uploads///CNI Petroleum

Why Did CNI’s Petroleum and Chemicals Revenues Slump in 1Q16?

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Dec. 4 2020, Updated 10:53 a.m. ET

Canadian National’s Petroleum and Chemicals

Canadian National’s (CNI) Petroleum and Chemicals division accounts for a second-largest share of its revenues. This segment contributed 20.3% to CNI’s 1Q16 revenues, down from 21.6% in the same period last year.

In the first quarter of 2016, the company’s Petroleum and Chemicals revenues fell by 10%, to $578.0 million Canadian from $643.0 million Canadian in 1Q15.

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1Q16 Petroleum and Chemicals volumes

The carloads in CNI’s Petroleum and Chemicals segment fell by 7% in 1Q16 compared with 1Q15. This was mainly due to lower volumes of crude oil as a result of higher pipeline capacity. The crude-by-rail volumes of CNI declined by half to 14,000 carloads in 1Q16 compared with 1Q15.

On the revenue side, the decline in revenues was offset by favorable conversion impact of a weaker Canadian dollar and higher shipments of refined petroleum products including propane, lubricants, and alternative fuels. The company witnessed fractionating sand volumes reduced by 45% in the first quarter of 2016 to 13,000 carloads.

Management outlook

Fractionating sand is a type of sand used in natural gas drilling and exploration. Canadian National’s fractionating sand business is highly related to natural gas drilling rather than shale oil drilling. CNI’s management expects lower volumes of crude-by-rail and fractionating sand.

However, the company hopes to cash in on shipment opportunities coming from upcoming new plastic plants in the Gulf Coast in the long term. The company expects that the low cost of manufacturing plastic in the Gulf Coast region would provide freight opportunities since some of the plants are close to CNI’s lines.

The breakdown in the LNG market made purchases of Brent crude by the coastal refineries very affordable. Plus, the ample pipeline capacity is resulting in unviable crude-by-rail economics.

New housing construction going well in the US and the requirement of specialty chemicals in construction projects is providing a boost in the industry. CNI’s peers Union Pacific (UNP), CSX Corp. (CSX), BNSF Railway (BRK-B), and Norfolk Southern (NSC) are hoping to cash in on incremental volumes from the chemicals space.

All the US-originated Class I railroads are included in the portfolio holdings of the VanEck Vectors Morningstar Wide Moat ETF (MOAT).

In the next part, we’ll look at Canadian National’s Grain and Fertilizers business and management’s outlook.

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