futures contracts rose 1.1% to $49.60 per barrel. The US July 2017 job data, the decline in US crude oil inventories, and record gasoline demand led to the rise in crude oil futures. That should lead to better volumes of energy-related commodities going forward. Particularly, the demand for drilling pipes and fractionating sand should rise in the near term.

Peer group segmentation

US Class I railroads differ in their approaches for including industrial merchandise in the industrial products’ freight segment. As a result, BNSF’s Industrial Products revenues are not comparable to the same segment for its peers. BNSF reports freight revenues in four segments, while Union Pacific (UNP) has six commodity groups. On Union Pacific’s (UNP) lines, Kansas City Southern (KSU), the smallest Class I railroad in the United States, reports revenue in six verticals.

Norfolk Southern (NSC), a dominant freight carrier in the Eastern United States, reports revenues in three segments. Another Eastern US carrier, CSX (CSX), reports revenues in three segments. The United States’ largest short-line operator, Genesee & Wyoming (GWR), also operates in Europe and Australia. As a result, it reports revenues by geography.

Investors who want indirect exposure to transportation stocks can consider investing in the iShares Transportation Average (IYT). All the key US-originated railroads make up 24.3% of the portfolio holdings of IYT.

In the next part, we’ll assess BNSF’s Agriculture Products’ revenues for 2Q17.

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