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How Coal Burned a Hole in Union Pacific’s 1Q16

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Union Pacific’s coal pocket

The commodity that burned a hole in all Class I railroads’ revenues in 1Q16 was, of course, coal. Union Pacific’s (UNP) Coal segment saw its revenues fall to $519 million in 1Q16, which represents a 43% YoY (year-over-year) drop from the $915 million it saw in 1Q15.

How Coal Burned a Hole in Union Pacific's 1Q16

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Coal volumes in 1Q16

In 1Q16, UNP’s coal volumes declined by 34%. This was primarily due to a 38% reduction in shipments in the PRB (Powder River Basin) and a decline of 35% in volumes in Colorado and Utah in 1Q16. The major reasons attributed to this fall were warm winter, low natural gas prices, and weakness in coal exports, which also impacted coal demand.

According to the National Oceanic and Atmospheric Administration, the past winter was the warmest winter on record. Coal inventory in the PRB region was also at 108 days—41 days above the five-year average. This also negatively impacted coal demand and thus coal freight for UNP.

Management outlook

UNP expects declines in the demand for coal and, in turn, fewer volumes for the remainder of 2016. The company anticipates high inventory stockpiles and low natural gas prices to create an even more unfavorable situation for coal freight. Weather conditions usually impact electricity consumption, however, which affects coal shipments. UNP expects coal volumes to fall by 30% YoY in the second quarter of 2016.

Coal dynamics for peer group

Investors should note that the coal market was split 50-50 between UNP and BNSF Railway (BRK-B) for 20 years—until 2011. Both companies haul coal originating from the PRB in Wyoming. UNP lost ~10% of its market share to BNSF Railway after 2011. UNP’s length of haul for coal decreased in 2015, but coal accounted for 15.8% of UNP’s 2015 revenues.

Below is a breakdown of coal’s share of total revenues for UNP’s other peers during the same period:

  • Norfolk Southern (NSC)—17.3%
  • CSX Corporation (CSX)—20.3%
  • Canadian National Railway (CNI)—5%
  • Canadian Pacific (CP)—9.8%
  • Genesee and Wyoming (GWR)—5.8%

All US Class I railroads except CP and CNI are included in the portfolio holdings of the VanEck Vectors Morningstar Wide Moat ETF (MOAT).

Now let’s explore UNP’s Automotive revenues in 1Q16.

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